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Federal, state, and local government agencies have differing roles with regard to public health emergency preparedness and response. The federal government conducts a variety of activities, including developing interagency response plans, increasing state and local response capabilities, developing and deploying federal response teams, increasing the availability of medical treatments, participating in and sponsoring exercises, planning for victim aid, and providing support in times of disaster and during special events such as the Olympic games. One of its main functions is to provide support for the primary responders at the state and local level, including emergency medical service personnel, public health officials, doctors, and nurses. This support is critical because the burden of response falls initially on state and local emergency response agencies. The President's proposal transfers control over many of the programs that provide preparedness and response support for the state and local governments to a new Department of Homeland Security. Among other changes, the proposed legislation transfers HHS's Office of the Assistant Secretary for Public Health Emergency Preparedness to the new department. Included in this transfer is the Office of Emergency Preparedness (OEP), which currently leads the National Disaster Medical System (NDMS) in conjunction with several other agencies and the Metropolitan Medical Response System (MMRS). The Strategic National Stockpile, currently administered by the Centers for Disease Control and Prevention (CDC), would also be transferred, although the Secretary of HHS would still manage the stockpile and continue to determine its contents. The President's proposal would also transfer the select agent registration enforcement program from HHS to the new department. Currently administered by CDC, the program's mission is the security of those biologic agents that have the potential for use by terrorists. The proposal provides for the new department to consult with appropriate agencies, which would include HHS, in maintaining the select agent list. Under the President's proposal, the new department would also be responsible for all current HHS public health emergency preparedness activities carried out to assist state and local governments or private organizations to plan, prepare for, prevent, identify, and respond to biological, chemical, radiological, and nuclear events and public health emergencies. Although not specifically named in the proposal, this would include CDC's Bioterrorism Preparedness and Response program and the Health Resources and Services Administration's (HRSA) Bioterrorism Hospital Preparedness Program. These programs provide grants to states and cities to develop plans and build capacity for communication, disease surveillance, epidemiology, hospital planning, laboratory analysis, and other basic public health functions. Except as otherwise directed by the President, the Secretary of Homeland Security would carry out these activities through HHS under agreements to be negotiated with the Secretary of HHS. Further, the Secretary of Homeland Security would be authorized to set the priorities for these preparedness and response activities. The new Department of Homeland Security would also be responsible for conducting a national scientific research and development program, including developing national policy and coordinating the federal government's civilian efforts to counter chemical, biological, radiological, and nuclear weapons or other emerging threats. This would include establishing priorities and directing and supporting national research and development and procurement of technology and systems for detecting, preventing, protecting against, and responding to terrorist acts using chemical, biological, radiological, or nuclear weapons. Portions of the Departments of Agriculture, Defense, and Energy that conduct research would be transferred to the new Department of Homeland Security. For example, the Department of Energy's (DOE) chemical and biological national security research and some of its nuclear smuggling and homeland security activities would be transferred to the new homeland security department. The Department of Homeland Security would carry out civilian health-related biological, biomedical, and infectious disease defense research and development through agreements with HHS, unless otherwise directed by the President. As part of this responsibility, the new department would establish priorities and direction for a program of basic and applied research on the detection, treatment, and prevention of infectious diseases to be conducted by the National Institutes of Health (NIH). The transfer of federal assets and resources in the President's proposed legislation has the potential to improve coordination of public health preparedness and response activities at the federal, state, and local levels. Our past work has detailed a lack of coordination in the programs that house these activities, which are currently dispersed across numerous federal agencies. In addition, we have discussed the need for an institutionalized responsibility for homeland security in federal statute. We have also testified that one key consideration in evaluating whether individual agencies or programs should be included or excluded from the proposed department is the extent to which homeland security is a major part of the agency or program mission. The President's proposal provides the potential to consolidate programs, thereby reducing the number of points of contact with which state and local officials have to contend. However, coordination would still be required with multiple agencies across departments. Many of the agencies involved in these programs have differing perspectives and priorities, and the proposal does not sufficiently clarify the lines of authority of different parties in the event of an emergency, such as between the Federal Bureau of Investigation (FBI) and public health officials investigating a suspected bioterrorist incident. Let me provide you with more details. We have reported that many state and local officials have expressed concerns about the coordination of federal public health preparedness and response efforts. Officials from state public health agencies and state emergency management agencies have told us that federal programs for improving state and local preparedness are not carefully coordinated or well organized. For example, federal programs managed by the Federal Emergency Management Agency (FEMA), Department of Justice (DOJ), OEP, and CDC all currently provide funds to assist state and local governments. Each program conditions the receipt of funds on the completion of a plan, but officials have told us that the preparation of multiple, generally overlapping plans can be an inefficient process. In addition, state and local officials told us that having so many federal entities involved in preparedness and response has led to confusion, making it difficult for them to identify available federal preparedness resources and effectively partner with the federal government. The proposed transfer of numerous federal response teams and assets to the new department would enhance efficiency and accountability for these activities. This would involve a number of separate federal programs for emergency preparedness and response, whose missions are closely aligned with homeland security, including FEMA; certain units of DOJ; and HHS's Office of the Assistant Secretary for Public Health Emergency Preparedness, including OEP and its NDMS and MMRS programs, along with the Strategic National Stockpile and the select agent program. In our previous work, we found that in spite of numerous efforts to improve coordination of the separate federal programs, problems remained, and we recommended consolidating the FEMA and DOJ programs to improve the coordination. The proposal places these programs under the control of the Under Secretary for Emergency Preparedness and Response, who could potentially reduce overlap and improve coordination. This change would make one individual accountable for these programs and would provide a central source for federal assistance. The proposed transfer of MMRS, a collection of local response systems funded by HHS in metropolitan areas, has the potential to enhance its communication and coordination. Officials from one state told us that their state has MMRSs in multiple cities but there is no mechanism in place to allow communication and coordination among them. Although the proposed department has the potential to facilitate the coordination of this program, this example highlights the need for greater regional coordination, an issue on which the proposal is silent. Because the new department would not include all agencies with public health responsibilities related to homeland security, coordination across departments would still be required for some programs. For example, NDMS functions as a partnership among HHS, the Department of Defense (DOD), the Department of Veterans Affairs (VA), FEMA, state and local governments, and the private sector. However, as the DOD and VA programs are not included in the proposal, only some of these federal organizations would be brought under the umbrella of the Department of Homeland Security. Similarly, the Strategic National Stockpile currently involves multiple agencies. It is administered by CDC, which contracts with VA to purchase and store pharmaceutical and medical supplies that could be used in the event of a terrorist incident. Recently expanded and reorganized, the program will now include management of the nation's inventory of smallpox vaccine. Under the President's proposal, CDC's responsibilities for the stockpile would be transferred to the new department, but VA and HHS involvement would be retained, including continuing review by experts of the contents of the stockpile to ensure that emerging threats, advanced technologies, and new countermeasures are adequately considered. Although the proposed department has the potential to improve emergency response functions, its success depends on several factors. In addition to facilitating coordination and maintaining key relationships with other departments, these factors include merging the perspectives of the various programs that would be integrated under the proposal and clarifying the lines of authority of different parties in the event of an emergency. As an example, in the recent anthrax events, local officials complained about differing priorities between the FBI and the public health officials in handling suspicious specimens. According to the public health officials, FBI officials insisted on first informing FBI managers of any test results, which delayed getting test results to treating physicians. The public health officials viewed contacting physicians as the first priority in order to ensure that effective treatment could begin as quickly as possible. The President's proposal to shift the responsibility for all programs assisting state and local agencies in public health emergency preparedness and response from HHS to the new department raises concern because of the dual-purpose nature of these activities. These programs include essential public health functions that, while important for homeland security, are critical to basic public health core capacities. Therefore, we are concerned about the transfer of control over the programs, including priority setting, that the proposal would give to the new department. We recognize the need for coordination of these activities with other homeland security functions, but the President's proposal is not clear on how the public health and homeland security objectives would be balanced. Under the President's proposal, responsibility for programs with dual homeland security and public health purposes would be transferred to the new department. These include such current HHS assistance programs as CDC's Bioterrorism Preparedness and Response program and HRSA's Bioterrorism Hospital Preparedness Program. Functions funded through these programs are central to investigations of naturally occurring infectious disease outbreaks and to regular public health communications, as well as to identifying and responding to a bioterrorist event. For example, CDC has used funds from these programs to help state and local health agencies build an electronic infrastructure for public health communications to improve the collection and transmission of information related to both bioterrorist incidents and other public health events. Just as with the West Nile virus outbreak in New York City, which initially was feared to be the result of bioterrorism, when an unusual case of disease occurs public health officials must investigate to determine whether it is naturally occurring or intentionally caused. Although the origin of the disease may not be clear at the outset, the same public health resources are needed to investigate, regardless of the source. States are planning to use funds from these assistance programs to build the dual-purpose public health infrastructure and core capacities that the recently enacted Public Health Security and Bioterrorism Preparedness and Response Act of 2002 stated are needed. States plan to expand laboratory capacity, enhance their ability to conduct infectious disease surveillance and epidemiological investigations, improve communication among public health agencies, and develop plans for communicating with the public. States also plan to use these funds to hire and train additional staff in many of these areas, including epidemiology. Our concern regarding these dual-purpose programs relates to the structure provided for in the President's proposal. The Secretary of Homeland Security would be given control over programs to be carried out by HHS. The proposal also authorizes the President to direct that these programs no longer be carried out through agreements with HHS, without addressing the circumstances under which such authority would be exercised. We are concerned that this approach may disrupt the synergy that exists in these dual-purpose programs. We are also concerned that the separation of control over the programs from their operations could lead to difficulty in balancing priorities. Although the HHS programs are important for homeland security, they are just as important to the day-to- day needs of public health agencies and hospitals, such as reporting on disease outbreaks and providing alerts to the medical community. The current proposal does not clearly provide a structure that ensures that the goals of both homeland security and public health will be met. The proposed Department of Homeland Security would be tasked with developing national policy for and coordinating the federal government's civilian research and development efforts to counter chemical, biological, radiological, and nuclear threats. In addition to coordination, we believe the role of the new department should include forging collaborative relationships with programs at all levels of government and developing a strategic plan for research and development. However, we have many of the same concerns regarding the transfer of responsibility for the research and development programs that we have regarding the transfer of the public health preparedness programs. We are concerned about the implications of the proposed transfer of control and priority setting for dual-purpose research. For example, some research programs have broad missions that are not easily separated into homeland security research and research for other purposes. We are concerned that such dual-purpose research activities may lose the synergy of their current placement in programs. In addition, we see a potential for duplication of capacity that already exists in the federal laboratories. We have previously reported that while federal research and development programs are coordinated in a variety of ways, coordination is limited, raising the potential for duplication of efforts among federal agencies. Coordination is limited by the extent of compartmentalization of efforts because of the sensitivity of the research and development programs, security classification of research, and the absence of a single coordinating entity to ensure against duplication. For example, DOD's Defense Advanced Research Projects Agency was unaware of U.S. Coast Guard plans to develop methods to detect biological agents on infected cruise ships and, therefore, was unable to share information on its research to develop biological detection devices for buildings that could have applicability in this area. The new department will need to develop mechanisms to coordinate and integrate information on research and development being performed across the government related to chemical, biological, radiological, and nuclear terrorism, as well as user needs. We reported in 1999 and again in 2001 that the current formal and informal research and development coordination mechanisms may not ensure that potential overlaps, gaps, and opportunities for collaboration are addressed. It should be noted, however, that the legislation tasks the new department with coordinating the federal government's "civilian efforts" only. We believe the new department will also need to coordinate with DOD and the intelligence agencies that conduct research and development efforts designed to detect and respond to weapons of mass destruction. In addition, the first responders and local governments possess practical knowledge about their technological needs and relevant design limitations that should be taken into account in federal efforts to provide new equipment, such as protective gear and sensor systems, and help set standards for performance and interoperability. Therefore, the new department will have to develop collaborative relationships with these organizations to facilitate technological improvements and encourage cooperative behavior. The President's proposal could help improve coordination of federal research and development by giving one person the responsibility for creating a single national research and development strategy that could address coordination, reduce potential duplication, and ensure that important issues are addressed. In 2001, we recommended the creation of a unified strategy to reduce duplication and leverage resources, and suggested that the plan be coordinated with federal agencies performing research as well as state and local authorities. The development of such a plan would help to ensure that research gaps are filled, unproductive duplication is minimized, and that individual agency plans are consistent with the overall goals. The proposal would transfer parts of DOE's nonproliferation and verification research and development program to the new department, including research on systems to improve the nation's capability to prepare for and respond to chemical and biological attacks. However, the legislation is not clear whether the programmatic management and dollars only would move or the scientists carrying out the research would also move to the new department. Because the research is carried out by multiprogram laboratories that employ scientists skilled in many disciplines who serve many different missions and whose research benefits from their interactions with colleagues within the laboratory, it may not be prudent to move the scientists who are doing the research. One option would be rather than moving the scientists, the new department could contract with DOE's national laboratories to conduct the research. The President's proposal would also transfer the responsibility for civilian health-related biological defense research and development programs to the new department, but the programs would continue to be carried out through HHS. These programs, now primarily sponsored by NIH, include a variety of efforts to understand basic biological mechanisms of infection and to develop and test rapid diagnostic tools, vaccines, and antibacterial and antiviral drugs. These efforts have dual-purpose applicability. The scientific research on biologic agents that could be used by terrorists cannot be readily separated from research on emerging infectious diseases. For example, NIH-funded research on a drug to treat cytomegalovirus complications in patients with HIV is now being investigated as a prototype for developing antiviral drugs against smallpox. Conversely, research being carried out on antiviral drugs in the NIH biodefense research program is expected to be useful in the development of treatments for hepatitis C. The proposal to transfer responsibility to the new department for research and development programs that would continue to be carried out by HHS raises many of the same concerns we have with the structure the proposal creates for public health preparedness programs. Although there is a clear need for the new department to have responsibility for setting policy, developing a strategy, providing leadership, and overall coordinating of research and development efforts in these areas, we are concerned that control and priority-setting responsibility will not be vested in those programs best positioned to understand the potential of basic research efforts or the relevance of research being carried out in other, non- biodefense programs. In addition, the proposal would allow the new department to direct, fund, and conduct research related to chemical, biological, radiological, nuclear, and other emerging threats on its own. This raises the potential for duplication of efforts, lack of efficiency, and an increased need for coordination with other departments that would continue to carry out relevant research. We are concerned that the proposal could result in a duplication of capacity that already exists in the current federal laboratories. Many aspects of the proposed consolidation of response activities are in line with our previous recommendations to consolidate programs, coordinate functions, and provide a statutory basis for leadership of homeland security. The transfer of the HHS medical response programs has the potential to reduce overlap among programs and facilitate response in times of disaster. However, we are concerned that the proposal does not provide the clear delineation of roles and responsibilities that is needed. We are also concerned about the broad control the proposal grants to the new department for research and development and public health preparedness programs. Although there is a need to coordinate these activities with the other homeland security preparedness and response programs that would be brought into the new department, there is also a need to maintain the priorities for basic public health capacities that are currently funded through these dual-purpose programs. We do not believe that the President's proposal adequately addresses how to accomplish both objectives. We are also concerned that the proposal would transfer the control and priority setting over dual- purpose research and has the potential to create an unnecessary duplication of federal research capacity. 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 about this testimony, please contact Janet Heinrich at (202) 512-7118. Gene Aloise, Robert Copeland, Marcia Crosse, Greg Ferrante, Gary Jones, Deborah Miller, Roseanne Price, and Keith Rhodes also made key contributions to this statement. Homeland Security: Proposal for Cabinet Agency Has Merit, but Implementation Will Be Pivotal to Success. GAO-02-886T. Washington, D.C.: June 25, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Public Health Priority Setting. GAO-02-883T. Washington, D.C.: June 25, 2002. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. Homeland Security: Responsibility and Accountability for Achieving National Goals. GAO-02-627T. Washington, D.C.: April 11, 2002. Homeland Security: Progress Made; More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs. GAO-02-160T. Washington, D.C.: November 7, 2001. Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts. GAO-02-208T. Washington, D.C.: October 31, 2001. Homeland Security: Need to Consider VA's Role in Strengthening Federal Preparedness. GAO-02-145T. Washington, D.C.: October 15, 2001. Homeland Security: Key Elements of a Risk Management Approach. GAO-02-150T. Washington, D.C.: October 12, 2001. Homeland Security: A Framework for Addressing the Nation's Efforts. GAO-01-1158T. Washington, D.C.: September 21, 2001. Bioterrorism: The Centers for Disease Control and Prevention's Role in Public Health Protection. GAO-02-235T. Washington, D.C.: November 15, 2001. Bioterrorism: Review of Public Health Preparedness Programs. GAO-02- 149T. Washington, D.C.: October 10, 2001. Bioterrorism: Public Health and Medical Preparedness. GAO-02-141T. Washington, D.C.: October 9, 2001. Bioterrorism: Coordination and Preparedness. GAO-02-129T. Washington, D.C.: October 5, 2001. Bioterrorism: Federal Research and Preparedness Activities. GAO-01- 915. Washington, D.C.: September 28, 2001. Chemical and Biological Defense: Improved Risk Assessment and Inventory Management Are Needed. GAO-01-667. Washington, D.C.: September 28, 2001. West Nile Virus Outbreak: Lessons for Public Health Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework. GAO/NSIAD-99-159. Washington, D.C.: August 16, 1999. Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives. GAO/T-NSIAD-99-112. Washington, D.C.: March 16, 1999. National Preparedness: Technologies to Secure Federal Buildings. GAO- 02-687T. Washington, D.C.: April 25, 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. Washington, D.C.: April 11, 2002. Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness. GAO-02-550T. Washington, D.C.: April 2, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness. GAO-02-548T. Washington, D.C.: March 25, 2002. Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness. GAO-02-547T. Washington, D.C.: March 22, 2002. Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1, 2002. Chemical and Biological Defense: DOD Should Clarify Expectations for Medical Readiness. GAO-02-219T. Washington, D.C.: November 7, 2001. Anthrax Vaccine: Changes to the Manufacturing Process. GAO-02-181T. Washington, D.C.: October 23, 2001. Chemical and Biological Defense: DOD Needs to Clarify Expectations for Medical Readiness. GAO-02-38. Washington, D.C.: October 19, 2001. Combating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness. GAO-02-162T. Washington, D.C.: October 17, 2001. Combating Terrorism: Selected Challenges and Related Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001. Combating Terrorism: Actions Needed to Improve DOD Antiterrorism Program Implementation and Management. GAO-01-909. Washington, D.C.: September 19, 2001. Combating Terrorism: Comments on H.R. 525 to Create a President's Council on Domestic Terrorism Preparedness. GAO-01-555T. Washington, D.C.: May 9, 2001. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement. GAO-01-666T. Washington, D.C.: May 1, 2001. Combating Terrorism: Observations on Options to Improve the Federal Response. GAO-01-660T. Washington, DC: April 24, 2001. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement. GAO-01-463. Washington, D.C.: March 30, 2001. Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy. GAO-01-556T. Washington, D.C.: March 27, 2001. Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response. GAO-01-15. Washington, D.C.: March 20, 2001. Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination. GAO-01- 14. Washington, D.C.: November 30, 2000. Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training. GAO/NSIAD-00-64. Washington, D.C.: March 21, 2000. Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed. GAO/T-HEHS/AIMD-00-59. Washington, D.C.: March 8, 2000. Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed. GAO/HEHS/AIMD-00-36. Washington, D.C.: October 29, 1999. Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism. GAO/T-NSIAD-00-50. Washington, D.C.: October 20, 1999. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 14, 1999. Chemical and Biological Defense: Coordination of Nonmedical Chemical and Biological R&D Programs. GAO/NSIAD-99-160. Washington, D.C.: August 16, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/T-NSIAD-99-184. Washington, D.C.: June 23, 1999. Combating Terrorism: Observations on Growth in Federal Programs. GAO/T-NSIAD-99-181. Washington, D.C.: June 9, 1999. Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs. GAO/NSIAD-99-151. Washington, D.C.: June 9, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/NSIAD-99-110. Washington, D.C.: May 21, 1999. Combating Terrorism: Observations on Federal Spending to Combat Terrorism. GAO/T-NSIAD/GGD-99-107. Washington, D.C.: March 11, 1999. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency. GAO/NSIAD-99-3. Washington, D.C.: November 12, 1998. Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program. GAO/T-NSIAD-99-16. Washington, D.C.: October 2, 1998. Combating Terrorism: Observations on Crosscutting Issues. GAO/T- NSIAD-98-164. Washington, D.C.: April 23, 1998. Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments. GAO/NSIAD-98-74. Washington, D.C.: April 9, 1998. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination. GAO/NSIAD-98-39. Washington, D.C.: December 1, 1997. Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures. GAO-01-837. Washington, D.C.: August 31, 2001. Chemical Weapons: FEMA and Army Must Be Proactive in Preparing States for Emergencies. GAO-01-850. Washington, D.C.: August 13, 2001. Federal Emergency Management Agency: Status of Achieving Key Outcomes and Addressing Major Management Challenges. GAO-01-832. Washington, D.C.: July 9, 2001. Budget Issues: Long-Term Fiscal Challenges. GAO-02-467T. Washington, D.C.: February 27, 2002. Results-Oriented Budget Practices in Federal Agencies. GAO-01-1084SP. Washington, D.C.: August 2001. Managing for Results: Federal Managers' Views on Key Management Issues Vary Widely Across Agencies. GAO-01-592. Washington, D.C.: May 25, 2001.
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Since the terrorist attacks on September 11, 2001, and the subsequent anthrax incidents, there has been concern about the ability of the federal government to prepare for and coordinate an effective public health response given the broad distribution of responsibility for that task at the federal level. More then 20 federal departments and agencies carry some responsibility for bioterrorism preparedness and response. The President's proposed Homeland Security Act of 2002 would bring many of these federal entities with homeland security responsibilities--including public health preparedness and response--into one department to mobilize and focus assets and resources at all levels of government. The proposed reorganization has the potential to assist in the coordination of public health preparedness and response programs at the federal, state, and local levels. There are concerns, however, about the proposed transfer of control of public health assistance programs that have both basic public health and homeland security functions from Health and Human Services to the new department. Transferring control over these programs, including priority setting, to the new department has the potential to disrupt some programs critical to basic public health responsibilities. The President's proposal is unclear on how both the homeland security and the public health objectives would be accomplished.
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Many federal agencies fund research to serve their goals and objectives. For example, NIH, the largest source of federal support for nondefense research, is the federal focal point for medical and behavioral research to help extend healthy life and reduce illness and disability. Each of the 27 institutes and centers that constitute NIH has an explicit mission focused on a particular disease, organ system, stage of development, or a cross- cutting mission, such as developing research tools. Other agencies, such as EPA, FDA, and FAA, support research, in part, to further scientific understanding that may in the future better inform their regulatory decisions. Nineteen offices within EPA conduct and/or support research to help carry out the regulatory aspect of the agency's mission to protect human health and the environment and to implement environmental laws. Similarly, FDA relies on research to help identify and assess risks and to serve as the basis for regulatory decisions about such issues as human and veterinary drugs, medical devices, and the nation's food supply. Finally, FAA, which enforces regulations and standards for the manufacture, operation, and maintenance of aircraft, conducts research to help ensure a safe and efficient system of air navigation and air traffic control. Federal research can be conducted by scientists in government laboratories--called intramural research--or by scientists at universities, in industry, or at nonprofit organizations--called extramural research. In fiscal year 2002, NIH, EPA, FDA, and FAA devoted a total of about $23 billion to intramural and extramural research. (See fig. 1.) Together, these four agencies accounted for about 50 percent of the federal funds devoted to research. Federal laws have created an environment conducive to a full range of joint ventures between government and industry, or between industry and universities, as well as among companies. Specifically, through collaboration, federal and nonfederal partners attempt to share the costs, risks, facilities, and expertise needed for research and to promote the movement of ideas and technologies between the public and private sectors. This cooperation between federal and private sector researchers may take many forms. Through informal cooperation, for example, federal agencies and industry may coordinate and share research agendas to prevent duplication of effort, or agency and private sector scientists may consult one another. Through formal cooperation, federal and nonfederal partners use written agreements, such as contracts or memorandums of understanding, to define the roles and responsibilities of each party. However, each type of arrangement differs in the extent of federal involvement in the research conducted under the agreement. Generally, work conducted under contracts is directed and overseen by federal agencies that do not participate in the work. In contrast, memorandums of understanding allow great flexibility in terms of participation by federal agencies and may also allow for sharing of resources or the funding of research by nonfederal partners. Congress may provide federal agencies the authority to accept gifts from external sources. For example, under the Public Health Service Act, certain agencies, such as NIH, may accept funds or nonmonetary gifts to support their research efforts or other agency functions. Under the act, donors may stipulate how agencies may use their gifts, for example, to only support research on a specific disease or condition, or they may allow the agency to use the gift for the benefit of any effort without stipulations. An agency's statutory authority to accept donations is called its "gift acceptance authority." In 2001 and 2003, NIEHS and ORD, respectively, entered into research arrangements with ACC to solicit and fund extramural research proposals. These arrangements specified how research proposals would be solicited, reviewed, funded, and overseen. Specifically, under the NIEHS-ACC arrangement, ACC and NIEHS agreed to support a 3-year research program to study the effects on reproduction and development of exposure to chemicals in the environment. ACC provided a gift of $1.05 million to NIEHS to fund this research, and NIEHS contributed $3.75 million to the project. Using the combined funds, NIEHS awarded a total of 17 research proposals from among the 52 it received. The program ended in 2004. Under the ORD-ACC arrangement, ACC and ORD agreed to support and fund research, with the first solicitation for research proposals focusing on novel approaches to analyzing existing human exposure data. In response to this first announcement of funding availability, issued in July 2003, 36 research proposals were submitted. ORD funded four research proposals, for a total of about $1.7 million, and ACC funded two proposals, for a total of about $1 million. ORD and ACC separately funded the research proposals that each had selected under this arrangement because EPA does not have the authority to accept contributions from outside sources. Researchers could specify whether they wanted their proposals considered for funding solely by ORD or by either ORD or ACC. ACC is a nonprofit trade organization representing most major U.S. chemical companies. It represents the chemical industry on public policy issues, coordinates the industry's research and testing programs, and leads the industry's initiative to improve participating companies' environmental, health, and safety performance. In 1999, ACC launched a $100 million research initiative to study the potential impacts of chemicals on human health and the environment and to help improve screening and testing methods. A primary goal of the initiative is to focus on projects or programs that might take advantage of work planned or conducted by EPA, NIEHS, and other laboratories to stimulate collaboration and/or to prevent unnecessary duplication. Individuals or organizations can have conflicts of interest that arise from their business or financial relationships. Typically, federal conflict-of- interest laws and regulations govern the actions of individual federal employees, including their financial interests in, and business or other relationships with, nonfederal organizations. Conflict-of-interest concerns about individual federal employees typically arise when employees receive compensation from outside organizations; such arrangements often require prior approval from the federal employer. When a federal agency enters into a relationship with, or accepts a gift from, a regulated company or industry, concerns may arise about the agency's ability to fulfill its responsibilities impartially. The statutory provisions that NIEHS and ORD relied upon to enter into their arrangements with ACC grant the agencies broad authority to collaborate with external organizations in support of research. Nothing in these statutes appears to prohibit either agency from entering into research arrangements with nonprofit organizations such as ACC. NIEHS used the authorities granted to NIH's institutes and centers under sections of the Public Health Service Act, as amended, to enter into its arrangement with ACC (sections 301 and 405). The act authorizes NIH and its institutes and centers to cooperate, assist, and promote the coordination of research into the causes, diagnosis, treatment, control, and prevention of physical and mental diseases. In its research arrangement with ACC, NIEHS cited sections of the act as the authority it relied on to enter into the arrangement. These sections enumerate the general powers and duties of the Secretary of Health and Human Services and the directors of the institutes and centers in broad terms, including the authority to encourage and support studies through grants, contracts, and cooperative agreements. Similarly, ORD relied on broad authorities granted to EPA under sections of the Clean Air Act, as amended; the Clean Water Act, as amended; and the Solid Waste Disposal Act, as amended, to enter into its research arrangement with ACC (sections 103, 104, and 8001, respectively). These sections authorize EPA to promote the coordination and acceleration of research relating to the causes, effects, extent, prevention, reduction, and elimination of pollution in the air and water, and from solid waste. These sections authorize the EPA Administrator and other EPA officials to cooperate with appropriate public and private agencies, institutions, organizations, and industry to conduct research and studies. NIEHS and ORD did not formally evaluate the possibility that organizational conflicts of interest could result from their research arrangements with ACC because neither agency had policies requiring such evaluations. However, officials at both agencies took steps to manage potential conflicts that might arise during implementation of the arrangements. In 2001 and 2003, when they entered into arrangements with ACC, neither NIH nor EPA had specific policies requiring officials to formally evaluate potential conflicts of interest that could result from entering into such collaborative arrangements. As a result, neither NIEHS nor ORD conducted such evaluations. During negotiations with ACC on their research arrangements, NIEHS and ORD officials recognized the potential for organizational conflicts of interest, or at least the appearance of such conflicts. However, in light of the lack of policies on this issue, neither agency formally evaluated the potential for conflicts before finalizing their arrangements with ACC. Instead, officials told us, they informally evaluated the potential for conflicts of interest and intended to manage potential conflicts that might arise during implementation. To date, neither agency has developed any such policy guidance. In implementing their arrangements with ACC, NIEHS and ORD used their general research management processes to help manage potential conflicts of interest. These processes are designed to help ensure the integrity of scientific research undertaken by these agencies. According to agency officials, these processes helped guard against undue influence of ACC by limiting ACC's participation in the selection, review, and oversight of agency-funded research conducted under the arrangements. For example: Developing research topics. Research priorities at both NIEHS and ORD were identified through routine agency planning processes that involved significant input from a range of stakeholders before the arrangements with ACC were finalized. In addition, NIEHS included research topics suggested by the National Research Council, a congressionally chartered scientific advisory body. Both NIEHS and ORD then worked with ACC to select the specific scientific topics that would become the focus of the research conducted under the arrangements. According to NIEHS and ORD officials, their arrangements with ACC did not change or influence the agencies' research priorities. Because the research conducted under these arrangements supported the agencies' existing research agendas, officials believe that the ACC arrangements helped them effectively leverage federal research dollars. Advisory council consultation. Both agencies have advisory panels that they routinely consult on matters related to the conduct and support of research, among other things. These consultations include public sessions that allow interested individuals, in addition to the panel members, to provide comments on the topics discussed. NIEHS obtained approval from its National Advisory Environmental Health Sciences Council before entering into the arrangement with ACC. ORD did not specifically consult its Board of Scientific Counselors regarding the agency's arrangement with ACC, but did seek input from the Board regarding the research priorities covered by the arrangement. Both advisory bodies were established under the Federal Advisory Committee Act and must comply with the requirements of the act as well as related regulations. Publicly announcing the availability of funds. Both NIEHS and ORD, in 2001 and 2003, respectively, announced the opportunity to apply for grant funds available under the arrangements with ACC throughout the scientific community. Both agencies announced the availability of funding on their Web sites and included detailed information on the research programs and how to apply for funds. Both agencies also posted announcements in publications that are commonly used to advertise the availability of federal funding. Specifically, NIEHS published an announcement in the NIH Guide to Grants and Contracts, and ORD published its announcement in the Catalog of Federal Domestic Assistance. In addition, both agencies sent announcements to relevant scientific and professional organizations and to interested scientists who had signed up for electronic notice of funding opportunities. ORD also published a notice in the Federal Register. By widely announcing the availability of funds, the agencies hoped to ensure the participation of many qualified researchers and to avoid the appearance of preferential treatment for specific researchers. Moreover, widely publicizing the availability of funds would help ensure the openness of the agencies' research processes. However, the agencies differed in the clarity of their instructions regarding how information would be shared with ACC. For example, in the portion of the announcement labeled "special requirements," NIEHS's announcement stated that applicants "should," among other things, submit a letter allowing NIEHS to share their proposals with ACC. According to NIEHS this wording was not intended to be interpreted as a requirement but instead was intended to be a request. We believe that the language could have confused potential applicants about whether sharing information with ACC was required and could have dissuaded some qualified applicants from submitting proposals. In contrast, under the ORD-ACC arrangement, researchers were clearly advised that they could elect to have their proposals considered for funding by either ORD or ACC or solely by ORD. Applicants who did not want to share their proposals with ACC could elect to have their applications reviewed and considered solely by ORD. Determining completeness and responsiveness. Initially, NIEHS and ORD reviewed all submitted research proposals for compliance with administrative requirements. ACC did not participate in these reviews. At both agencies, research proposals judged incomplete were to receive no further consideration. NIEHS and ORD also had similar approaches for determining the responsiveness of the applications to the goals of the research program. At ORD, responsiveness was determined as part of the agency's completeness review and did not involve ACC. Similarly, at NIEHS, responsiveness was determined solely by agency officials. Although NIEHS's announcement stated that ACC would participate in the responsiveness review, NIEHS and ACC officials told us that ACC did not take part in this review. Peer review of research proposals. At both NIEHS and ORD, complete and responsive research proposals were independently peer reviewed for technical and scientific merit. According to officials, each agency followed its standard procedures for selecting experts to serve as peer reviewers and excluded representatives of ACC from serving as reviewers. At both agencies, only meritorious research proposals qualified for funding decisions. Both agencies also subjected these proposals to additional independent review. NIEHS's National Advisory Environmental Health Sciences Council reviewed qualified proposals, and ORD required other EPA staff to review research proposals that were judged "excellent" or "very good" to help ensure a balanced research portfolio responsive to the agency's existing research agenda. ACC convened its own technical panels to review qualified research proposals to ensure the relevancy of the proposals to the industry's research needs and to ensure that the proposals balanced its research portfolio. Making results available to the public. NIEHS and ORD required-- without input from ACC--the results of the research funded under the arrangements to be made public. For example, according to agency officials, NIEHS and ORD required researchers to discuss their preliminary findings in periodic public meetings, and, once their projects were completed, both agencies required researchers to submit their results for publication in peer-reviewed scientific journals. In addition, NIEHS strongly encouraged researchers to present their results at professional conferences and workshops. Officials from both agencies agreed that publicizing the results of research conducted under the arrangements helped ensure that agency-sponsored research adhered to accepted analytic standards and was unbiased. In addition to the routine research management processes, discussed in the previous section, officials at ORD took further steps that they believe helped them manage the potential for conflicts of interest in their collaboration with ACC. Specifically: Research arrangement developed with public input. ORD publicly announced that it might collaborate with ACC and invited public comment on the terms and conditions of the proposed partnership. In addition, ORD invited public comment on the draft announcement of the opportunity to apply for funding. ORD officials told us that they believed an open and public process to define the terms of ORD's collaboration with ACC could help guard against real or perceived conflicts of interest. Membership of review panels. In addition to prohibiting ACC representatives from serving as expert reviewers, ORD did not allow employees of ACC member companies to serve on the peer review panels that evaluated research proposals for technical and scientific merit. ORD officials said this step helped minimize the perception that ACC or its members could play a role in evaluating the scientific merit of research proposals. When accepting funds from ACC under the research arrangement, NIEHS officials complied with those sections of NIH's policy that guide the acknowledgement and administration of gifts. However, the policy's guidance on evaluating and managing potential conflicts is extremely broad, lacking clarity and consistency. Consequently, officials have wide discretion in deciding how to fulfill their responsibilities under the gift acceptance policy. Further, the policy does not require officials to document the basis of their decisions. As a result, the gift policy does not provide the public sufficient assurance that potential conflicts of interest between NIH and donor organizations will be appropriately considered. Specifically, NIH's gift acceptance policy outlines several steps that officials must take to acknowledge and administer gifts. NIEHS officials generally complied with these policy sections when accepting the gift from ACC. For example, NIEHS officials acknowledged the acceptance of ACC's gift in a timely manner, deposited the funds in government accounts, and used the gift only for the purposes stipulated by ACC. As the policy also requires, NIEHS obtained ACC's written agreement that any remaining funds could be used to further NIH's goals without additional stipulation. However, other policy sections are inconsistent or unclear about what actions officials must take to evaluate conflicts of interest when accepting gifts--thereby affording officials wide discretion in carrying out their responsibilities. For example, one part of the policy in effect at that time and in subsequent revisions requires the approving official to use two assessment tools to evaluate conflicts of interest before accepting a gift, but another part of the policy states that the use of these tools is recommended rather than required. The Director of NIEHS, who had authority to accept the gift, said he was acutely aware that accepting the ACC money could pose the potential for real or apparent conflicts of interest. In light of his concerns, he spoke informally with the Acting NIH Director, senior NIEHS officials, NIH legal advisers, and senior officials from two external groups. Through these discussions and using his professional judgment, the NIEHS Director determined that accepting the ACC funds would not present a conflict of interest for NIEHS. When he decided to accept the ACC gift, the Director said that he was unaware of the assessment tools recommended by NIH's policy. However, he believes the steps he and other NIEHS officials took in accepting ACC's gift satisfied the gift acceptance policy regarding conflicts of interest. Given the lack of consistency in the policy sections that relate to conflicts of interest and the use of the assessment tools, it is difficult for us to determine whether the actions the director took complied with the NIH policy. Moreover, without documentation of his actions, we could not determine whether the steps he took were adequate to evaluate the potential for conflicts of interest. Furthermore, the policy in effect at that time and in subsequent revisions does not provide clear guidance on what type of coordination should occur between NIH offices in evaluating the potential for conflicts of interest when accepting a gift. For example, several NIEHS staff were concerned that the proposed ACC gift could result in an apparent conflict of interest and, consistent with NIH's gift policy, forwarded the written agreement to the NIH Legal Advisor's Office for review. However, the gift policy does not require staff to identify their concerns when seeking legal advice. According to these officials, in referring the agreement to NIH attorneys for review, they did not specifically request a determination of whether the gift would constitute a conflict of interest. As a result, the NIH attorneys conducted a general legal review of the gift and the proposed research arrangement, focusing primarily on the agency's legal authority to enter into the arrangement. NIH legal staff told us that they could have provided assistance on conflict-of-interest issues had they been notified that the program staff had such concerns, or if in their view, the gift or written agreement had contained clauses that were obviously illegal or contrary to NIH policy. If the policy had been clearer about how conflict of interest concerns are to be communicated to NIH attorneys, we believe the legal staff would have conducted a conflict-of-interest review. Finally, NIH's policy does not require officials to document how they have addressed conflict-of-interest concerns. Neither the NIEHS Director nor other senior NIH officials documented their consideration of potential conflicts of interest when accepting the ACC gift. The lack of documentation, coupled with the broad discretion resulting from the inconsistency and lack of clarity in the policy, allows officials to satisfy requirements with a wide array of actions, ranging from a formal evaluation to a highly informal one. At NIH, we identified nine arrangements that were somewhat comparable to the ACC research arrangements, but we did not identify any similar arrangements at ORD, other EPA program offices, FDA, or FAA. None of the nonprofit partners in the nine research arrangements we found at NIH represents industry in the same direct manner that ACC represents the chemical industry. However, some of the nonprofit partners have either general corporate sponsorship or corporate sponsorship for specific events. For example, sponsors of the Parkinson's Unity Walk in 2004 included pharmaceutical companies. The sponsors helped defray operating expenses to ensure that all proceeds from the walk supported Parkinson's research. Likewise, the Juvenile Diabetes Research Foundation received corporate sponsorship from an airline company, manufacturers of soft drinks and household products, and others, none of whom had any material connection to the outcome of the research. One nonprofit partner is a corporation's philanthropic foundation. At NIH, we found a total of 11 institutes and centers--either singly or with other institutes and centers--that had entered into research arrangements with one or more nonprofit partners. Under the terms of four of the arrangements, NIH accepted gift funds from nonprofit partners to support the research described in the arrangements. In four other arrangements, when NIH institutes or centers lacked sufficient money to fund all the research proposals rated highly by peer review panels, they forwarded the research proposals to their nonprofit partner(s) for possible funding. (See table 1 for details on the NIH arrangements.) At EPA, none of the 16 program and regional offices we contacted identified any arrangements similar to the research arrangement between ORD and ACC. In addition, we did not identify any partnerships similar to the ACC research arrangement at FDA or at FAA. FDA officials we contacted said the agency had no research arrangements similar to the ACC arrangement with organizations that represent industry. Finally, FAA officials said that the agency had not entered into any research arrangements like the arrangements with ACC and generally did not use this type of collaborative arrangement to conduct extramural research. Federally funded research advances scientific understanding and helps improve regulatory approaches to protecting human health and the environment. For both regulatory and nonregulatory agencies collaboration with external organizations is one mechanism to maximize the financial and intellectual resources available to federal agencies. However, collaboration, particularly with organizations that directly represent regulated industries, can raise concerns about conflicts of interest that could call into question the quality and independence of federally funded research. As a result, it is imperative that federal agencies ensure, before they enter into collaborative research arrangements with nonfederal partners, that they fully consider the potential for conflicts of interest. NIEHS and ORD relied on their general research management processes to minimize any potential conflicts of interest that might arise during implementation of their respective ACC arrangements. While these processes were appropriate for managing the arrangements, they were not specifically designed to address conflict-of-interest concerns and therefore cannot be considered adequate substitutes for formal conflict-of-interest evaluations. Consequently, without policies requiring officials at NIH and EPA to formally evaluate and manage potential conflicts of interest when they enter into collaborative arrangements such as those with ACC, neither agency can ensure that similar arrangements in the future will be systematically evaluated and managed for potential conflicts of interest. When accepting the gift from ACC, NIEHS officials believed their actions satisfied the conditions of the NIH gift acceptance policy for conflict of interest. However, NIH's policy--both the wide discretion allowed in deciding on whether and how officials should evaluate conflicts of interest and the lack of required documentation--provides little assurance of systematic evaluation of gifts that may present potential conflicts of interest for the agency. To allay concerns about the potential for conflicts of interest that may result from accepting gifts, officials should clearly document both their evaluation of the potential for conflicts of interest and the basis for their decisions to accept or reject a gift. The Director of NIH and the Administrator of EPA should develop formal policies for evaluating and managing potential conflicts of interest when entering into research arrangements with nongovernmental organizations, particularly those that represent regulated industry. The Director of NIH should further revise the NIH gift acceptance policy to require NIH officials to evaluate gifts, particularly from organizations that represent regulated industry, for potential conflicts of interest and to document the basis for their decisions, including what, if any, steps are needed to manage potential conflicts. We provided EPA and NIH with a draft of this report for their review and comment. EPA neither agreed nor disagreed with our recommendation, but provided technical comments that we have incorporated as appropriate. (See app. II.) NIH concurred with our recommendations and stated it would take steps to implement them. In addition, NIH emphasized that is it not a regulatory agency and suggested changes to the report to clarify its role. We have added language to clarify NIH's relationship with the regulated industry. NIH also provided technical comments that we have incorporated as appropriate. NIH's comments and our response are included in appendix III. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days after the date of this letter. At that time, copies of this report will be sent to the congressional committees with jurisdiction over the Environmental Protection Agency and the National Institutes of Health; the Honorable Stephen L. Johnson, Acting Administrator of EPA; the Honorable Elias A. Zerhouni, Director of NIH; and the Honorable Joshua B. Bolten, Director of the Office of Management and Budget. This report will also be available at no charge on GAO's home page at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 3841. Key contributors to this report are listed in appendix IV. As requested by the Ranking Member of the Subcommittee on Environment, Technology and Standards, House Committee on Science, and the Ranking Member of the Subcommittee on Research, House Committee on Science, we determined the (1) legal authority the National Institutes of Health's (NIH) National Institute of Environmental Health Sciences (NIEHS) and the Environmental Protection Agency's (EPA) Office of Research and Development (ORD) used to enter into arrangements with the American Chemistry Council (ACC); (2) extent to which NIEHS and ORD evaluated and managed the possibility that conflicts of interest could result from their arrangements; (3) extent to which NIEHS complied with NIH's gift acceptance policy when accepting ACC's funds; and (4) extent to which similar research arrangements exist within other offices and programs within NIH and EPA, as well as other regulatory agencies. To determine the legal authorities NIEHS and ORD relied on to enter the research arrangements with ACC to solicit and fund extramural research, we reviewed the statutes cited in agency documentation related to the arrangements. For NIH, these authorities included sections 301 and 405 of the Public Health Service (PHS) Act, as amended (42 U.S.C. SSSS 241 and 284); and gift acceptance statutes contained in sections 231 and 405(b)(1)(H) of the PHS Act as amended (42 U.S.C. SSSS 238, 284(b)(1)(H)). For ORD these authorities included section 103 of the Clean Air Act, as amended (42 U.S.C. SS 7403), section 104 of the Clean Water Act, as amended (33 U.S.C. SS1254), and section 8001 of the Solid Waste Disposal Act, as amended (42 U.S.C. SS 6981). We also reviewed the following related documentation on delegations of authority: Memorandum from the Assistant Secretary for Health to Public Health Service Agency Heads for "Delegation of Authority To Accept Gifts Under Title XXI of the PHS, Miscellaneous" (July 10, 1995), and NIH Manual Chapter 1130, Delegations of Authority, Program: General #5 Accept Gifts Under Section 231 of the PHS Act, Program: General #10 National Library of Medicine. We also reviewed relevant legislative histories and Comptroller General decisions and interviewed attorneys at NIEHS and ORD about their reviews of the arrangements. Furthermore, we compared each agency's policies and both formal arrangements with the authorities cited above. To determine what measures NIEHS and ORD took to evaluate and manage the potential that conflicts of interest could result from their arrangements with ACC, we interviewed program officials on their perceptions of conflict of interest when the ACC arrangement was being considered, as well as on the actions they took to develop and implement the arrangements. We also interviewed budget and legal officials, as appropriate, at each agency on their involvement in reviewing and completing the arrangements. We reviewed the research arrangements with ACC, as well as other documentation related to the arrangements, including correspondence between agency officials and ACC, interagency memorandums, and documentation of agency legal and other reviews. We considered statutes on conflict of interest and ethics guidelines that might address the need for agencies to consider and manage real or apparent conflicts of interest (18 U.S.C. SS 209, and the Ethics in Government Act of 1978, 5 U.S.C. app. 4). Finally, we interviewed ACC officials to obtain their views on conflicts of interest and on the role of ACC representatives in developing the announcement of funding availability, reviewing and funding research proposals, and administering the grants. We did not test the NIEHS or ORD internal controls governing the administration of grants awarded under the arrangements. To determine whether NIEHS's acceptance of ACC funds as a gift complied with NIH policy for accepting gifts, we collected and analyzed NIH's policy for gift acceptance and we interviewed legal staff at NIEHS concerning their review of potential gifts and their assistance to program officials. We obtained and reviewed the research arrangement and related documentation on transferring and administering the gift funds. We interviewed program officials on their actions in accepting the funds and compared activities and documentation pertaining to NIEHS's acceptance of ACC's gift with the requirements and recommendations outlined in NIH's policy. To determine the extent of similar research arrangements at other federal agencies, we identified officials responsible for 96 percent or more of the extramural research budgets at NIH, EPA, and two additional agencies. We then used a structured guide to determine what, if any, research arrangements the agencies had with external partners. In addition to NIEHS and ORD, we selected a nonprobability sample of two additional agencies on the basis of the magnitude of the research component of their mission and congressional interest. The two agencies selected were the Food and Drug Administration (FDA) and the Federal Aviation Administration (FAA) because each agency had a research component to its mission, a corresponding research budget, and a regulatory role. We determined that the selection was appropriate for our design and objectives and that the selection would generate valid and reliable evidence to support our work. To determine the extent to which arrangements exist within these four agencies, we obtained the most current available data on extramural research budgets from institutes and centers in NIH, program and regional offices in EPA, and the programs and centers at FAA and FDA. To assess the reliability of these data, we used a structured guide to interview officials at each agency responsible for maintaining the databases containing the data provided. Specifically, we obtained descriptions of the databases, how data are entered into the databases, quality control checks on the data, testing conducted on the data, and officials' views on the accuracy and completeness of the data. We asked follow-up questions whenever necessary. FDA officials noted one limitation on the data that were provided. Specifically, when compiling data on research budgets, officials must sometimes subjectively interpret the term "research." The impact of such interpretation may cause the extramural research figures for FDA to be slightly overstated. After taking these steps, we determined that the data were sufficiently reliable for the purposes of this report. We used these data to rank order the programs and centers and identify officials in each agency responsible for administering 96 percent or more of each agency's extramural research budget. In our interviews with these officials, we focused on arrangements established since January 1999-- specifically, arrangements with characteristics similar to the ACC arrangements. We looked for and considered arrangements with nongovernmental, nonacademic partners to sponsor research extramural to both organizations. We did not collect information or report on the use of other types of agency research cooperation with external partners such as cooperative research and development agreements or informal consultations between agency and external scientists. At NIH, we used a structured guide to interview officials at the following institutes or centers, listed in order of greatest to least extramural research grant-dollar totals, in fiscal year 2002: National Cancer Institute; National Heart, Lung, and Blood Institute; National Institute of Allergy and Infectious Diseases; National Institute of General Medical Sciences; National Institute of Diabetes and Digestive and Kidney Diseases; National Institute of Neurological Disorders and Stroke; National Institute of Mental Health; National Center for Research Resources; National Institute of Child Health and Human Development; National Institute on Drug Abuse; National Institute on Aging; National Eye Institute; NIEHS; National Institute of Arthritis and Musculoskeletal and Skin Diseases; National Human Genome Research Institute; National Institute on Alcohol Abuse and Alcoholism; National Institute on Deafness and Other Communication Disorders; National Institute of Dental and Craniofacial Research; National Institute of Nursing Research; and National Institute of Biomedical Imaging and Bioengineering. Together, these institutes and centers accounted for 99 percent of NIH's total extramural research funds for fiscal year 2002. At EPA, we used a structured guide to interview program officials from the following offices and regions (shown in order of greatest to least funding available for extramural research fiscal year 2003): ORD; Office of Water; Region 6; Region 9; Office of International Affairs; Region 3; Office of Solid Waste and Emergency Response; Region 4; Region 5; Region 1; Region 2; Region 7; Region 10; Region 8; Office of Prevention, Pesticides and Toxic Substances; and Office of Air and Radiation. Together, these offices accounted for 99 percent of the EPA's extramural research funds for fiscal year 2003. At FDA, we interviewed the agency official responsible for getting approval for Memorandums of Agreement from the General Counsel's Office and Office of Grants Management and for ensuring that each agreement is published in the Federal Register. FDA does not accept funds from external partners under these agreements. Finally, at FAA, we interviewed officials from the research and development offices at headquarters as well as the division manager of the Acquisition, Materiel, and Grants Division of the William J. Hughes Technical Center. Together, these offices accounted for 96 percent of the agency's fiscal year 2003 funds for extramural research. To independently corroborate the information obtained from agency officials, to the extent possible, we collected documents on the agreements we identified at these agencies and reviewed agency Web sites maintained by the relevant centers and offices, as well as Web sites maintained by external sources, such as advocacy or trade groups. We conducted our review from February 2004 through February 2005 in accordance with generally accepted government auditing standards. In addition to the individuals listed above, key contributions to this report were made by Amy Dingler, Karen Keegan, Judy Pagano, Carol Herrnstadt Shulman, Barbara Timmerman, Mindi Weisenbloom, and Eugene Wisnoski. Also contributing to this report were Anne Dievler and Jim Lager.
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An institute at the National Institutes of Health (NIH) and an office in the Environmental Protection Agency (EPA) entered into collaborative arrangements with the American Chemistry Council (ACC) to support research on the health effects of chemical exposures. NIH accepted a gift from ACC to help fund the research. EPA and ACC funded their proposals separately. The arrangements raised concerns about the potential for ACC to influence research that could affect the chemical industry. GAO determined the agencies' legal authorities to enter into the arrangements; the extent to which the agencies evaluated and managed potential conflicts of interest resulting from these arrangements; the extent to which the NIH institute complied with NIH's gift acceptance policy; and the extent to which NIH, EPA, and other agencies have similar arrangements. NIH's National Institute of Environmental Health Sciences (NIEHS) used the authorities granted to NIH's institutes and centers under sections of the Public Health Service Act to enter into its arrangement with ACC. Similarly, EPA's Office of Research and Development (ORD) relied on authorities granted to EPA under sections of the Clean Air Act, the Clean Water Act, and the Solid Waste Disposal Act to enter into its research arrangement. Nothing in these statutes appears to prohibit either agency from entering into research arrangements with nonprofit organizations such as ACC. NIEHS and ORD did not formally evaluate the potential for conflicts of interest with ACC before they entered into the arrangements, but both agencies took steps to manage the potential as the arrangements were implemented. NIH and EPA had no specific policies requiring officials to evaluate or manage potential conflicts of interest when they entered into the ACC arrangements, nor do they currently have such policies. Although no formal evaluation occurred, agency officials managed the arrangements through their existing research management processes. Both agencies believe these actions helped mitigate the potential for undue influence by ACC and adequately protected the integrity of the scientific research conducted under the arrangements. Because the agencies' research management processes were not designed to address conflict of interest issues they are not a substitute for a formal evaluation of such conflicts. Without policies requiring a formal evaluation and management of conflicts, there is no assurance that similar arrangements will be appropriately evaluated and managed for such conflicts in the future. NIEHS officials complied with portions of NIH's gift acceptance policy that guide the acknowledgement and administration of gifts. However, the policy's guidance on evaluating and managing potential conflicts is extremely broad, and it lacks clarity and consistency. As a result, the policy gives officials wide discretion in this area. In addition, the policy does not require the agency to document the basis for its decisions. Consequently, the policy does not provide sufficient assurance that potential conflicts of interest between NIH and donor organizations will be appropriately considered. While some institutes and centers at NIH had arrangements somewhat similar to the ACC arrangements, GAO did not find any similar arrangements at other program offices at EPA or at the Food and Drug Administration and the Federal Aviation Administration--two other agencies with significant research budgets. None of the nine research arrangements GAO found at NIH institutes and centers involve organizations that represent industry in the same direct manner that ACC represents the chemical industry.
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Over the last 50 years, the composition of the American household has changed dramatically. During this period, the proportion of unmarried individuals in the population increased steadily as couples chose to marry at later ages and cohabit prior to marriage--and as divorce rates rose (see fig. 1). From 1960 to 2010, the percentage of single-parent families also rose. In fact, from 1970 through 2012, the estimated proportion of single-parent families more than doubled, increasing from 13 to 32 percent of all families. The decline in marriage and rise in single parenthood over this period were more pronounced among low-income, less-educated individuals, and some minorities. For example, from 1960 to 2010, the proportion of married, 45- to 54-year old men in the highest income quintile declined modestly while the proportion of married men in the lowest income quintile declined from an estimated 71 to 27 percent (see fig. 2). Similarly, the percentage of single parents among 45- to 54-year-old men and women in the highest income quintile remained flat, while there was a steep rise in the percentage of single parents in the lowest income quintile, according to our estimates. In terms of education, among individuals age 18 years and older, the rise in single parenthood was steeper for those without a high school diploma in comparison to their counterparts with 4 or more years of college. Over the same period, the labor force participation rate of married women increased (see fig. 3). In 1960, labor force participation rates among married men, single men, married women, and single women ranged from 89 percent for married men to 32 percent for married women, according to our estimates. Since then, the differences in labor force participation rates for these four groups have narrowed, with labor force participation among married and single women within 3 percentage points in 2010. As a result of married women's increasing labor force participation, the proportion of married couples with two earners has risen--along with the wives' contributions to household income. According to the Bureau of Labor Statistics, from 1970 through 2010, women's median contribution to household income rose from 27 to 38 percent. Further, from 1987 through 2010, the percentage of households in which the wives' earnings exceeded their husband's rose from 24 to 38 percent. As marriage and workforce patterns have changed, the U.S. retirement system has undergone its own transition. Specifically, over the last two decades employers have increasingly shifted away from offering their employees traditional DB to DC plans, and roughly half of U.S. workers do not participate in any employer-sponsored pension plan. DB plans typically offer retirement benefits to a retiree in the form of an annuity that provides a monthly payment for life, including a lifetime annuity to the surviving spouse, unless the couple chooses otherwise. In contrast, under a DC plan, workers and employers may make contributions to individual accounts. Depending on the options available under the plan, at retirement DC participants may take a lump sum, roll their plan savings into an IRA, leave some or all of their money in the plan, or purchase an annuity offered through the plan. Further, many of the remaining DB plans now offer lump sums as one of the form-of-payment options under the plan. Participants who elect a lump sum forgo a lifetime annuity. Some DB plan sponsors have also begun offering special, one-time lump sum elections to participants who are already retired and receiving monthly pension benefits. Taken together, the trends in marriage and workforce participation have implications for the receipt of Social Security retirement benefits, especially for women. Specifically, the proportion of women who are not eligible to receive Social Security spousal benefits because they were either never married, or divorced after less than 10 years of marriage-- the length of time required for eligibility for Social Security divorced spouse benefits--has increased over the last two decades. The decline in the proportion of women with marriages that qualify them for spousal benefits--coupled with the rise in the percentage of women receiving benefits based on their own work record--has resulted in fewer women today receiving Social Security spousal and survivor benefits than in the past.been more dramatic. In general, the trend away from women receiving spousal benefits is projected to continue, with the largest shift occurring among black women, according to SSA analyses. For many elderly, this shift is likely to be positive, reflecting their higher earnings and greater capacity to save for retirement. However, elderly women with low levels of lifetime earnings, who have no spouse or do not receive a spousal benefit--a group that is disproportionately represented by black women-- For blacks, the rise in ineligibility for spousal or widow benefits has are expected to have correspondingly lower Social Security retirement benefits relative to those with higher incomes. These trends have also affected household savings behavior and the financial risks households face in retirement. Households with DC plans have greater responsibility to save and manage their retirement savings so that they have sufficient income throughout retirement. However, our analysis of SCF data shows that many households approaching retirement still have no or very limited retirement savings (see fig. 4). Married households--in which many women now make significant contributions to retirement savings--are more likely to have retirement savings, but their median savings are low. The majority of single-headed households have no retirement savings. Single parents, in particular, tend to have fewer resources available to save for retirement during their working years and are less likely to participate in DC plans. In addition to challenges with accumulating sufficient savings for retirement, individuals may also find it difficult to determine how to invest their savings during their working years and spend down their savings when they reach retirement. During their working years, DC plan participants typically must determine the size of their contributions and choose among various investment options offered by the plan. At retirement or separation from their employer, plan participants must decide what to do with their plan savings. Participants in DB plans also face similar decisions if the plan offers a lump sum option, including whether to take the annuity or lump sum, and if a lump sum is elected, how to manage those benefits. GAO has found that these decisions are difficult to navigate because the appropriate investment strategy depends on many different aspects of an individual's circumstances, such as anticipated expenses, income level, health, and each household's tolerance for risk. In addition, individuals with DC plans face challenges comparing their distribution options, in part due to a host of complicated factors that must be considered in choosing among such options. They may also lack objective information to inform these complicated decisions. In fact, while financial experts GAO has interviewed typically recommended that retirees convert a portion of their savings into an income annuity, or opt for the annuity provided by an employer-sponsored DB pension instead of a lump sum withdrawal, we found that most retirees pass up opportunities for additional lifetime retirement income. These choices coupled with increasing life expectancy may result in more retirees outliving their assets. Lastly, the transition from DB to DC plans has increased the vulnerability of some spouses due to differences in the federal requirements for spousal protections between these two types of retirement plans. For DB plans, spousal consent is required if the participant wishes to waive the survivor annuity for his or her spouse. In contrast, for DC plans, spousal consent is not required for the participant to withdraw funds from the account--either before or at retirement--and DC plans do not generally offer annuities at all, including those with a survivor benefit. While this may not be a concern among many couples, it is a concern for some, especially those who depend on their spouse for income. While the trends described above have the potential to affect many Americans, it is likely that they will impact the nation's most vulnerable more severely. Despite the role Social Security has played in reducing poverty among seniors, poverty remains high among certain groups (see fig. 5). These groups include older women, especially those who are unmarried or over age 80, and nonwhites. Moreover, individuals nearing retirement who experience economic shocks, such as losing a job or spouse, are also vulnerable to economic insecurity. During the 2007-2009 recession, unemployment rates doubled for workers aged 55 and older. When older workers lose a job they are less likely to find other employment. In fact, the median duration of unemployment for older workers rose sharply from 2007 to 2010, more than tripling for workers 65 and older and increasing to 31 weeks from 11 weeks for workers age 55 to 64. Prior GAO work has shown that long- term unemployment can reduce an older worker's future retirement income in numerous ways, including reducing the number of years the worker can accumulate savings, prompting workers to claim Social Security retirement benefits before they reach their full retirement age, Similarly, our and leading workers to draw down their retirement assets.past work has shown that divorce and widowhood in the years leading up to and during retirement have detrimental effects on an individual's assets and income, and that these effects were more pronounced for women. As a result of the trends described above, these vulnerable populations may face increasing income insecurity in old age and be in greater need of assistance. For example, during the 2007-2009 recession, the demand for food assistance rose sharply among older adults. Specifically, from fiscal year 2006 to 2009, the average number of households with a member age 60 or older participating in the Supplemental Nutrition Assistance Program rose 25 percent, while the population in that age group rose by 9 percent. Pub. L. No. 89-73, 79 Stat. 218 (codified as amended at 42 U.S.C. SSSS 3001-3058ff). past work, we noted that the national funding formula used to allocate funding to states does not include factors to target older adults in greatest need, such as low-income older adults, although states are required to consider such factors when developing the intrastate formulas they use to allocate funds among their local agencies. We found that certain formula changes to better target states with elderly adults with the greatest need would have disparate effects on states, depending on their characteristics. We have also found that lack of federal guidance and data make it difficult to know whether those with the greatest need are being served. Our findings underscore how retirement security can be affected by changing circumstances in the American household and the economy. As the composition of the American family continues to evolve and as our retirement system transitions to one that is primarily account-based, vulnerable populations in this country will face increasing risk of saving sufficiently and potentially outliving their assets. For those with little or no pension or other financial assets, ensuring income in retirement may involve difficult choices, including how long to wait before claiming Social Security benefits, how long to work, and how to adjust consumption and lifestyle to lower levels of income in retirement. Poor or imprudent decisions may mean the difference between a secure retirement and poverty. Planning for these needs will be crucial if we wish to avoid turning back the clock on the gains we have achieved over the past 50 years from Social Security in reducing poverty among seniors. Chairman Nelson, Ranking Member Collins, and Members of the Committee, this completes my statement. I would be happy to answer any questions you might have. In addition to the above, Charlie Jeszeck, Director; Michael Collins, Assistant Director; Jennifer Cook, Erin M. Godtland, Rhiannon Patterson, and Ryan Siegel made significant contributions to this testimony and the related report. In addition, James Bennett, David Chrisinger, Sarah Cornetto, Courtney LaFountain, Kathy Leslie, Amy Moran Lowe, Sheila McCoy, Susan Offutt, Marylynn Sergent, Frank Todisco, and Shana Wallace made valuable contributions. 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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Over the past 50 years, poverty rates among older Americans have declined dramatically, in large part due to the availability and expansion of Social Security benefits. Social Security is now the most common type of income for retirees. Social Security retirement benefits are available not only to those who qualify based on their own work history, but also to spouses, widows/widowers, and in some cases former spouses of workers who qualify. However, in recent decades, marriage has become less common, women have entered the workforce in greater numbers, and many employers have shifted from offering DB to DC plans. In light of these trends, GAO is reporting on: (1) the trends in marriage and labor force participation in the American household and in the U.S. retirement system, (2) the effect of those trends on the receipt of retirement benefits and savings, and (3) the implications for vulnerable elderly populations and current challenges in assisting them. This statement draws from previously issued GAO work and a recently issued report, which was based on an analysis of nationally representative survey data including the Survey of Consumer Finances, the Survey of Income and Program Participation, and the Current Population Survey (CPS); and a broad literature review. GAO also interviewed agency officials and a range of experts in the area of retirement security. GAO is making no recommendations. The decline in marriage, rise in women's labor force participation, and transition away from defined benefit (DB) plans to defined contribution (DC) plans have resulted in changes in the types of retirement benefits households receive and increased vulnerabilities for some. Since the 1960s, the percentage of unmarried and single-parent families has risen dramatically, especially among low-income, less-educated individuals, and some minorities. At the same time, the percentage of married women entering the labor force has increased. The decline in marriage and rise in women's labor force participation have affected the types of Social Security benefits households receive, with fewer women receiving spousal benefits today than in the past. In addition, the shift away from DB to DC plans has increased financial vulnerabilities for some due to the fact that DC plans typically offer fewer spousal protections. DC plans also place greater responsibility on households to make decisions and manage their pension and financial assets so they have income throughout retirement. As shown in the figure below, despite Social Security's role in reducing poverty among seniors, poverty remains high among certain groups of seniors, such as minorities and unmarried women. These vulnerable populations are more likely to be adversely affected by these trends and may need assistance in old age. Note: The category "White" refers to people who are white only, non-Hispanic. "Black" refers to people who are black only, non-Hispanic. "Asian" refers to people who are either Asian only, Pacific Islander only or Asian and Pacific Islander, and are non-Hispanic. Hispanic people may be any race. Percentage estimates for poverty rates have margins of error ranging from 0.6 to 8.6 percentage points. See the hearing statement for more information on confidence levels and the data.
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Of VA's $48.8 billion budget in fiscal year 2001, $20.9 billion was for carrying out its four health care missions. Its first, most visible health care mission is to provide medical care for veterans. VA operates a national health system of hospitals, clinics, nursing homes and other facilities that provide a broad spectrum of medical, surgical, and rehabilitative care. More than 3.8 million people received care in VA health care facilities last year. Under its second mission--to provide education and training for health care personnel--VA manages the largest medical education and health professions training program in the United States, training about 85,000 health professionals annually in its medical facilities that are affiliated with almost 1,400 medical and other schools. Under its third mission--to conduct medical research--VA funding was about $1.2 billion in 2000 for over 15,000 medical research projects and related medical science endeavors. VA's fourth mission--to serve as backup to the Department of Defense (DOD) health system in war or other emergencies and as support to communities following domestic terrorist incidents and other major disasters--has attracted greater congressional interest since the September 11 terrorist attacks in the United States. This role, however, is not new. Since the early 1980s, when a national system was put in place to provide for local medical responses when a disaster occurs, VA has been providing medical support. In fiscal year 2001, less than one-half of 1 percent of VA's total health care budget, $7.9 million, was allocated to this mission. VA was first formally assigned a federal disaster management role in 1982, when legislation tasked VA with ensuring the availability of health care for eligible veterans, military personnel, and the public during military conflicts and domestic emergencies. In the immediate aftermath of the September 11 attacks, VA medical facilities in New York, Washington, D.C., Baltimore, and Altoona, Pennsylvania, were readied to handle casualties. In prior emergencies, such as hurricanes Andrew and Floyd and the 1995 bombing of the federal building in Oklahoma City, VA deployed more than 1,000 medical personnel and provided substantial amounts of medical supplies and equipment as well as the use of VA facilities. VA's role as part of the federal government's response for disasters has grown with the reduction of medical capacity in the Public Health Service and military medical facilities. VA established an Emergency Management Strategic Healthcare Group with responsibility for the following six emergency response functions: Ensuring the continuity of VA medical facility operations. Prior to emergency conditions, VA emergency management staff are responsible for minimizing disruption in the treatment of veterans by developing, managing, and reviewing plans for disasters and evacuations and coordinating mutual aid agreements for patient transfers among VA facilities. During emergency conditions these staff are responsible for ensuring that these plans are carried out as intended. Backing up DOD's medical resources following an outbreak of war or other emergencies involving military personnel. In 2001, VA has plans for the allocation of up to 5,500 of its staffed operating beds for DOD casualties within 72 hours of notification. In total, 66 VA medical centers are designated as primary receiving centers for treating DOD patients. In turn, these centers must execute plans for early release or movement of VA patients to 65 other VA medical centers designated as secondary support centers. Jointly administering the National Disaster Medical System (NDMS). In 1984, VA, DOD, the Federal Emergency Management Agency (FEMA), and the Department of Health and Human Services (HHS) created a federal partnership to administer and oversee NDMS, which is a joint effort between the federal and private sectors to provide backup to civilian health care in the event of disasters producing mass casualties. The system divides the country into 72 areas selected for their concentration of hospitals and proximity to airports. Nationwide, more than 2,000 civilian and federal hospitals participate in the system. One of VA's roles in NDMS is to help coordinate VA hospital capacity with the nonfederal hospitals participating in the system. Carrying out Federal Response Plan efforts to assist state and local governments in coping with disasters. Under FEMA's leadership, VA and other agencies are responsible for carrying out the Federal Response Plan, which is a general disaster contingency plan. As a support agency, VA is one of several federal agencies sharing responsibility for providing public works and engineering services, mass care and sheltering, resource support, and health and medical services. VA is also involved with other agencies in positioning medical resources at high-visibility public events requiring enhanced security, such as national political conventions. VA also maintains a database of deployable VA medical personnel that is intended to help the agency to quickly locate medical personnel (such as nurses, physicians, and pharmacists) for deployment to a disaster site. Carrying out Federal Radiological Emergency Response Plan efforts to respond to nuclear hazards. Depending on the type of emergency involved, VA is responsible for supporting the designated lead federal agency in responding to accidents at nuclear power stations or terrorist acts to spread radioactivity in the environment. VA also has its own medical emergency radiological response team of physicians and other health specialists. When requested by the lead agency, VA's response team is expected to be ready to deploy to an incident site within 12 to 24 hours to provide technical advice, radiological monitoring, decontamination expertise, and medical care as a supplement to local authorities' efforts. Supporting efforts to ensure the continuity of government during national emergencies. VA maintains the agency's relocation site and necessary communication facilities to continue functioning during a major national emergency. In addition to these functions, VA plays a key support role in the nation's stockpiling of pharmaceuticals and medical supplies in the event of large- scale disasters caused by weapons of mass destruction (WMD). These stockpiles are critical to the federal assistance provided to state and local governments should they be overwhelmed by terrorist attack. Under a memorandum of agreement between VA and HHS' Office of Emergency Preparedness (OEP), VA maintains at designated locations medical stockpiles containing antidotes, antibiotics, and medical supplies and smaller stockpiles containing antidotes, which can be loaned to local governments or predeployed for special events, such as the Olympic Games. In fiscal year 2001, OEP reimbursed VA $1.2 million for the purchase, storage, and maintenance of the pharmaceutical stockpiles. VA also maintains stockpiles of pharmaceuticals for another HHS agency, the Centers for Disease Control and Prevention (CDC). Under contract with CDC, VA purchases drugs and other medical items and manages a spectrum of contracts for the storage, rotation, security, and transportation of stockpiled items. VA maintains the inventory of pharmaceutical and medical supplies called "12-hour push packages," which can be delivered to any location in the nation within 12 hours of a federal decision to deploy them. It also maintains a larger stock of antibiotics, antidotes, other drugs, medical equipment, and supplies known as vendor-managed inventory that can be deployed within 24 to 36 hours of notification. In fiscal year 2001, CDC contracts included an estimated $60 million to reimburse VA for its purchasing and management activities associated with the stockpiles, including the cost of medical items. Consistent with the agency's fourth health care mission, VA operates as a support rather than command agency under the umbrella of several federal policies and contingency plans for combating terrorism. Its direct emergency response activities include conducting and evaluating terrorist attack simulations to develop more effective response procedures and maintaining the inventories for stockpiled pharmaceuticals and medical supplies. Our prior work on federal coordination of efforts to combat terrorism found that VA led many disaster response simulation exercises and conducted follow-up evaluations. These exercises are an important part of VA's efforts to prepare for catastrophic terrorist attacks. The exercises test and evaluate policies and procedures, test the effectiveness of response capabilities, and increase the confidence and skill level of personnel. Those exercises held jointly with other federal, state, and local agencies facilitate the planning and execution of multiagency missions and help identify strengths and weaknesses of interagency coordination. VA has sponsored or participated in a variety of exercises to prepare for combating terrorism, including those involving several federal agencies and WMD scenarios. In addition, VA participates in numerous other disaster-related exercises aimed at improving its consequence management capabilities. The following are examples of terrorism-related exercises in which VA has participated. In March 1997, in conjunction with the state of Minnesota, VA participated in the "Radex North" exercise in Minneapolis, which simulated a terrorist attack on a federal building. The attack involved simulated explosives laced with radioactive material, requiring the subsequent decontamination and treatment of hundreds of casualties. One of the objectives was to test the capabilities of VA's radiological response team. The exercise had 500 participants and was designed to integrate the federal medical response into the state and local response, including local hospitals. In July 1997, VA participated in "Terex '97" in Nebraska. The exercise's main objectives were to provide federal and state public health agencies with integrated training in disaster response and to assess coordination among federal, state, and local agencies for responding to a catastrophic, mass-casualty incident. The VA hospital in Lincoln provided bed space for mock casualties wounded by simulated conventional explosives. In addition, VA management staff worked with other federal, state, and local health care officials to coordinate emergency response efforts. In May 1998, VA, DOD, and HHS cosponsored "Consequence Management 1998" in Georgia. The 2-day exercise trained and evaluated federal medical response team personnel in emergency procedures for responding to a WMD attack. In organizing the event, VA's radiological response team worked with the Marine Corps' special response force to decontaminate mock casualties. The VA medical center in Augusta supplied logistics support, including stockpiled pharmaceuticals. In May 1999, VA sponsored "Catex '99" in Minnesota. Over 80 groups representing federal, state, and local governments, the military, volunteer organizations, and the private sector worked with VA to train for a mass- casualty WMD incident. In a scenario depicting simultaneous chemical weapons attacks throughout the Twin Cities region, VA activated and oversaw an emergency operations center, which coordinated response efforts, including simulated casualty evacuations to hospitals in Detroit, Cleveland, Milwaukee, and Des Moines. In May 2000, VA participated in "Consequence Management 2000" in Georgia. Developed jointly by VA, DOD, HHS, and various state and local agencies, the exercise trained federal emergency personnel in procedures and techniques for responding to a WMD attack. The event also served to familiarize federal, state, and local agencies with the U.S. Army Reserves' role in the event of a catastrophic terrorist incident. Simulating a mass- casualty terrorist attack in Georgia, VA emergency response teams performed triage and decontaminated patients exposed to chemical and radiological agents. Several VA medical centers in Georgia, Alabama, and South Carolina provided care to simulated serious casualties. In May 2000, VA participated in "TOPOFF 2000," a national, "no-notice" exercise designed to assess the ability of federal, state, and local agencies to respond to coordinated terrorist attacks involving WMD. The event was the largest peace-time terrorism exercise ever sponsored by the Department of Justice and FEMA, and incorporated three main crisis simulations: a radiological scenario in Washington, D.C.; a chemical scenario in New Hampshire; and a biological scenario in Colorado. VA provided consequence management support to other federal agencies, identified hospital bed space for potential casualties, and dispatched medical personnel to various locations. VA also placed its radiological response team on alert. VA also conducts follow-up evaluations of these simulation exercises. Evaluations typically include, among other things, operational limitations, identified strengths and weaknesses, and recommended actions. Our work shows that VA has a good record of evaluating its participation in these exercises. The evaluations generally discuss interagency issues and are disseminated within VA. Among the favorable findings from VA's reviews were that emergency personnel were activated quickly and were deployed to incident sites fully equipped and prepared; personnel demonstrated high levels of motivation and technical expertise; and interaction among federal, state, and local personnel and between civilian and military counterparts was positive. The reviews also identified the following concerns: On-site medical personnel experienced communications problems due to incompatible equipment. Communication between headquarters and field offices was at times hindered by an over-reliance on a single means of communication. Unclear standards and inadequate means for reporting available bed space also posed problems. Caregivers sometimes had difficulty tracking patients as they progressed through on-site treatment stages. Incident-site security was a recurrent concern, especially with respect to decontamination controls. We have made a number of recommendations to federal lead and support agencies to improve such interagency exercises and follow-up evaluations, including the dissemination of evaluation results across agencies. VA has improved the internal controls and inventory management of several medical supply stockpiles it maintains for OEP and CDC to address previously identified deficiencies. VA is responsible for the purchase, storage, and quality control of thousands of stockpile supply items. It maintains stockpiles at several sites around the country for immediate use by federal agency teams staffed with specially trained doctors, nurses, other health care providers, and emergency personnel whose mission is to decontaminate and treat victims of chemical and biological terrorist attacks. In 1999, we found that VA lacked the internal controls to ensure that the stockpiled medical supplies and pharmaceuticals were current, accounted for, and available for use. However, our recent work shows that VA has taken significant corrective actions in response to our recommendations that have resulted in reducing inventory discrepancy rates and improved accountability. At the same time, we have recommended additional steps that, VA, in concert with OEP and CDC, should take to further tighten the security of the nation's stockpiles. These include finalizing and implementing approved operating plans and ensuring compliance with these plans through periodic quality reviews. VA supports these recommendations and is taking action with OEP and CDC to implement them. VA has significant capabilities related to its four health care missions that have potential applicability for the purpose of homeland security. At the same time, it is clear that some of these capabilities would need to be strengthened. How best to employ and enhance this potential will be determined as part of a larger effort currently underway to develop a national homeland security strategy. As the Comptroller General recently noted, this broad strategy will require partnership with the Congress, the executive branch, state and local governments, and the private sector to minimize confusion, duplication of effort, and ineffective alignment of resources with strategic goals. It will also require a systematic approach that includes, among other elements, ensuring the nation's ability to respond to and mitigate the consequences of an attack. In this regard, VA has a substantial medical infrastructure of 163 hospitals and more than 800 outpatient clinics strategically located throughout the United States, including the largest pharmaceutical and medical supply procurement systems in the world and a nationwide register of skilled VA medical personnel. In addition, VA operates a network of 140 treatment programs for post-traumatic stress disorder and is recognized as the leading expert on diagnosing and treating this disorder. VA holds other substantial health system assets. For example, the agency has well-established relationships with 85 percent of the nation's medical schools. According to VA, more than half of the nation's medical students and a third of all medical residents receive some of their training at VA facilities. In addition, more than 40 other types of health care professionals, including specialists in medical toxicology and occupational and environmental medicine, receive training at VA facilities every year. In recent years, VA expanded physician training slots in disciplines associated with WMD preparedness. In 1998, several government agencies, including VA, contributed to a presidential report to the Congress on federal, state, and local preparations and capability to handle medical emergencies resulting from WMD incidents. The report outlined both strengths and weaknesses in regard to VA's emergency response capabilities. The report noted the potential for VA to augment the resources of state and local responders because more than 80 percent of VA hospital emergency plans are included in the local community emergency response plan. However, the report also noted that VA hospitals do not have the capability to process and treat mass casualties resulting from WMD incidents. VA hospitals and most private sector medical facilities are better prepared for treating injuries resulting from chemical exposure than those resulting from biological agents or radiological material. VA hospitals, like community hospitals, lack decontamination equipment, routine training to treat mass casualties, and adequate on-hand medical supplies. Currently, VA's budget authority does not include funds to address these shortcomings. Myriad federal efforts are underway to strengthen the nation's ability to prevent and mitigate the consequences of terrorism. Consideration of what future role VA may assume in coordination with its federal partners in consequence management is an important element. Currently, the agency, in a supporting role, makes a significant contribution to the emergency preparedness response activities carried out by lead federal agencies. Expanding this role in response to stepped up homeland security efforts may be deemed beneficial but would require an analysis of the potential impact on the agency's health care missions, the resource implications for VA's budget, and the merits of enhancing VA's capabilities relative to other federal alternatives. 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. For more information regarding this testimony, please contact me at (202) 512-7101. Stephen L. Caldwell, Hannah F. Fein, Carolyn R. Kirby, and Paul Rades also made key contributions to this statement.
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In the event of a domestic terrorist attack or other major disasters, the Department of Veterans Affairs (VA) is to provide backup medical resources to the military health system and local communities. VA now assists other federal agencies that have lead responsibility for responding to disasters, including terrorism. Its areas of responsibility include disaster simulation exercises and maintaining medical stockpiles. VA's efforts in these areas have enhanced national emergency preparedness by improving medical response procedures and by strengthening the security of federal pharmaceutical stockpiles to ensure rapid response to local authorities. VA also has resources that could play a role in future federal homeland security efforts. Its assets include the bricks, mortar, and human capital components of its health care system; graduate medical education programs; and expertise involving emergency backup and support activities. In managing large-scale medical emergencies arising from terrorist attacks, VA's emergency response capabilities have strengths and weaknesses. Determining how VA can best contribute to homeland security is especially timely given the extraordinary level of federal activity underway to manage large-scale disasters.
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Most Army cardholders properly used their travel cards and paid amounts owed to Bank of America promptly. However, we found that the Army's delinquency rate is higher than any other DOD component or executive branch agency in the federal government. As shown in figure 1, for the eight quarters ending March 31, 2002, the Army's delinquency rate fluctuated from 10 to 18 percent, and on average was about 5 percent higher than the rest of DOD and 7 percent higher than federal civilian agencies. As of March 31, 2002, over 11,000 Army cardholders had $8.4 million in delinquent debt. We also found substantial charge-offs of Army travel card accounts. Since the inception of the travel charge card task order between DOD and Bank of America on November 30, 1998, Bank of America has charged off over 23,000 Army travel card accounts with nearly $34 million of bad debt. As shown in figure 2, the travel cardholder's grade (and associated pay) is a strong predictor of delinquency problems. We found that the Army's delinquency and charge-off problems are primarily associated with young, low- and midlevel enlisted military personnel with basic pay levels ranging from $11,000 to $26,000. A more detailed explanation of each of these grades along with their associated basic pay rates is provided in appendix II. These delinquencies and charge-offs have cost the Army millions of dollars in lost rebates, higher fees, and substantial resources spent pursuing and collecting past-due accounts. For example, we estimated that in fiscal year 2001, delinquencies and charge-offs cost the Army $2.4 million in lost rebates, and will cost $1.4 million in increased automated teller machine (ATM) fees annually. Our work also identified numerous instances of potentially fraudulent and abusive activity related to the travel card. We found that during fiscal year 2001 at least 200 Army employees wrote three or more nonsufficient funds (NSF) or "bounced" checks to Bank of America as payment for their travel card bills--a potentially fraudulent act. Appendix III provides a table summarizing 10 examples, along with more detailed descriptions, of cases in which cardholders wrote three or more NSF checks to Bank of America and had their travel card accounts subsequently charged off. For example, in one case, an Army employee from Ft. Jackson, who was convicted for writing NSF checks prior to receiving the government travel card, wrote over 86 NSF checks to Bank of America. Further, we found instances in which cardholders abused their travel cards by using them to purchase a wide variety of personal goods or services that were unrelated to official government travel. As shown in figure 3, government travel cards are clearly marked, "For Official Government Travel Only." In addition, before receipt of their travel cards, all Army cardholders are required to sign a statement of understanding that the card is to be used only for authorized official government travel expenses. However, as part of our statistical sampling results at the four sites we audited, we estimated that personal use of the government travel card ranged from 15 percent of fiscal year 2001 transactions at one site to 45 percent at another site. Government travel cards were used to pay for such diverse goods and services as dating and escort services; casino and Internet gambling; cruises; tickets to musical and sporting events; personal clothing; closing costs on a home purchase; and, in one case, the purchase of a used automobile. For example, we were able to determine that, during fiscal year 2001, approximately $45,000 was spent Army-wide to purchase cruise packages or to pay for a variety of activities or services on cruise ships. We found that charged-off accounts included both those of (1) cardholders who were reimbursed by the Army for official travel expenses but failed to pay Bank of America for the related charges, thus pocketing the reimbursements, and (2) cardholders who used their travel cards for personal purchases for which they did not pay Bank of America. Appendix IV provides a summary table and supporting narrative describing examples of both types of abusive travel card activity. As detailed in appendix V, we also found instances in which cardholders used their travel cards for personal purposes, but paid their travel card bills when they became due. For example, we found that a Lieutenant Colonel used his travel card to purchase accommodations and tickets to attend the Tournament of Roses in Pasadena, California. These cardholders benefited by, in effect, getting interest-free loans. Personal use of the cards increases the risk of charge-offs related to abusive purchases, which are costly to the government and the taxpayer. We also found several instances of abusive travel card activity where Army cardholders used their cards at questionable establishments such as gentlemen's clubs, which provide adult entertainment. Further, these clubs were used to convert the travel card to cash by supplying cardholders with actual cash or "club cash" for a 10 percent fee. For instance, a cardholder may charge $330 to the government travel card at one of these clubs and receive $300 in cash. Subsequently, the club receives payment from Bank of America for a $330 restaurant charge. For fiscal year 2001, we identified about 200 individuals who charged almost $38,000 at these establishments. For example, we found that 1 cardholder obtained more than $5,000 in cash from these establishments. We found little evidence of documented disciplinary action against Army personnel who misused the card, or that Army travel program managers or supervisors were even aware that Army personnel were using their travel cards for personal use. For example, a civilian employee working at the Pentagon on a classified program used her travel card for personal purchases of about $3,600 and subsequently wrote four NSF checks for over $7,700 to Bank of America. The cardholder's account was subsequently charged-off when the cardholder failed to pay the bill. The employee's supervisor was not aware that the employee had any potentially fraudulent and abusive activity related to the travel card. In another example, a California National Guardsman with over $5,400 of charge-offs associated with authorized travel, for which the Army reimbursed the cardholder, was subsequently promoted from a Major to a Lieutenant Colonel. In addition, we found that 38 of 105 travel cardholders we examined that had their accounts charged-off still had active secret or top-secret clearances as of June 2002. Some of the Army personnel holding security clearances who have had difficulty paying their travel card bills may present security risks to the Army. Army regulations provide that an individual's finances are one of the key factors to be considered in whether an individual should continue to be entrusted with a secret or top-secret clearance. However, we found that Army security officials were unaware of these financial issues and consequently could not consider their potential effect on whether these individuals should continue to receive security clearances. For fiscal year 2001, the Army had significant breakdowns in key internal controls over individually billed travel cards. The breakdowns stemmed from a weak overall control environment, flawed policies and procedures, and a lack of adherence to valid policies and procedures. These breakdowns contributed to the significant delinquencies and charge-offs of Army employee account balances and potentially fraudulent and abusive activity related to the travel cards. At the four units we audited, we found management was focused primarily on delinquencies and often only after severe problems were discovered and major commands began demanding improved performance in reducing the amount of such delinquencies. There were few indications that management placed any emphasis on controls designed to prevent or provide for early detection of travel card misuse. In addition, we identified two key overall control environment weaknesses: (1) the lack of clear, sufficiently detailed policies and procedures and (2) limited travel card audit and program oversight. First, the units we audited used DOD's travel management regulations (DOD Financial Management Regulation, volume 9, chapter 3) as the primary source of policy guidance for management of Army's travel card program. However, in many areas, the existing guidance was not sufficiently detailed to provide clear, consistent travel management procedures to be followed across all Army units. Second, as recognized in the DOD Inspector General's March 2002 summary report on the DOD travel card program, "ecause of its dollar magnitude and mandated use, the DOD travel card program remains an area needing continued emphasis, oversight, and improvement. Independent internal audits should continue to be an integral component of management controls." However, the DOD Inspector General report noted that only two internal review reports were issued from fiscal year 1999 through fiscal year 2001 concerning the Army's travel card program. We found that this overall weak control environment contributed to design flaws and weaknesses in a number of management control areas needed for an effective travel card program. For example, many problems we identified were the result of ineffective controls over issuance of travel cards. Although DOD's policy allows denial of travel cards for certain groups or individuals with poor credit histories, we found that, without exception, the Army processed all travel card applications it received, regardless of an applicant's credit history. For the cases we reviewed, we found a significant correlation between travel card fraud, abuse, and delinquencies and individuals with substantial credit history problems. The prior and current credit problems we identified for Army travel cardholders included charged-off credit card and automobile loans, defaulted and foreclosed mortgages, bankruptcies, and convictions for writing NSF checks. Also, agency program coordinators (APCs), who have the key responsibility for managing and overseeing travel cardholders' activities, are essentially set up to fail in their duties because they are given substantial responsibility for a large number of cardholders--for example up to 1,000 cardholders per APC--and little time to do this collateral duty. Military personnel who are responsible for and rated on other job responsibilities--such as airport security--are given the APC role as "other duty as assigned." With a high level of APC turnover (particularly military APCs, which at one of the locations we audited were reassigned about every 6 months), and only minimal time allotted to perform this collateral duty, we found that APCs generally were ineffective in carrying out their key travel card program management and oversight responsibilities. Table 1 summarizes our statistical tests of four key control activities related to basic travel transaction and voucher processing at four Army locations. Substantial delays in travel voucher reimbursements to cardholders can have a significant impact on high delinquency rates. For example, such delays at the California National Guard contributed to the high delinquency rate for that unit. We found a substantial number of California National Guard employees and several employees at other units audited who may have been due payments for late fees because their reimbursements were late. We also found errors in travel voucher processing that resulted in both overpayment and underpayment of the amounts that cardholders should have received for their official travel expenses. DOD has taken a number of actions focused on reducing delinquencies. In October 2000, the Vice Chief of Staff of the Army issued a directive to cut the Army's delinquencies by 50 percent by the end of March 2001. Further, the Vice Chief of Staff established a goal of a delinquency rate of no more than 4 percent of active cardholders as soon as possible and ordered commanders throughout the Army to provide additional attention to the government travel card program. Beginning in November 2001, DOD began a salary and military retirement offset program--similar to garnishment. As a result of these actions, Army experienced a significant drop in charged-off accounts in the first half of fiscal year 2002. In addition, DOD has encouraged cardholders to make greater use of split pay disbursements. This payment method, by which cardholders elect to have all or part of their reimbursement sent directly to Bank of America, has the potential to significantly reduce delinquencies. Split disbursements are a standard practice of many private sector companies. DOD reported that for about 27 percent of the travel vouchers paid in April 2002 at one of its major disbursing centers, cardholders elected this payment option. Further, the DOD Comptroller created a DOD Charge Card Task Force to address management issues related to DOD's purchase and travel card programs. We met with the task force in June and provided our perspectives on both programs. The task force issued its final report on June 27, 2002. However, we have not yet had an opportunity to review the report's findings in detail. To date, many of the actions that DOD has taken primarily address the symptoms or "back-end" result of delinquency and charge-offs after they have already occurred. We are encouraged by the DOD Comptroller's recent announcement concerning the cancellation of all travel cards of cardholders who have not been on official government travel within the last 12 months. Actions to implement additional "front- end" or preventive controls will be critical if DOD is to effectively address the high delinquency rates and charge-offs, as well as potentially fraudulent and abusive activity, discussed in this testimony. To that end, we will be issuing a related report in this area with specific recommendations, including a number of preventive actions that, if effectively implemented, should substantially reduce delinquencies and potentially fraudulent and abusive activity related to the travel cards. For example, we plan to include recommendations that will address actions needed in the areas of exempting individuals with a history of financial problems from the requirement to use a travel card; providing sufficient infrastructure to effectively manage and provide day-to-day monitoring of travel card activity related to the program; deactivating cards when employees are not on official travel; moving towards mandating use of split disbursements; providing strong, consistent disciplinary action to employees who commit fraud or abuse the travel cards; and ensuring that information on any financial problems related to the travel cards of any cardholders with secret or top-secret security clearances is provided to appropriate security officials to consider in determining whether such clearances should be suspended or revoked. Mr. Chairman, Members of the Subcommittee, and Senator Grassley, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For future contacts regarding this testimony, please contact Gregory D. Kutz at (202) 512-9095 or [email protected] or John J. Ryan at (202) 512-9587 or [email protected]. We used as our primary criteria applicable laws and regulations, including the Travel and Transportation Reform Act of 1998 (Public Law 105-264), the General Services Administration's (GSA) Federal Travel Regulation, and the Department of Defense Financial Management Regulations, Volume 9, Travel Policies and Procedures. We also used as criteria our Standards for Internal Control in Federal Government; and our Guide to Evaluating and Testing Controls Over Sensitive Payments. To assess the management control environment, we applied the fundamental concepts and standards in the GAO internal control standards to the practices followed by management in the six areas reviewed. To assess the magnitude and impact of delinquent and charged-off accounts, we compared the Army's delinquency and charge-off rates to other DOD services and the other executive branch agencies in the federal government. We also analyzed the trends in the delinquency and charge-off data from fiscal year 2000 through the first half of fiscal year 2002. We also used data mining to identify Army individually billed travel card transactions for audit. Our data mining procedures covered the universe of individually billed Army travel card activity during fiscal year 2001 and identified transactions that we believed were potentially fraudulent or abusive. However, our work was not designed to identify, and we did not determine, the extent of any potentially fraudulent or abusive activity related to the travel cards. To assess the overall control environment for the travel card program at the Department of the Army, we obtained an understanding of the travel process, including travel card management and oversight, by interviewing officials from the Office of the Undersecretary of Defense Comptroller, Department of the Army; Defense Finance and Accounting Service (DFAS); Bank of America; and GSA, and reviewing applicable policies and procedures and program guidance they provided. We visited four Army units to "walk through" the travel process including the management of travel card usage and delinquency. We visited the DFAS Orlando location to "walk through" the voucher review and payment process used for two of the four Army locations we tested. We also assessed actions taken to reduce the severity of travel card delinquencies and charge-offs. Further, we contacted one of the three largest U.S. credit bureaus to obtain credit history data and information on how credit scoring models are developed and used by the credit industry for credit reporting. At each of the Army locations we audited, we also used our review of policies and procedures and the results of our walk throughs of travel processes and other observations to assess the effectiveness of controls over segregation of duties among persons responsible for preparing travel vouchers, processing and approving travel vouchers, and certifying travel voucher payments. To test the implementation of key controls over individually billed Army travel card transactions processed through the travel system--including the travel order, travel voucher, and payment processes--we obtained and used the database of fiscal year 2001 Army travel card transactions to review random samples of transactions at four Army locations. Because our objective was to test controls over travel card expenses, we excluded credits and miscellaneous debits (such as fees) from the population of transactions used to select random samples of travel card transactions to review at each of four Army units we audited. Each sampled transaction was subsequently weighted in the analysis to account statistically for all charged transactions at each of the four units, including those transactions that were not selected for review at those locations. We selected the four Army locations for testing controls over travel card activity based on the relative size of travel card activity at the 13 Army commands and of the units under these commands, the number and percentage of delinquent accounts, and the number and percentage of accounts charged-off. We selected two units from Army's Forces Command because that command represented approximately 19 percent of travel card activity, 22 percent of the delinquent accounts, and 28 percent of accounts charged-off during fiscal year 2001 across the Army. We also selected an Army National Guard location because the Army National Guard represented 13 percent of the total travel card activity, 22 percent of the delinquent accounts, and 15 percent of charge-offs for fiscal year 2001. The Special Operations Command represents about 6 percent of Army's charge card activity, 5 percent of the delinquent accounts and 4 percent of Army travel card accounts charged-off in fiscal year 2001. Each of the units within the commands was selected because of the relative size of the unit within the respective command. Table 2 presents the sites selected and the universe of fiscal year 2001 transactions at each location. We performed tests on statistical samples of travel card transactions at each of the four case study sites to assess whether the system of internal control over the transactions was effective and to provide an estimate of the percentage of transactions that were not for official government travel by unit. For each transaction in our statistical sample, we assessed whether (1) there was an approved travel order prior to the trip, (2) the travel voucher payment was accurate, (3) the travel voucher was submitted within 5 days of the completion of travel, and (4) the travel voucher was paid within 30 days of the submission of an approved voucher. We considered transactions not related to authorized travel to be abusive and incurred for personal purposes. The results of the samples of these control attributes, as well as the estimate for personal use--or abuse--related to travel card activity, can be projected to the population of transactions at the respective test case study site only, not to the population of travel card transactions for all Army cardholders. Table 3 shows the results of our test of the key control related to the authorization of travel (approved travel orders were prepared prior to dates of travel). Table 4 shows the results of our test for effectiveness of controls in place over the accuracy of travel voucher payments. Table 5 shows the results of our tests of two key controls related to timely processing of claims for reimbursement of expenses related to government travel--timely submission of the travel voucher by the employee and timely approval and payment processing. To determine if cardholders were reimbursed within 30 days, we used payment dates provided by DFAS. We did not independently validate the accuracy of these reported payment dates. We briefed DOD managers, including officials in DOD's Defense Finance and Accounting Service, and Army Managers including Assistant Secretary of the Army (Financial Management and Comptroller) officials, Army Forces Command and Special Operations Command Unit Commanders, unit-level APCs, and Army National Guard Bureau management and the California National Guard Adjutant General, and Bank of America officials on the details of our review, including our objectives, scope, and methodology and our findings and conclusions. We incorporated their comments where appropriate. With the exception of our limited review of access controls at the California National Guard, we did not review the general or application controls associated with the electronic data processing of Army travel card transactions. We conducted our audit work from December 2001 through July 2002 in accordance with generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. Following this testimony, we plan to issue a report, which will include recommendations to DOD and the Army for improving internal controls over travel card activity. Tables 6 and 7 show the grade, rank (where relevant), and the associated basic pay rates for 2001 for the Army's military and civilian personnel, respectively.
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In fiscal year 2001, the Army had 430,000 individually billed travel card accounts, and about $619 million in related charges. Most Army cardholders properly used their travel cards and promptly paid amounts owed. However, the Army's delinquency rate is higher than any other Department of Defense (DOD) component or executive branch agency. GAO also identified numerous instances of potentially fraudulent and abusive activity related to the travel cards. During fiscal year 2001, at least 200 Army employees wrote three or more nonsufficient funds or "bounced" checks to Bank of America as payment for their travel bills--potentially fraudulent acts. GAO found little evidence of documented disciplinary action against Army personnel who misused the card, or that Army travel program managers or supervisors were even aware that travel cards were being used for personal use. For fiscal year 2001, the Army had significant breakdowns in key internal controls over individually billed travel cards that stemmed from a weak overall environment, flawed policies and procedures, and a lack of adherence to valid policies and procedures. These breakdowns contributed to the significant delinquencies and charge-offs of Army employee account balances and potentially fraudulent and abusive activity related to the travel cards. DOD has taken a number of actions focused on reducing delinquencies. As a result of these actions, Army experienced a significant drop in charged-off accounts in the first half of fiscal year 2002.
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Today, the Social Security program does not face an immediate crisis, but it does face a long-range financing problem driven primarily by known demographic trends that is growing rapidly. While the crisis is not immediate, the challenge is more urgent than it may appear. Acting soon to address these problems reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program's rising costs. Acting soon would also allow changes to be phased in so that the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning while helping to avoid related "expectation gaps." On the other hand, failure to take remedial action will, in combination with other entitlement spending, lead to a situation unsustainable for both the federal government and, ultimately, the economy. The Social Security system has required changes in the past to ensure future solvency. Indeed, the Congress has always taken the actions necessary to do this when faced with an immediate solvency crisis. I would like to spend some time describing the nature, timing, and extent of Social Security's financing problem. As you all know, Social Security has always been a largely pay-as-you-go system. This means that the system's financial condition is directly affected by the relative size of the populations of covered workers and beneficiaries. Historically, this relationship has been favorable. Now, however, people are living longer, and spending more time in retirement. As shown in figure 1, the U.S. elderly dependency ratio is expected to continue to increase. The proportion of the elderly population relative to the working-age population in the U.S. rose from 13 percent in 1950 to 19 percent in 2000. By 2050, there is projected to be almost 1 elderly dependent for every 3 people of working age--a ratio of 32 percent. Additionally, the average life expectancy of males at birth has increased from 66.6 in 1960 to 74.3 in 2000, with females at birth experiencing a rise of 6.6 years from 73.1 to 79.7 over the same period. As general life expectancy has increased in the United States, there has also been an increase in the number of years spent in retirement. Improvements in life expectancy have extended the average amount of time spent by workers in retirement from 11.5 years in 1950 to 18 years for the average male worker as of 2003. A falling fertility rate is the other principal factor underlying the growth in the elderly's share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95--a rate that is below what it takes to maintain a stable population. Taken together, these trends threaten the financial solvency and sustainability of this important program. The result of these trends is that labor force growth will continue to decline in 2006 and by 2025 is expected to be less than a fifth of what it is today, as shown in figure 2. Relatively fewer U.S. workers will be available to produce goods and services. Without a major increase in productivity or increases in immigration, low labor force growth will lead to slower growth in the economy and to slower growth of federal revenues. This in turn will only accentuate the overall pressure on the federal budget. This slowing labor force growth has important implications for the Social Security system. Social Security's retirement eligibility dates are often the subject of discussion and debate and can have a direct effect on both labor force growth and the condition of the Social Security retirement program. It is also appropriate to consider whether and how changes in pension and/or other government policies could encourage longer workforce participation. To the extent that people choose to work longer as they live longer, the increase in the amount of time spent in retirement could be diminished. This could improve the finances of Social Security and mitigate the expected slowdown in labor force growth. The Social Security program's situation is one symptom of this larger demographic trend that will have broad and profound effects on our nation's future in other ways as well. The aging of the labor force and the reduced growth in the number of workers will have important implications for the size and composition of the labor force, as well as the characteristics of many jobs in our increasingly knowledge-based economy, throughout the 21st century. The U.S. workforce of the 21st century will be facing very different opportunities and challenges than those of previous generations. Today, the Social Security Trust Funds take in more in taxes than they spend. Largely because of the demographic trends I have described, this situation will change. Although the trustees' 2004 intermediate estimates project that the combined Social Security Trust Funds will be solvent until 2042, program spending will constitute a rapidly growing share of the budget and the economy well before that date. Under the trustees' 2004 intermediate estimates, Social Security's cash surplus--the difference between program tax income and the costs of paying scheduled benefits-- will begin to decline in 2008. By 2018, the program's cash flow is projected to turn negative--its tax income will fall below benefit payments. At that time, the program will begin to experience a negative cash flow, which will accelerate over time. Social Security will join Medicare's Hospital Insurance Trust Fund, whose outlays exceeded cash income in 2004, as a net claimant on the rest of the federal budget. (See figure 3.) In 2018, the combined OASDI Trust Funds will begin drawing on its Treasury securities to cover the cash shortfall. At this point, Treasury will need to obtain cash for these redeemed securities either through increased taxes, spending cuts, and/or more borrowing from the public than would have been the case had Social Security's cash flow remained positive. Whatever the means of financing, the shift from positive to negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. There are different ways to describe the magnitude of the problem. A case can be made for a range of different measures, as well as different time horizons. For instance, the actuarial deficit can be measured in present value, as a percentage of GDP, or as a percentage of taxable payroll in the future. The Social Security Administration (SSA) and CBO have both made projections of Social Security's future actuarial deficit using different horizons. (See table 1.) CBO uses a 100-year horizon to project Social Security's future actuarial deficit, while the Social Security Administration utilizes both 75-year and infinite horizon projections to estimate the future deficit. In addition, both the Social Security Administration and CBO have different economic assumptions for variables such as real earnings, real interest rates, inflation, and unemployment. While their estimates vary due to different horizons and economic assumptions, each identifies the same long-term challenge: The Social Security system is unsustainable in its present form over the long run. Taking action soon on Social Security would not only make the necessary action less dramatic than if we wait but would also promote increased budgetary flexibility in the future and stronger economic growth. Some of the benefits of early action--and the costs of delay--can be seen in figure 4. This figure compares what it would take to keep Social Security solvent through 2078, if action were taken at three different points in time, by either raising payroll taxes or reducing benefits. If we did nothing until 2042--the year SSA estimates the Trust Funds will be exhausted-- achieving actuarial balance would require changes in benefits of 30 percent or changes in taxes of 43 percent. As figure 4 shows, earlier action shrinks the size of the necessary adjustment. As I have already discussed, reducing the relative future burdens of Social Security and health programs is essential to a sustainable budget policy for the longer term. It is also critical if we are to avoid putting unsupportable financial pressures on Americans in the future. Reforming Social Security and health programs is essential to reclaiming our future fiscal flexibility to address other national priorities. Changes in the composition of federal spending over the past several decades have reduced budgetary flexibility, and our current fiscal path will reduce it even further. During this time, spending on mandatory programs has consumed an ever-increasing share of the federal budget. In 1964, prior to the creation of the Medicare and Medicaid programs, spending for mandatory programs plus net interest accounted for about 33 percent of total federal spending. By 2004, this share had almost doubled to approximately 61 percent of the budget. If you look ahead in the federal budget, the Social Security programs (Old- Age and Survivors Insurance and Disability Insurance), together with the rapidly growing health programs (Medicare and Medicaid), will dominate the federal government's future fiscal outlook. Absent reform, the nation will ultimately have to choose among persistent, escalating federal deficits and debt, huge tax increases and/or dramatic budget cuts. GAO's long-term budget simulations show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. Assuming that discretionary spending grows with inflation and all existing tax cuts are allowed to expire when scheduled under current law, spending for Social Security and health care programs would grow to consume over three-quarters of federal revenue by 2040. Moreover, if all expiring tax provisions are extended and discretionary spending keeps pace with the economy, by 2040 total federal revenues may be adequate to pay little more than interest on the federal debt. (See figure 5.) Alternatively, taking action soon on Social Security would not only promote increased budgetary flexibility in the future and stronger economic growth but would also make the necessary action less dramatic than if we wait. Indeed, long-term budget flexibility is about more than Social Security and Medicare. While these programs dominate the long- term outlook, they are not the only federal programs or activities that bind the future. The federal government undertakes a wide range of programs, responsibilities, and activities that obligate it to future spending or create an expectation for spending. GAO has described the range and measurement of such fiscal exposures--from explicit liabilities such as environmental cleanup requirements to the more implicit obligations presented by life-cycle costs of capital acquisition or disaster assistance. Making government fit the challenges of the future will require not only dealing with the drivers-- entitlements for the elderly--but also looking at the range of federal activities. A fundamental review of what the federal government does and how it does it will be needed. Also, at the same time it is important to look beyond the federal budget to the economy as a whole. Under the 2004 Trustees' intermediate estimates and CBO's long-term Medicaid estimates, spending for Social Security, Medicare, and Medicaid combined will grow to 15.6 percent of GDP in 2030 from today's 8.5 percent (See figure 6.) Taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. As important as financial stability may be for Social Security, it cannot be the only consideration. As a former public trustee of Social Security and Medicare, I am well aware of the central role these programs play in the lives of millions of Americans. Social Security remains the foundation of the nation's retirement system. It is also much more than just a retirement program; it pays benefits to disabled workers and their dependents, spouses and children of retired workers, and survivors of deceased workers. In 2004, Social Security paid almost $493 billion in benefits to more than 47 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or older were poor, and 48 percent would have been poor without Social Security. It is precisely because the program is so deeply woven into the fabric of our nation that any proposed reform must consider the program in its entirety, rather than one aspect alone. Thus, GAO has developed a broad framework for evaluating reform proposals that considers not only solvency but other aspects of the program as well. The analytic framework GAO has developed to assess proposals comprises three basic criteria: Financing Sustainable Solvency--the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget. Our sustainable solvency standard encompasses several different ways of looking at the Social Security program's financing needs. While a 75-year actuarial balance has generally been used in evaluating the long-term financial outlook of the Social Security program and reform proposals, it is not sufficient in gauging the program's solvency after the 75th year. For example, under the trustees' intermediate assumptions, each year the 75-year actuarial period changes, and a year with a surplus is replaced by a new 75th year that has a significant deficit. As a result, changes made to restore trust fund solvency only for the 75-year period can result in future actuarial imbalances almost immediately. Reform plans that lead to sustainable solvency would be those that consider the broader issues of fiscal sustainability and affordability over the long term. Specifically, a standard of sustainable solvency also involves looking at (1) the balance between program income and costs beyond the 75th year and (2) the share of the budget and economy consumed by Social Security spending. Balancing Adequacy and Equity--the relative balance struck between the goals of individual equity and income adequacy. The current Social Security system's benefit structure attempts to strike a balance between the goals of retirement income adequacy and individual equity. From the beginning, Social Security benefits were set in a way that focused especially on replacing some portion of workers' pre-retirement earnings. Over time other changes were made that were intended to enhance the program's role in helping ensure adequate incomes. Retirement income adequacy, therefore, is addressed in part through the program's progressive benefit structure, providing proportionately larger benefits to lower earners and certain household types, such as those with dependents. Individual equity refers to the relationship between contributions made and benefits received. This can be thought of as the rate of return on individual contributions. Balancing these seemingly conflicting objectives through the political process has resulted in the design of the current Social Security program and should still be taken into account in any proposed reforms. Implementing and Administering Proposed Reforms--how readily a proposal could be implemented, administered, and explained to the public. Program complexity makes implementation and administration both more difficult and harder to explain to the public. Some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security, even those that make incremental changes in the already existing structure. Although these issues may appear technical or routine on the surface, they are important issues because they have the potential to delay--if not derail--reform if they are not considered early enough for planning purposes. Moreover, issues such as feasibility and cost can, and should, influence policy choices. Continued public acceptance of and confidence in the Social Security program require that any reforms and their implications for benefits be well understood. This means that the American people must understand why change is necessary, what the reforms are, why they are needed, how they are to be implemented and administered, and how they will affect their own retirement income. All reform proposals will require some additional outreach to the public so that future beneficiaries can adjust their retirement planning accordingly. The more transparent the implementation and administration of reform, and the more carefully such reform is phased in, the more likely it will be understood and accepted by the American people. The weight that different policy makers may place on different criteria will vary, depending on how they value different attributes. For example, if offering individual choice and control is less important than maintaining replacement rates for low-income workers, then a reform proposal emphasizing adequacy considerations might be preferred. As they fashion a comprehensive proposal, however, policy makers will ultimately have to balance the relative importance they place on each of these criteria. As we have noted in the past before this committee and elsewhere, a comprehensive evaluation is needed that considers a range of effects together. Focusing on comprehensive packages of reforms will enable us to foster credibility and acceptance. This will help us avoid getting mired in the details and losing sight of important interactive effects. It will help build the bridges necessary to achieve consensus. One issue that often arises within the Social Security debate concerns the appropriate comparisons or benchmarks to be used when assessing a particular proposal. While this issue may seem to be somewhat abstract, it has critical implications, for depending on the comparisons chosen, a proposal can be made more or less attractive. Some analyses compare proposals to a single benchmark and as a result can lead to incomplete or misleading conclusions. For that reason, GAO has used several benchmarks in assessing reform proposals. Currently promised benefits are not fully financed, and so any analysis that seeks to fairly evaluate reform proposals should rely on benchmarks that reflect a policy of an adequately financed system. Similarly, it is important to have benchmarks that are consistent with each other. Using one that relies on action relatively soon versus one that posits no action at all are not consistent and could also lead to misleading conclusions. Estimating future effects on Social Security benefits should reflect the fact that the program faces a long-term actuarial deficit and that conscious policies of benefit reduction and/or revenue increases will be necessary to restore solvency and sustain it over time. A variety of proposals have been offered to address Social Security's financial problems. Many proposals contain reforms that would alter benefits or revenues within the structure of the current defined benefits system. Some would reduce benefits by modifying the benefit formula (such as increasing the number of years used to calculate benefits or using price-indexing instead of wage-indexing), reduce cost-of-living adjustments (COLA), raise the normal and/or early retirement ages, or revise dependent benefits. Some of the proposals also include measures or benefit changes that seek to strengthen progressivity (e.g., replacement rates) in an effort to mitigate the effect on low-income workers. Others have proposed revenue increases, including raising the payroll tax or expanding the Social Security taxable wage base that finances the system; increasing the taxation of benefits; or covering those few remaining workers not currently required to participate in Social Security, such as older state and local government employees. A number of proposals also seek to restructure the program through the creation of individual accounts. Under a system of individual accounts, workers would manage a portion of their own Social Security contributions to varying degrees. This would expose workers to a greater degree of risk in return for both greater individual choice in retirement investments and the possibility of a higher rate of return on contributions than available under current law. There are many different ways that an individual account system could be set up. For example, contributions to individual accounts could be mandatory or they could be voluntary. Proposals also differ in the manner in which accounts would be financed, the extent of choice and flexibility concerning investment options, the way in which benefits are paid out, and the way the accounts would interact with the existing Social Security program--individual accounts could serve either as an addition to or as a replacement for part of the current benefit structure. In addition, the timing and impact of individual accounts on the solvency, sustainability, adequacy, equity, net savings, and rate of return associated with the Social Security system varies depending on the structure of the total reform package. Individual accounts by themselves will not lead the system to sustainable solvency. Achieving sustainable solvency requires more revenue, lower benefits, or both. Furthermore, incorporating a system of individual accounts may involve significant transition costs. These costs come about because the Social Security system would have to continue paying out benefits to current and near-term retirees concurrently with establishing new individual accounts. Individual accounts can contribute to sustainability as they could provide a mechanism to prefund retirement benefits that would be immune to demographic booms and busts. However, if such accounts are funded through borrowing, no such prefunding is achieved. An additional important consideration in adopting a reform package that contains individual accounts would be the level of benefit adequacy achieved by the reform. To the extent that benefits are not adequate, it may result in the government eventually providing additional revenues to make up the difference. Also, some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security. The greatest potential implementation and administrative challenges are associated with proposals that would create individual accounts. These include, for example, issues concerning the management of the information and money flow needed to maintain such a system, the degree of choice and flexibility individuals would have over investment options and access to their accounts, investment education and transitional efforts, and the mechanisms that would be used to pay out benefits upon retirement. The Federal Thrift Savings Plan (TSP) could serve as a model for providing a limited amount of options that reduce risk and administrative costs while still providing some degree of choice. However, a system of accounts that spans the entire national workforce and millions of employers would be significantly larger and more complex than the TSP or any other system we have in place today. Harmonizing a system that includes individual accounts with the regulatory framework that governs our nation's private pension system would also be a complicated endeavor. However, the complexity of meshing these systems should be weighed against the potential benefits of extending participation in individual accounts to millions of workers who currently lack private pension coverage. Another important consideration for Social Security reform is assessing a proposal's effect on national saving. Individual account proposals that fund accounts through redirection of payroll taxes or general revenue do not increase national saving on a first order basis. The redirection of payroll taxes or general revenue reduces government saving by the same amount that the individual accounts increase private saving. Beyond these first order effects, the actual net effect of a proposal on national saving is difficult to estimate due to uncertainties in predicting changes in future spending and revenue policies of the government as well as changes in the saving behavior of private households and individuals. For example, the lower surpluses and higher deficits that result from redirecting payroll taxes to individual accounts could lead to changes in federal fiscal policy that would increase national saving. On the other hand, households may respond by reducing their other saving in response to the creation of individual accounts. No expert consensus exists on how Social Security reform proposals would affect the saving behavior of private households and businesses. Finally, the effort to reform Social Security is occurring as our nation's private pension system is also facing serious challenges. Only about half of the private sector workforce is covered by a pension plan. A number of large underfunded traditional defined benefit plans--plans where the employer bears the risk of investment--have been terminated by bankrupt firms, including household names like Bethlehem Steel, US Airways, and Polaroid. These terminations have resulted in thousands of workers losing promised benefits and have saddled the Pension Benefit Guaranty Corporation, the government corporation that partially insures certain defined benefit pension benefits, with billions of dollars in liabilities that threaten its long-term solvency. Meanwhile, the number of traditional defined benefit pension plans continues to decline as employers increasingly offer workers defined contribution plans like 401(k) plans where, like individual accounts, workers face the potential of both greater return and greater risk. These challenges serve to reinforce the imperative to place Social Security on a sound financial footing. Regardless of what type of Social Security reform package is adopted, continued confidence in the Social Security program is essential. This means that the American people must understand why change is necessary, what the reforms are, why they are needed, how they are to be implemented and administered, and how they will affect their own retirement income. All reform proposals will require some additional outreach to the public so that future beneficiaries can adjust their retirement planning accordingly. The more transparent the implementation and administration of reform, and the more carefully such reform is phased in, the more likely it will be understood and accepted by the American people. Social Security does not face an immediate crisis but it does face a large and growing financial problem. In addition, our Social Security challenge is only part of a much broader challenge that includes, among other things, the need to reform Medicare, Medicaid and our overall health care system. Today many retirees and near retirees fear cuts that would affect them in the immediate future while young people believe they will get little or no Social Security benefits in the longer term. I believe that it is possible to reform Social Security in a way that will ensure the program's solvency, sustainability, and security while exceeding the expectations of all generations of Americans. In my view, there is a window of opportunity to reform Social Security; however, this window of opportunity will begin to close as the baby boom generation begins to retire. Furthermore, it would be prudent to move forward to address Social Security now because we have much larger challenges confronting us that will take years to resolve. The fact is, compared to addressing our long-range health care financing problem, reforming Social Security should be easy lifting. We at GAO look forward to continuing to work with this Committee and the Congress in addressing this and other important issues facing our nation. In doing so, we will be true to our core values of accountability, integrity, and reliability. 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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Social Security is the foundation of the nation's retirement income system, helping to protect the vast majority of American workers and their families from poverty in old age. However, it is much more than a retirement program and also provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires and as Americans continue to live longer and have fewer children, Social Security's financing shortfall presents a major program solvency and sustainability challenge that is growing as time passes. The Chairman and Ranking Member of the Senate Special Committee on Aging asked GAO to discuss the future of the Social Security program. This testimony will address the nature of Social Security's long-term financing problem and why it is preferable for Congress to take action sooner rather than later, as well as the broader context in which reform proposals should be considered. Although the Social Security system in not in crisis today, it faces serious and growing solvency and sustainability challenges. Furthermore, Social Security's problems are a subset of our nation's overall fiscal challenge. Absent reform, the nation will ultimately have to choose among escalating federal deficits and debt, huge tax increases and/or dramatic budget cuts. GAO's long-term budget simulations show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. With regard to Social Security, if we did nothing until 2042, achieving actuarial balance would require a reduction in benefits of 30 percent or an increase in payroll taxes of 43 percent. In contrast, taking action soon will serve to reduce the amount of change needed to ensure that Social Security is solvent, sustainable, and secure for current and future generations. Acting sooner will also serve to improve the federal government's credibility with the markets and the confidence of the American people in the government's ability to address long-range challenges before they reach crisis proportions. However, financial stability should not be the only consideration when evaluating reform proposals. Other important objectives, such as balancing the adequacy and equity of the benefits structure need to be considered. Furthermore, any changes to Social Security should be considered in the context of the broader challenges facing our nation, such as the changing nature of the private pension system, escalating health care costs, and the need to reform Medicare and Medicaid.
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SSA provides financial assistance to eligible individuals through three major benefit programs: Old-Age and Survivors Insurance (OASI)--provides retirement benefits to older workers and their families and to survivors of deceased workers. Disability Insurance (DI)--provides benefits to eligible workers who have qualifying disabilities, and their eligible family members. Supplemental Security Income (SSI)--provides income for aged, blind, or disabled individuals with limited income and resources. SSA projects that the number of beneficiaries and benefit payments for the three programs will increase over the next several years. DI and SSI are the nation's largest federal disability programs, and applications for benefits have grown significantly over the last 5 years, due in part to baby boomers reaching their disability-prone years, as well as a sustained economic downturn and high unemployment. Retirement claims have also steadily increased in recent years. Although SSA's disability programs account for only about 23 percent of its total benefit outlays, they represent 66 percent of the administrative expenses for these 3 programs. Complex eligibility rules and many layers of review with multiple handoffs from one person to another make the disability programs complicated, and therefore costly, to administer. Both OASI and DI face long-term financial challenges. In 2012, SSA's Office of the Chief Actuary projected that the DI and OASI Trust Funds would be exhausted in 2016 and 2035, respectively. If the trust funds are depleted before legislative changes are made to restore long-term solvency, the agency projects that it will be able to pay benefits only to the extent that funds are available. In support of its mission and programs, SSA's basic functions include maintaining earnings information, making initial eligibility determinations for program payments, making changes to beneficiaries' accounts that affect their benefit payments, and issuing Social Security numbers. has over 80,000 state and federal employees and about 1,700 facilities nationwide. Almost 182,000 people visit one of the nearly 1,300 SSA field offices daily and more than 445,000 people call the offices daily to file applications, ask questions, or update their information. Social Security numbers have become the universal identifier of choice for government agencies and are currently used for many non-Social Security purposes. been used to keep up with increases in expenses such as personnel costs, rent, and security. Over the next decade, SSA will experience management challenges in four key areas: (1) human capital, (2) disability program issues, (3) information technology, and (4) physical infrastructure. Over the next decade, SSA's ongoing retirement wave, coupled with a hiring freeze that has been in place since 2010, represents a significant challenge for the agency in meeting the projected growth in work demands. Although not all employees will necessarily retire when eligible, nearly 7,000 headquarters employees and more than 24,000 field employees will be retirement eligible between 2011 and 2020. The agency projects that it could lose nearly 22,500 employees, or nearly one- third of its workforce, during this time due to retirement--its primary The Commissioner stated in SSA's fiscal year 2012 source of attrition.budget overview that as a result of attrition, some offices could become understaffed, and that without a sufficient number of skilled employees, backlogs and wait times could significantly increase and improper payments could grow. As SSA's workforce decreases and its workload increases, our preliminary work suggests that the agency's strategies for preventing a loss of leadership and skills may prove insufficient for a variety of reasons. Retaining institutional knowledge and developing new leaders. SSA could face a significant loss of institutional knowledge and expertise in the coming years. An estimated 43 percent of SSA's non-supervisory employees and 60 percent of its supervisors will be eligible to retire by 2020. Regional and district managers told us they have already lost staff experienced in handling the most complex disability cases.and DDS managers told us that it typically takes 2 to 3 years for new employees to become fully proficient and that new hires benefit from SSA officials mentoring by veteran employees. Because of budget cutbacks, SSA has also curtailed its leadership development programs, which have historically been used to establish a pipeline of future leaders. Succession planning. SSA's most recent succession plan was issued in 2006, even though the agency has experienced significant changes since that time, including a hiring freeze and greater movement toward online services. The most recent succession plan established a target of evaluating and updating the plan by the end of 2007. Internal control standards state that management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce with those required skills to achieve organizational goals. Our prior work also indicates that leading organizations use succession planning to help prepare for an anticipated loss of leadership. SSA's 2006 succession plan states that without sound succession planning, SSA's loss of leadership would result in a drain on institutional knowledge and expertise at a time when workloads are growing. This loss of knowledge and expertise could result in increasing workloads, backlogs, and improper payments. Several SSA officials told us individuals with less experience and training are beginning to assume supervisory roles and some have made poor decisions related to such things as providing reasonable accommodations to employees with disabilities. Some officials also told us that inexperienced managers are also less proficient at supervising others, which leads to inefficiencies in managing increasing workloads. Forecasting workforce needs. Findings from OIG reports raise additional concerns about SSA's ability to accurately forecast workload demands and workforce needs. These reports found methodological flaws in the workload and work year data SSA uses to formulate and execute its budget. For example, the reports concluded that the internal controls and main processes related to work sampling--which SSA uses to measure work and assign direct and indirect costs to workloads--did not ensure the completeness and reliability of data in SSA's Cost Analysis System. The reports found that work samples were not consistently performed. Furthermore, they noted no instances of peer or management review, which could improve the accuracy of the workload data collected.these findings. SSA continues to face challenges in modernizing its disability programs, while seeking a balance between reducing initial claims and hearings backlogs and conducting oversight activities to ensure program integrity. Modernizing disability programs. We designated federal disability programs as a high-risk area in 2003, in part because these programs emphasize medical conditions in assessing an individual's work incapacity without adequate consideration of the work opportunities afforded by advances in medicine, technology, and job demands.Concerns have been raised that the medical listings being used lack current and relevant criteria to evaluate disability applicants' inability to work, and that by failing to consider the role of assistive devices and workplace accommodations, SSA may be missing opportunities to help individuals with disabilities return to work. SSA has recently taken steps toward comprehensively updating the medical and labor market information that underlie its disability criteria. As of March 2013, SSA had completed comprehensive revisions of its medical criteria for 10 of the 14 adult body systems and initiated targeted reviews of certain conditions under these systems, as appropriate, according to SSA officials. SSA has recently made progress toward replacing its outdated occupational information system, including signing an interagency agreement with the Department of Labor's Bureau of Labor Statistics to design, develop, and carry out pilot testing of an approach to collect data for an updated system. According to SSA officials, the agency still needs to determine exactly how many occupations it will include in its new system and the extent to which it might leverage aspects of the Department of Labor's existing occupational database, the Occupational Information Network (O*NET). The agency also needs to determine the extent to which the new system will include cognitive information, according to agency officials. In addition, officials told us the agency has not yet formalized a cost estimate and lacks a research and development plan. SSA has also taken steps to more fully consider individuals' ability to function with medical impairments in their work or other environments, which is consistent with modern views of disability. However, SSA disagreed with our prior recommendation to conduct limited, focused studies on how to more fully consider factors such as assistive devices and workplace accommodations in its disability determinations, stating that such studies would be inconsistent with Congress' intentions. We noted, however, that Congress has not explicitly prohibited SSA from considering these factors and we believe that conducting these studies would put SSA in a better position to thoughtfully weigh various policy options before deciding on a course of action. SSA has two initiatives to expedite cases for the most severely disabled individuals: Quick Disability Determination and Compassionate Allowances. Using predictive modeling and computer-based screening tools to screen initial applicants, the Quick Disability Determination identifies cases where a favorable disability determination is highly likely and medical evidence is readily available, such as with certain cancers and end-stage renal disease. With Compassionate Allowances, SSA targets the most obviously disabled applicants based on available medical information and generally awards benefits if there is objective medical evidence to confirm the diagnosis and the applicant also meets SSA's non-disability criteria. commissioners told us that simplifying disability policy, such as by streamlining work incentive and work reporting rules, could also help staff better manage disability workloads. SSA is processing more initial claims annually, but claims denied at the initial level can be appealed and often result in a request for a hearing by an administrative law judge. To reduce its hearings backlog, SSA has used strategies such as hiring additional administrative law judges and support staff, opening more hearings offices, and conducting more hearings via video conference. Our preliminary results indicate that, although SSA completed more hearing requests in fiscal year 2012 than in previous years, the agency fell short of its hearings completion target by more than 54,000 hearings, and at 321 days, the average wait time for hearings exceeded the agency's target by 41 days. At the same time, the agency eliminated most of its oldest pending hearing requests. Ensuring disability program integrity. SSA also faces disability program integrity challenges due to budget decisions and the way it prioritizes competing workload demands such as processing initial claims. Continuing disability reviews (CDR) are periodic reviews that the agency is required to perform to verify that certain recipients still meet SSA disability rules. SSA reported that in fiscal year 2010, the agency did not conduct 1.4 million CDRs that were due for review, in part because of competing workloads. In June 2012, we also found that the number of childhood CDRs conducted fell from more than 150,000 in fiscal year 2000 to about 45,000 in fiscal year 2011 (a 70 percent decrease). During this time, the number of adult CDRs fell from 584,000 to 179,000. This figure represents the present value of future benefits saved for OASDI, SSI, Medicare, and Medicaid. The estimate includes savings to Medicare and Medicaid because in some cases eligibility for SSI and DI confers eligibility for certain Medicare or Medicaid benefits. continue to receive them, SSA officials reported that resource constraints have made it more difficult to balance competing workloads and remain current on the millions of CDRs it is required to conduct each year. SSA has taken steps to modernize its information technology (IT) systems to help keep pace with workload demands, but some entities have identified additional areas that could be improved. In addition, increased risk exists that sensitive information could be exposed because of internal security weaknesses. IT modernization efforts. SSA has begun to take action on several of our prior recommendations to improve the way it modernizes its IT systems. For example, in May 2012, SSA released its Capital Planning and Investment Control guide. The guide describes the roles and responsibilities of staff under the agency's realigned IT organizational structure. SSA also issued an updated IT strategic plan that covers 2012-2016 and supports the updated agencywide strategic plan. Furthermore, SSA officials told us that they intend to revisit the IT strategic plan annually and refresh it as appropriate. Our prior work indicates that SSA has not always had an updated IT strategic plan to guide its modernization efforts. In the absence of regular updates, SSA based its IT modernization efforts on program activities that were tied to short-term budget cycles and not developed in the context of a long-term strategic plan. While we are encouraged that SSA issued an updated IT strategic plan, at present, it is too soon to assess the extent to which SSA will adhere to the plan and annual reevaluation cycle. SSA is modernizing its IT systems, in part, to support a shift toward offering more online services. However, SSA's OIG has expressed concerns that the agency is continuing to rely on its legacy applications. Many of its programs are written in COBOL, which is one of the oldest computer programming languages and is difficult to modify and update. The OIG noted also that the agency risks losing key institutional knowledge relating to COBOL programming and its increasingly complex information systems. According to the OIG, SSA has indicated that modernizing its legacy applications will ultimately reduce operating costs and improve service delivery. However, agency officials told us they have conducted analyses that show the costs of moving away from using COBOL currently outweigh the benefits. Accordingly, the OIG found that SSA has developed an approach to gradually reduce its reliance on COBOL for core processing of program transactions but has not yet articulated a formal strategy for converting its legacy programs to a more modern programming language. SSA officials disagree that such a strategy is needed because they consider this programming language to be sufficient for their needs and point out that it is still used by other businesses. Information security weaknesses. SSA uses and stores a great deal of sensitive information, but has been challenged to effectively protect its computer systems and networks in recent years. Our prior work states that it is essential for agencies to have information security controls that ensure sensitive information is adequately protected from inadvertent or deliberate misuse, fraudulent use, and improper disclosure, modification, or destruction. However, in fiscal year 2012, several concerns were raised about SSA's information security program. SSA's OIG identified weaknesses in some of the agency's information security program components that limited SSA's overall effectiveness in protecting the agency's information and information systems, constituting a significant deficiency in the agency's information security program under the Federal Information Security Management Act of 2002 (FISMA). The OIG has also noted that weaknesses in certain elements of the agency's information security program may challenge SSA's ability to use its IT infrastructure to support current and future workloads. The agency's independent financial auditor also identified a material weakness in information systems controls over financial management statements based on several concerns, many of which have been longstanding. SSA is implementing a multi-year plan to address many of these weaknesses. However, the OIG stated that one of the underlying causes for these weaknesses is that SSA needed to strategically allocate sufficient resources to resolve or prevent high-risk security weaknesses in a more timely fashion. Though SSA officials emphasized that the information security risks identified were internal,access to or misuse of sensitive information can have a significant impact. For example, according to the OIG, in 2012, a former SSA employee was found to have used her position to provide personally identifiable information to a person outside the agency, who is accused of using the information for criminal purposes. SSA is taking steps to centralize its facilities management, which may standardize facilities decisions, but our preliminary results show that the agency lacks a proactive approach to evaluate its physical infrastructure and identify potential efficiencies. Centralizing facilities management. SSA is beginning to centralize its facilities management, but officials indicated it may lead to a trade-off between efficiency and flexibility. The agency administers its programs and services through a network of over 1,700 facilities, at an annual cost of approximately $1 billion.facilities management process, but officials told us they are currently moving all facilities management under SSA's Office of Facilities and Supply Management (OFSM). Some officials said that centralization can lead to greater efficiencies and standardization, but cautioned that there may be less flexibility and awareness of local circumstances--such as the layout of specific buildings--at the regional level. The agency has had a more decentralized Limited facilities planning efforts. A contractor hired by the General Services Administration (GSA) is currently working on a long-term plan for SSA's headquarters facilities, called the Master Housing Plan. An SSA official told us that the contractor has solicited input and feedback from the agency on the draft plan. However, an SSA official told us the agency lacks a comprehensive planning effort that encompasses all of the agency's facilities, including nearly 1,300 field offices. Efforts to reduce office space. SSA officials told us the agency is engaged in ongoing efforts to reduce the footprint of its headquarters facilities. According to an SSA official, vacant space in headquarters facilities has increased during the past few years as a result of the shrinking workforce. SSA officials told us that OFSM is analyzing the space needs of all offices in the headquarters area and will reassign space according to staffing levels and other criteria. According to an official, SSA's efforts were motivated by several factors, including an OMB directiveagency's ultimate goal of terminating all commercial leasing in the headquarters area; and, to a lesser degree, reducing current vacancies in headquarters. to make more efficient use of federal office space; the In addition to these headquarters-focused efforts, SSA is reducing office space in the field as opportunities arise, but our preliminary work shows that it lacks a proactive plan to assess field facilities for potential space reductions. When OFSM reviews a field-based space action (e.g., lease renewal, move, renovation), an SSA official told us that the proposed action is assessed to identify if there are opportunities to reduce or otherwise change the facility's space allocation. However, OFSM's standards do not call for wholesale reductions or reconfigurations of existing space. SSA has established a workgroup that is developing guidance to help identify opportunities to reduce space by co-locating certain field-based facilities, such as field offices and video-based disability hearing offices, but the workgroup's proposals need to be reviewed and it is not yet clear if the agency will adopt them. Considerations for realigning the facilities structure. SSA has been advised to consider aligning its facilities structure with its changing methods of providing services. For example, the OIG reported in 2011 that SSA's long-term planning efforts should assess whether the agency's existing office structure will align with future methods of providing customer service. In 2011, the Social Security Advisory Board suggested that as SSA continues to increase electronic service delivery, it adapt its organizational structure to maximize the effectiveness of the agency's transformation. In prior work, we have also reported that federal agencies may be able to increase efficiency and effectiveness by consolidating physical infrastructure or management functions. Several agencies--including the Internal Revenue Service, the U.S. Postal Service, and the Census Bureau--plan to or have already undertaken consolidation efforts to achieve efficiencies and save money. At the same time, SSA has long considered face-to-face interaction to be the gold standard of customer service, and an official has told us that any changes away from that model would represent a major cultural shift for the agency. SSA has begun to take advantage of opportunities to consolidate or co- locate offices in the regions. SSA regional commissioners told us that field offices have been consolidated in most of its of 10 regions and several regions have co-located with the Office of Disability Adjudication and Review to provide space to hold disability hearings within field offices. These consolidations and co-locations can save money on rent and guard services. Regional commissioners told us that a single office consolidation can save up to $3 million over a 10-year period. Despite these actions, our preliminary work indicates that SSA has not engaged in a systematic analysis of potential approaches for consolidating its facilities or realigning its facilities with the agency's evolving service delivery model. The National Research Council recommends that federal agencies use their organizational mission to guide facilities investment decisions and then integrate these investments into their strategic planning processes. We previously reported that agencies should consider the potential costs and benefits of any widespread efforts to consolidate physical infrastructure before embarking on such an action. To support its rationale for consolidation and assess the potential impact and challenges of consolidation, we suggested that agencies consider issues such as how to fund up-front costs associated with consolidation and the effect on various stakeholders. SSA has ongoing planning efforts, but we have identified two major areas in which these efforts may fall short in addressing the long-term nature of the agency's management challenges: (1) its planning efforts are short- term and do not adequately address emerging issues, and (2) it lacks continuity in its strategic planning leadership. Need for longer-term efforts to address emerging issues. SSA's planning efforts, from an overall strategic plan to its service delivery plan, typically look no more than 5 years out. For example, SSA is finalizing a service delivery plan, but the draft document primarily contains detailed plans for the next 5 years and focuses on existing initiatives rather than articulating specific long-term strategies for the agency's service delivery model. While the draft service delivery plan acknowledges the need to assess the agency's workforce structure, it stops short of providing a vision for how the workforce structure should best make use of expanded virtual and automated service delivery channels. The plan also states that issues such as the need to strategically develop and place self-service options and to determine whether the Internet should be the primary service delivery mechanism for certain services, will need to be considered over the next 6 to 10 years, but it does not provide a specific strategy for how to resolve these issues. Further, the plan does not articulate SSA's long-term costs and benefits for its investments, such as the specific impact that moving to online services is expected to have on backlogs and workforce needs. For many years, we have recommended that SSA develop a comprehensive service delivery plan that outlines how it will deliver quality service while managing growing work demands within a constrained budget. Similarly, our preliminary work shows that SSA's current strategic plan largely describes the continuation, expansion, or enhancement of existing activities, rather than proposing new initiatives or broad changes to address emerging issues. One of the goals of the agency's strategic plan is to increase the public's use of online services, but several SSA officials and representatives of one SSA management group told us that this shift will not be sufficient to address growing service demands. For example, as discussed earlier, to meet service challenges, some officials said the agency will also need to simplify its disability policy and develop a strategy for meeting the needs of individuals who may not have access to computers at home or who may not be computer literate. At the same time, however, some SSA officials noted that the agency may need to limit the number of days per week that field offices are open to the public to contain costs. Various groups have called on SSA to acknowledge emerging long-term issues by articulating them in a longer-term strategy. In 2011, the Social Security Advisory Board called for SSA to develop a strategy for service delivery through 2020 that will serve as the cornerstone for its IT, human capital, policy review, and organizational restructuring plans. The SSA OIG also called on SSA to prepare a longer-term vision to ensure that it has the programs, processes, staff, and infrastructure necessary to provide service in the future. Several SSA officials we spoke with told us that developing a long-term service delivery plan should be the next Commissioner's top priority. Moreover, regional commissioners and field managers said that such a plan could help to clarify issues such as what services will be available online in the future, how these services will be implemented, how IT modernization will support service delivery, and which offices will have responsibility for different workloads. SSA prepared its last long-term agency vision--which covered a 10-year period--in 2000, motivated by many conditions which remain true today, such as increasing workloads, advances in technology, and employee retirements. Senior agency officials told us that as an agency, SSA generally views long-term planning as a secondary responsibility and is more focused on addressing short-term, tactical issues. Several officials also noted that uncertainty about budget resources has made it difficult for SSA to engage in multi-year planning. One official commented that as a result of its budget situation, the agency has been reactive and failed to consider big picture issues. Strategic planning literature notes the success of organizations that are flexible and adaptive; these organizations plan for different scenarios and consider strategic options. Need for continuity in strategic planning leadership. The GPRA Modernization Act of 2010 charges top agency leadership with improving SSA previously had an Office of agency management and performance.the Chief Strategic Officer, which was responsible for overseeing strategic planning. This office worked with all SSA components to prioritize initiatives that would help the agency meet its goals and determined how to link these initiatives to the agency's budget. However, the office was dissolved in May 2008, and since that time the agency has not had an office dedicated to strategic planning. Senior officials said that SSA should dedicate a position, such as a chief strategic officer, that will report directly to the Commissioner and be solely responsible for strategic planning in order to bring sustained, focused attention to long-term management challenges. In conclusion, the challenges SSA faces will substantially affect its ability to address critical concerns in the coming years. SSA's efforts to meet many of its management challenges have been complicated by budgetary constraints and continued uncertainty about the current and future fiscal environment. Despite these constraints, the agency will need to balance competing demands for resources--both in terms of managing day-to-day budget decisions and planning for emerging and long-term budget issues. SSA already manages a substantial and diverse workload and the demands on SSA from new retirees and individuals with disabilities will continue to grow. SSA's new Commissioner will face wide-ranging challenges that will require a comprehensive, long-range strategy that current planning efforts do not adequately address. In the absence of a long-term strategy for service delivery, the agency will be poorly positioned to make needed well-informed decisions about its critical functions, including how many and what type of employees SSA will need for its future workforce, how the agency will address disability claims backlogs while ensuring program integrity, and how the agency will more strategically use its information technology and physical infrastructure to best deliver services. Chairman Johnson, Ranking Member Becerra, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this testimony, please contact me at (202) 512-7215. Michael Alexander, James Bennett, Jeremy Cox, Larry Crosland, Alex Galuten, Isabella Johnson, Kristen Jones, Anjalique Lawrence, Sheila McCoy, Christie Motley, Walter Vance, Kathleen Van Gelder, and Jill Yost also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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SSA is responsible for providing benefits and services that affect the lives of nearly every American. In calendar year 2012, SSA paid over 62 million people more than $826 billion in Social Security retirement and disability benefits and Supplemental Security Income payments. However, SSA faces increased workloads and large numbers of potential employee retirements in the long term. A new Commissioner will soon be leading the agency and will face many complicated issues confronting the agency. In this statement, GAO discusses initial observations from its ongoing review and describes (1) key management challenges SSA faces in meeting its mission-related objectives and (2) the extent to which SSA's planning efforts address these challenges. To examine these issues, GAO reviewed relevant planning documents and reports from SSA and others as well as SSA management information and data on workload and staffing projections, applicable federal laws and regulations, and interviewed SSA headquarters and regional officials, representatives of employee groups, and other experts. This work is ongoing and GAO has no recommendations at this time. GAO plans to issue its final report in June 2013. The Social Security Administration (SSA) will experience management challenges in four key areas over the next decade. Human capital. SSA has not updated its succession plan since 2006 although the agency faces an ongoing retirement wave and hiring freeze which will make it difficult to respond to growing workload demands. Disability program issues. SSA faces ongoing challenges incorporating a more modern concept of disability into its programs, while balancing competing needs to reduce backlogs of initial and appealed claims and ensure program integrity. Information technology (IT). SSA has made strides in modernizing its IT systems to address growing workload demands, but faces challenges with these modernization efforts--such as an ongoing need to refresh and adhere to its IT strategic plan and a continued reliance on legacy applications--and correcting internal weaknesses in information security. Physical infrastructure. SSA is moving toward centralized facilities management, but the agency lacks a proactive approach to evaluating its office structure that will identify potential efficiencies, such as consolidating offices. SSA has ongoing planning efforts, but they do not address the long-term nature of these management challenges. For example, SSA is finalizing a service delivery plan, but it only includes detailed plans for the next 5 years and focuses on existing initiatives rather than articulating specific long-term strategies for the agency's service delivery model. Its current strategic plan also largely describes the continuation, expansion, or enhancement of ongoing activities, rather than proposing broad changes to address emerging issues. Since 2008, SSA has not had an entity or individual dedicated to strategic planning. Various groups have called on SSA to articulate a longer-term strategy, which it last did in 2000, motivated by many conditions which remain true today, such as increasing workloads, advances in technology, and employee retirements, and which will need to be addressed in the future.
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The Forest Service, created in 1905, manages about 192 million acres of land that include about one-fifth of the nation's forest lands. The Organic Administration Act of 1897 and the Multiple Use-Sustained Yield Act of 1960 guide the management of these lands. The Forest Service is to manage its lands under the principles of multiple use and sustained yield to meet people's diverse needs. The Congress mandated forest plans in the Forest and Rangeland Renewable Resources Planning Act of 1974, as amended by the National Forest Management Act of 1976 (NFMA). NFMA provides guidance for forest planning by delineating a procedure to be followed in developing and periodically revising or amending forest plans. Under this act and its implementing regulations, the Forest Service is to, among other things, (1) involve the public in the planning process, (2) recognize wilderness as a use of the forests, (3) maintain biological diversity, (4) monitor and assess the effects of its management practices on the lands' productivity, and (5) ensure a sustained yield of timber. The last of the 123 forest plans covering all 155 forests in the National Forest System was approved in 1995, and the first plans, approved in the early 1980s, are due for revision. The plans identify (1) different management areas or "zones" within a forest where one or more uses will be permitted for up to 15 years and (2) requirements and limitations for protecting the environment, such as those to protect species listed as endangered or threatened under the Endangered Species Act. Forest plans are implemented by identifying, analyzing, and undertaking specific projects, which must be consistent with the requirements and limitations in the plans. In developing forest plans and reaching project-level decisions, the Forest Service must comply with the requirements of the National Environmental Policy Act (NEPA). NEPA and its implementing regulations specify the procedures for integrating environmental considerations into an agency's decisionmaking. Forest plans and projects must also comply with the requirements and implementing regulations of numerous environmental statutes, including the Endangered Species Act, the Clean Water Act, and the Clean Air Act. In a 1992 report, the Office of Technology Assessment (OTA) stated that, to improve forest planning under NFMA, the Congress could require the Forest Service to specify objectives (targets) for all uses in its forest plans. However, some Forest Service officials believe that if the agency is to achieve the objectives in its forest plans, other changes may be needed to reduce the influence of many variables that affect the outcomes of its decisions. These variables include changing natural conditions, such as drought, insects and disease, and wildfires, as well as changes in annual funding for the National Forest System. They also include information and events that occur after forest plans have been approved. In addition, Forest Service policy and planning officials believe that differences among the requirements and limitations in laws and regulations can sometimes be difficult to reconcile, and that reconciliation is further complicated by the fragmentation of authority for implementing these laws and regulations among several federal agencies and the states. As we stated in our January 25, 1996, testimony, because the Forest Service's decisionmaking process is extremely complex and the issues surrounding it are interrelated, there are no quick fixes or simple solutions. Rather, a systematic and comprehensive approach will be needed to address them. Some options that may be considered in developing such an approach may help the Forest Service to achieve the objectives in its forest plans. Some of these options could be implemented by the Forest Service within the existing statutory framework, while others would require changes in law. Forest plans generally take from 3 to 10 years to develop and explain how forests will be managed for 10 to 15 years. Much can change over such extended periods of time. As a result, forest plans can be outdated by the time they are approved, and schedules for implementing the plans' objectives cannot be established for 10 to 15 years. Options that have been suggested include shortening both (1) the time required to develop the plans and (2) the periods covered by the plans to 3 to 5 years. One drawback to shortening the periods covered by forest plans may be that 3 to 5 years might not provide companies and communities dependent on Forest Service lands with enough time to plan or develop long-range investment strategies. In addition, according to some Forest Service officials, events that occur after forest plans have been approved can significantly affect the agency's ability to provide a high degree of confidence concerning the future availability of uses on national forest lands. These events can include listing a species as endangered or threatened or designating land as habitat under the Endangered Species Act, changing timber harvesting methods in response to increased environmental restrictions, and evolving judicial interpretations of procedural requirements in environmental statutes. For example, Forest Service officials note that recent federal court decisions have required the agency to re-initiate lengthy, formal consultations on several approved forest plans because a species of salmon was listed as threatened in the Pacific Northwest and the Mexican Spotted Owl was listed as threatened in the Southwest. These rulings have prohibited the agency from implementing projects under these plans until the new round of consultations has been completed, even though the Forest Service believes that some of the projects would have no effect on these species. These Forest Service officials believe that the Congress should provide legislative clarification so that projects unaffected by a subsequent event would not have to be delayed by the lengthy process to amend or revise forest plans. Forest Service officials also believe that annual appropriations have not always matched the funding assumptions incorporated in forest plans. This lack of connection has occurred, in part, because some forest plans have been developed without reference to likely funding levels. Options that have been suggested include linking forest plans more closely to budgeting and including objectives for commodity and noncommodity uses at various funding levels in forest plans. According to these officials, a possible complementary statutory option would be to appropriate funds for the duration of a shortened planning period. The process currently used to reach project-level decisions for implementing forest plans may also have to be shortened. For example, preparing timber sales usually takes 3 to 8 years. One option that might shorten the time required to reach project-level decisions would be to obtain better data to use in developing forest plans. Prior GAO reports have shown that the goals and objectives in some forest plans were developed using inadequate data and inaccurate estimating techniques. Information subsequently gathered at the project level showed that certain objectives in the plans could not be met. In addition, the Forest Service established a re-engineering team, consisting primarily of regional and forest-level personnel, and tasked the team with designing a new process for conducting project-level environmental analyses. According to this team, the agency is currently gathering and analyzing information at the project level that should have been analyzed at the forest plan level. Gathering and analyzing information in this manner is both time-consuming and costly and can result in delayed, modified, or withdrawn projects. The re-engineering team has made several recommendations whose implementation, it believes, would produce more timely and adequate information. These recommendations include (1) identifying issues that should be analyzed and resolved in forest plans or other broader-scale studies, (2) maintaining a centralized system of comparable environmental information, and (3) eliminating redundant analyses by focusing on what is new and using existing analyses to support new decisions when possible. In addition, Forest Service officials have told us that some effects cannot be adequately determined in advance of a project-level decision because of scientific uncertainty and/or the prohibitive costs of obtaining the necessary data. Therefore, they believe that, for some projects, monitoring and evaluation could be more efficient and effective than attempting to predict the projects' outcomes. The Forest Service is currently evaluating the findings and recommendations that the re-engineering team believes could improve timeliness and reduce costs by 10 to 15 percent initially and by 30 to 40 percent over time. The agency is also considering or testing other actions that it believes could make its project-level environmental analysis process more efficient, including improving the monitoring and evaluation of decisions. According to Forest Service officials with whom we spoke, another difficulty at both the forest plan and project levels is that the authority to implement various environmental laws and regulations is fragmented among several federal agencies and the states. In developing forest plans and reaching project-level decisions, the Forest Service often must consult with other federal agencies, including the Department of the Interior's Fish and Wildlife Service, the Department of Commerce's National Marine Fisheries Service, the Environmental Protection Agency, and/or the U.S. Army Corps of Engineers. These agencies sometimes disagree on how environmental requirements can best be met in a forest plan or project, and they have difficulty resolving their disagreements, thereby delaying decisionmaking. According to federal officials with whom we spoke, these disagreements often stem from differences in the agencies' evaluations of environmental effects that tend to reflect the agencies' disparate missions and responsibilities. The officials believe that, to resolve these disagreements more quickly, they would need to place greater reliance on monitoring and evaluating the effects of prior decisions to derive guidance for future decisions on similar projects. Additionally, the Forest Service and other federal agencies recently have signed various memoranda of agreement to improve coordination. However, not enough time has passed to evaluate the effects of these agreements. The Forest Service receives over 1,200 administrative appeals to project-level decisions annually by parties seeking to delay, modify, or stop projects with which they disagree. While believing that appeals and litigation are legitimate ways for the Forest Service to resolve substantive conflicts and support its NEPA policy, the re-engineering team tasked with designing a new process for project-level environmental analyses recommended amending the current law and regulations to limit such appeals to the parties who participate in the decisionmaking process and to the concerns that are raised in reaching a decision. By establishing participation as a condition for appealing a decision, this change might increase public participation in the Forest Service's project-level decisionmaking process. While these options may improve the ability of the Forest Service to provide a higher degree of confidence concerning the future availability of forest uses on national forest lands, they are unlikely to resolve the increasing difficulty the Forest Service is experiencing in reconciling conflicts among competing uses. For example, in its 1992 report, OTA stated that "Congressional efforts to change the judicial review process seem to be attempts to resolve substantive issues without appearing to take sides. However, such changes are unlikely to improve forest planning or plan implementation, or reduce conflict over national forest management." In the past, the Forest Service was able to meet the diverse needs of the American people because it could avoid, resolve, or mitigate conflicts between commodity and noncommodity uses by separating them among areas and over time. For example, while timber harvesting was forbidden in wilderness areas and was secondary to other uses, such as recreation and wildlife, in some other areas, it was the dominant use in still other areas. Alternatively, the Forest Service sometimes avoided conflicts by using the same land for different commodity and noncommodity uses, but at different times. For example, it sometimes used harvested timberlands as browsing and hiding habitat for game animals while the lands were being reforested for subsequent harvests. However, according to Forest Service officials, the interaction of legislation, regulation, case law, and administrative direction, coupled with growing demands for commodity and noncommodity uses on Forest Service lands and activities occurring outside forest boundaries--such as harvesting timber on state timberlands and converting private timberlands to agricultural and urban uses--have made simultaneously meeting all of these needs increasingly difficult. According to the Chief of the Forest Service, the agency has placed increasing emphasis on maintaining or restoring noncommodity uses, especially biological diversity, on national forest lands, and this emphasis has significantly affected the agency's ability to meet the demands for commodity uses. For example, increasing amounts of national forest land are being managed primarily for conservation, as wilderness, wild and scenic rivers, and recreation. In 1964, less than 9 percent (16 million acres) of national forest land was managed for conservation. By 1994, this figure had increased to 26 percent (almost 50 million acres). Most of the federal acreage set aside for conservation purposes is located in 12 western states. For example, of the 24.5 million acres of federal land in the western Washington State, Oregon, and California that were available for commercial timber harvest, about 11.4 million acres, or 47 percent of these lands, have been set aside by the Congress or administratively withdrawn under the original forest plans for such uses as wilderness, wild and scenic rivers, national monuments, and recreation. These figures do not take into account additional environmental restrictions that have reduced the amount of federal land available for commodity uses. For example, another 7.6 million acres, or 31 percent, of federal land in western Washington, Oregon, and California that were available for commercial timber harvest have been set aside or withdrawn as habitat for species that live in old-growth forests, including the threatened northern spotted owl, and for riparian reserves to protect watersheds. Limited timber harvesting and salvage are allowed in some of these areas for forest health. In total, 77 percent of the 24.5 million acres of federal land in western Washington, Oregon, and California that were available for commercial timber harvest have been set aside or withdrawn primarily for noncommodity uses. In addition, while the remaining 5.5 million acres, or 22 percent, are available for regulated harvest, minimum requirements for maintaining biological diversity under NFMA as well as air and water quality under the Clean Air and Clean Water acts, respectively, may limit the timing, location, and amount of harvesting that can occur. Moreover, harvests from these lands could be further reduced by plans to protect threatened and endangered salmon. Timber sold from Forest Service lands in the three states declined from 4.3 billion board feet in 1989 to 0.9 billion board feet in 1994, a decrease of about 80 percent. However, as we noted in an August 1994 report, many agency officials, scientists, and natural resource policy analysts believe that maintaining or restoring wildlife and their physical environment is critical to sustaining other uses on Forest Service lands. As the Forest Service noted in October 1995, demands for forest uses, both commodity and noncommodity, will increase substantially in the future. Thus, as we noted in our January 25, 1996, testimony, some Forest Service officials do not believe that the conflicts among competing uses will lessen substantially. As a result, some Forest Service officials have suggested that the Congress needs to provide greater guidance on how the agency is to balance competing uses. In particular, the Chief has stated that (1) the maintenance and restoration of noncommodity uses, especially biological diversity, needs to be explicitly accepted or rejected and (2) if accepted, its effects on the availability of commodity uses should be acknowledged. In summary, Mr. Chairman, I would like to offer the following observation. As indicated by the GAO products referred to in this statement, we have over the last several years looked at the Forest Service from several different perspectives and at several organizational levels. What is becoming more apparent is that, regardless of the organizational level and the perspective from which the agency is viewed, many of the issues appear to be the same. These issues include the lack of (1) adequate scientific and socioeconomic data to make necessary or desired trade-offs among various values and concerns, (2) adequate coordination within the Forest Service and among federal agencies to address issues and concerns that transcend the boundaries of ownership and jurisdiction, and (3) incentives for federal and nonfederal stakeholders to work together cooperatively to resolve their differences. We will, in the coming months, more fully evaluate these and other issues. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 Forest Service's management of national forests, focusing on the issues related to multiple use of forest land. GAO noted that: (1) the Forest Service's decisions are affected by changing natural land conditions, funding, and new information and events; (2) laws concerning forest land use are complicated by fragmented authority between federal agencies and states; (3) the Forest Service should consider shortening the periods covered under forest plans, reducing the influence of subsequent events, improving the data on which decisions are based, increasing coordination among the Forest Service and other federal agencies, and limiting administrative appeals; (4) some Forest Service officials believe that Congress should provide guidance on how to balance competing uses of forest land; and (5) the Chief of the Forest Service believes that the maintenance and restoration of noncommodity uses should be explicitly accepted or rejected, and if accepted, the effects should be acknowledged.
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After the Peru accident, a joint investigation by the United States and Peru reviewed the circumstances of the accident and made several conclusions. The investigation team was comprised of U.S. representatives from the Departments of State and Defense, as well as Peruvian officials from its Ministries of Foreign Affairs and Defense. According to U.S. officials, Colombian President Alvaro Uribe requested the restart of the ABD program to help combat drug trafficking. After initial discussions, the United States decided to assist Colombia in restarting a revised ABD program that would be managed by the Colombian Air Force and overseen by State/INL. In addition, U.S. officials said that Colombia had existing infrastructure that facilitated the program's restart, such as air bases and a national air command center. Prior to the restart of Colombia's ABD program, a committee of representatives from the Departments of State, Defense, and Justice, as well as the Colombian government developed a Letter of Agreement outlining the program's goal, safety requirements, operational procedures, and each country's responsibilities. The Letter of Agreement, which was signed in April 2003, states that the program's goal is to increase the Colombian government's ability to stop aerial drug trafficking over Colombia. Colombia is required to provide personnel and interceptor aircraft, designate the areas where the program can operate in Colombia's airspace, and manage the daily operations. The United States is primarily responsible for providing the program with surveillance aircraft, personnel, training, and funds to maintain and operate the equipment, while ensuring that the program is regularly reviewed. Finally, a U.S. Presidential determination was necessary to restart the program, and is required annually to allow U.S. employees and its agents to assist Colombia in the use of force against civilian aircraft reasonably suspected to be primarily engaged in illicit drug trafficking. Since 2002, the United States has provided $68.4 million and surveillance aircraft for the ABD program (see table 1) and plans to provide an additional $25.9 million in fiscal year 2006. State/INL provided $57.2 million to support ARINC operations, including the U.S. personnel involved in the program and maintenance of the surveillance aircraft. State's Narcotics Affairs Section (NAS) in the U.S. Embassy in Bogota provided $11.2 million for training, aircraft operations, logistics support, and construction at ABD air bases. At no cost to State, the department also transferred five U.S.- owned Cessna Citation surveillance aircraft used in the prior ABD programs, which are equipped with tracking systems. Also, Defense gave Colombia two additional surveillance aircraft, which have yet to be used for surveillance. The fiscal year 2006 request for approximately $26 million for the program is planned to continue existing operations and construct additional infrastructure. U.S. and Colombian officials said they do not intend for Colombia to fully finance the program in the near future. In response to the findings of the Peru investigation and other determinations, the United States and Colombia developed new safeguards for the renewed ABD program which were implemented consistently in the interdiction missions we observed. The program also undergoes multiple evaluations to ensure that all elements of the Letter of Agreement are followed. The renewed ABD program has new safeguards in place, which were prompted by the review of the Peru accident. The investigation of the Peru incident found that crewmembers did not fully perform some procedures, neglected the safety of the mission, had limited foreign language skills, and were talking on a congested communication system. In response, safeguards were developed to reinforce and clarify procedures, bolster safety monitoring, enhance language skills of ABD personnel, and improve communication channels. Another factor of the accident--the civilian pilot's unawareness of the ABD program's procedures--was addressed by teaching civilian pilots about the program. In the Letter of Agreement for the renewed program, U.S. and Colombian officials require ABD personnel to follow specific procedures summarized in a safety checklist to ensure safe operations and clarify the roles of the United States and Colombia (see app. I). According to the Peru investigative report, the aircrews involved in the accident did not fully execute the program's procedures, particularly aircraft identification. Also, the documentation of ABD procedures had become less specific over time. The procedural checklist for the renewed program lists the specific steps that must be taken to execute an ABD mission, including visually identifying the suspicious aircraft; calling to the aircraft over the radio; and, if necessary, requesting permission from the Commander of the Colombian Air Force to fire at the aircraft. In particular, the list provides the exact wording for crewmembers to use when confirming the completion of checklist steps to avoid confusion among the participants. While at the Colombian Air Force's ABD command center in Bogota, we observed ABD personnel following the checklist during the start of an ABD mission. While, at the time of the accident, the program did not have U.S. personnel dedicated to monitoring safety, three U.S. personnel are now responsible for safety and implementation of safeguards for each mission. The Peru investigation concluded that the interceptor crewmembers were focused on forcing aircraft to land and not on the overall safety of the mission. Under the renewed program, the three U.S. safety monitors are located at the Colombian Air Force's command center in Bogota; at JIATF-South in Key West, Florida; and onboard the surveillance aircraft. The safety monitor onboard the aircraft observes the completion of checklist procedures and alerts the U.S. monitors on the ground when each procedure is accomplished. If any of the three monitors objects to an action taken during the mission, the monitor immediately stops the mission. For example, if a monitor objects to the firing of warning shots because he is not confident that the suspicious aircraft is involved in drug trafficking, he will immediately pull all U.S. resources out of the mission, including the surveillance aircraft and U.S. personnel. However, if the problem is resolved, the mission can resume. As of June 2005, the U.S. monitors had objected to actions in ten missions, two of which were due to incorrect implementation of the checklist. The Letter of Agreement with Colombia requires all U.S. safety monitors to be fluent in Spanish and the Colombian crewmembers, besides the weapons controllers, to be proficient in English because language barriers among the aircrew members contributed to the Peru accident. The aircrews involved in the Peru accident had flown on previous operational missions together and had some foreign language skills; however, they were not proficient enough to communicate clearly during the high stress of an interception. For example, one of the crewmembers in the Peru incident obtained the suspicious aircraft's tail number so that ground personnel could determine the owners of the aircraft. However, other participants in the mission did not understand the message, and never learned that the plane was a legitimate civilian aircraft. Under the renewed program, the U.S. safety monitors are native Spanish speakers or were formerly trained as linguists with the U.S. military. Annually, ARINC tests the U.S. monitors fluency in Spanish and the NAS tests the Colombians' proficiency in English. Additionally, the renewed ABD program has incorporated improved communications systems and procedures to ensure the communications mishaps that contributed to the Peru accident do not reoccur. An ABD interception requires the coordination of many individuals, including ground personnel in the ABD command center in Bogota and JIATF-South in Key West, Florida, and aircrews in the surveillance and interceptor aircraft. During the Peru accident, the aircrews were talking simultaneously over the same radio channels and were not able to hear each other clearly. For example, the crew of the suspicious aircraft called the closest air control tower when they saw the interceptor aircraft following them, but the control tower did not receive the call because it was too far away. Although the ABD aircrews were monitoring the tower's radio frequency, they did not hear the call because other communication was occurring at the same time. For the new program, a satellite radio channel is dedicated to the U.S. monitors, and the Colombian crewmembers communicate on various radio channels. A satellite phone is also available if radio communication is impaired. The U.S. monitors must suspend the mission if communication among them is lost, which has happened three times. Although not a finding of the Peru investigation, the Letter of Agreement with Colombia recognizes that a community of civilian pilots unaware of the ABD program can threaten the safety of the program's operations. Pilots who do not know how to respond to an ABD interception may put themselves and the ABD aircrews at undue risk. The pilot of the suspicious aircraft in Peru was unaware that he was being called over the radio by the ABD aircrew. The Letter of Agreement with Colombia requires the Colombian government to inform the public of the program's operating procedures, which the government does through publicly posted notices and required training courses for pilots and air traffic controllers. The government also teaches the civilian pilots how to respond to an ABD interception, as well as the consequences of not complying with the Colombian Air Force's commands. The program managers that we interviewed said that the program's operations are reviewed and evaluated regularly by the program managers and cognizant U.S. agency officials. For example: The United States recertifies the program once a year, a process that serves as the basis for the President's annual decision on whether to continue supporting the program. The program was first certified in May 2003 before it could restart and again in July 2004 by a team of representatives from the Departments of State, Defense, Homeland Security, Justice, and Transportation. The 2004 certification team ensured that the major components of the Letter of Agreement-- operational procedures, training requirements, logistics support, and information to civilian pilots--were in place by reviewing official documents, performing interviews, and observing training and operational exercises. The crew of the surveillance aircraft records a video of each ABD mission once the suspicious aircraft is located. Both Colombian and U.S. program managers review the video to determine if the checklist was followed. We reviewed recordings of some ABD missions and observed the implementation of the safety procedures. U.S. and Colombian managers of the program meet every six months to plan for the future and discuss Colombia's needs for the program. After the U.S. managers consider Colombia's needs, they determine whether to fund the requests for such items as repaving runways at ABD operating locations. In addition, the Congress requires an annual report from the President on the program's resources and procedures used to intercept drug trafficking aircraft. The report certifies that the procedures agreed to in the Letter of Agreement were followed in the interception of aircraft engaged in illegal drug trafficking during the preceding year. Our analysis of available data--the number of suspicious tracks and law enforcement activities--indicates that the ABD program's progress to date is mixed. The Colombian Air Force surveillance aircraft pursued less than half of the almost 900 suspicious tracks identified since October 2003 and few were located. But the number of suspicious tracks appears to have declined, although the consistency of the suspicious track data is unknown. The program's primary objective--to safely force suspicious aircraft to land so law enforcement authorities can gain control of it--has not happened very often. In addition, the location of most suspicious tracks has changed, making them more difficult to locate and intercept. State/INL does not have clear performance measures that can be used to help assess the ABD program's progress toward eliminating aerial drug trafficking in Colombia. State/INL officials told us that they began developing measures in early 2005, but they do not contain benchmarks or timeframes. These same officials said they will meet with Defense shortly to review data related to these measures for the first time. Since October 2003, the Colombians pursued about 390 out of approximately 880 suspicious tracks, and located 48 of them (see fig. 1). Tracks are often difficult to locate because the relocatable over-the-horizon radar does not provide the suspicious aircraft track's altitude or the exact location. Furthermore, according to Colombian Air Force officials, drug traffickers use hundreds of clandestine airstrips in Colombia. Often the airstrips are camouflaged and suspicious aircraft are hidden from view. Therefore, when surveillance aircraft do not interdict suspicious aircraft in the air, they are unlikely to find them once they land and disappear from radar. Recently, the Colombian Air Force asked the United States to permanently increase the number of flight hours (from 180 to 300 per month) for the surveillance aircraft to spend more time training and locating clandestine airstrips. According to U.S. and Colombian officials, once these airstrips are located, the ABD aircrews can focus on them when searching for a suspicious aircraft in the area. To date, based on our review of ABD documents, identification of clandestine airstrips has not assisted in locating any suspicious aircraft. Some State/INL officials are skeptical that more flying time, which would increase maintenance and fuel costs, would produce greater results for the program. The number of suspicious aircraft tracks over Colombia has apparently declined from approximately 49 to 30 a month, a decrease of about 40 percent, between the first 11 months of the program and the last 11 months (see fig. 1). According to U.S. and Colombian officials, the reduction in tracks indicates that the program is deterring drug traffickers from transporting drugs by air, and is allowing the Colombian government to meet its goal of regaining control of its airspace, but performance measures with benchmarks and timeframes linking the reduction of suspicious tracks to the overall goal have not been developed. Moreover, the accuracy of the suspicious track data over time is suspect due to the nature of the process, which relies on some subjective criteria. The process for determining whether a track is suspicious or legitimate is partly based on the judgment of JIATF-South and Colombian Air Force personnel, who screen thousands of tracks every month looking for suspicious movements. For example, personnel consider whether the aircraft has inexplicably deviated from its planned flight path or the aircraft's altitude is unusually low. However, no definitive criteria exist for such factors, which can therefore be interpreted differently among operators. The National Police seldom take control of suspicious aircraft, arrest individuals suspected of drug trafficking, or seize drugs. Since October 2003, law enforcement was involved in 14 instances (see fig. 2), arresting four suspects and impounding several aircraft. However, in four of these instances, the aircraft was already on the ground. Only one ABD mission resulted in a drug seizure--0.6 metric tons (about 1,300 pounds) of cocaine. Because State/INL has not established performance measures regarding law enforcement activities, determining whether the objectives of the ABD program are being met is difficult. However, State/INL officials said they would like law enforcement authorities to more often take control of suspicious aircraft, which may contain drugs, weapons, or cash that goes unaccounted for if the military or police do not arrive. As steps on the procedural checklist, ABD personnel contact the Colombian National Police in Bogota at the start of an interdiction mission and prior to firing at the aircraft. But, besides these calls, the Colombian Air Force usually does not involve the police in ABD missions. Further, the police face various challenges in reaching the locations where suspicious aircraft land--often in remote areas of Colombia that are not accessible by road. The police cannot travel to some locations without additional resources, including security and transportation, according to INL officials. But, according to U.S. officials, greater planning and coordination between the Colombian Air Force and National Police could enable law enforcement to more frequently take control of suspicious aircraft. For example, in the February 2005 ABD mission that yielded 1,300 pounds of cocaine, one armed Colombian Navy helicopter provided cover for another Navy helicopter to land and seize as much cocaine from the aircraft as it could carry, while the Colombian Army and National Police arrived later and confiscated the remaining cocaine. In recent months, the majority of suspicious tracks are concentrated along Colombia's borders (see fig. 3), making it more difficult for surveillance and interceptor aircraft to reach the aircraft before it lands or leaves Colombian airspace. Once a suspicious aircraft lands, surveillance aircraft often have difficulty locating it. From November 2003 to July 2005, 141 suspicious tracks were not pursued by surveillance aircraft because they were near borders or too far away. In particular, suspicious tracks along Colombia's southeastern border with Brazil and Venezuela are at least an hour flight from the closest ABD air base in Apiay, leaving surveillance and interceptor aircraft little time to find and intercept a suspicious aircraft before having to refuel (see fig. 4). For example, one ABD interceptor aircraft, the A-37B Dragonfly, takes 50 minutes to fly to Caruru (about 250 miles) in southeastern Colombia, but it can remain in that area for only 10 minutes before leaving to refuel. ABD program managers and safety monitors said it usually takes about 25 minutes to complete an ABD mission when all resources are in place, from visually locating the aircraft to forcing it to land. However, some ABD missions have lasted as long as six or seven hours and utilized multiple surveillance and interceptor aircraft. The United States agreed to help Colombia restart the ABD program at the request of Colombian President Alvaro Uribe. U.S. funding provided for the program through fiscal year 2005 totals over $68 million; almost $26 million is proposed for 2006. We found the results of the ABD program mixed. A primary U.S. concern regarding the program--the safety of the ABD aircrews and innocent civilians--is addressed in detail in the Letter of Agreement between the United States and Colombia. However, the agreement does not include performance measures with benchmarks and timeframes to help with assessing results. Although State has begun developing such measures, assessing the program's effectiveness and determining whether additional resources might contribute to increased results is difficult. Although the number of suspicious aircraft tracks has apparently declined--from about 49 to 30 per month, the Colombian Air Force seldom locates the suspicious aircraft. Moreover, drug traffickers do not face a great risk of being arrested even if they are detected. Out of about 390 suspicious tracks pursued since the start of the program, the Colombian Air Force located 48; law enforcement or military authorities went to the scene of 14, including four that were already on the ground. Besides calling the Colombian National Police during a mission, as required by the procedural checklist, the Colombian Air Force rarely involves the police. Without sufficient notice, the police cannot respond quickly and safely to suspicious aircraft on the ground because much of Colombia is not controlled by the government. Moreover, many of the suspicious aircraft tracks detected in recent months are along Colombia's border regions with Brazil and Venezuela where ABD aircraft are often too far away to threaten the trafficking mission. First, to help in assessing whether the ABD program is making progress toward meeting its overall goal of reducing illegal drug trafficking in Colombia's airspace, we recommend that the Secretary of State work with Colombia to define performance measures with benchmarks and timeframes. These performance measures, as well as results, should be included in the annual report to the Congress regarding the ABD program. Second, because the police are seldom involved in ABD missions, we recommend that the Secretary of State encourage Colombia to seek ways to more actively involve the National Police. Finally, because many of the suspicious aircraft tracks are difficult for Colombia to locate and interdict given the current location of its ABD air bases, we recommend that the Secretary of State encourage Colombia to establish ABD air bases closer to the current activity of suspicious aircraft tracks. State provided written comments on a draft of this report (see appendix III). Overall, it found the report to be an accurate assessment of the intent and execution of the program and noted that it is developing benchmarks and timeframes for its performance measures. Defense did not provide written comments. However, neither department commented on our recommendations. In addition, State and Defense officials provided technical comments and updates that we incorporated throughout the report, as 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 of this report to interested congressional committees and the Secretaries of State and Defense. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please call me at (202) 512-4268 or [email protected]. Key contributors to this report were Al Huntington, Hynek Kalkus, Summer Pachman, and Kerry Lipsitz. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. ander) assumed suspect (UAS) An ABD mission begins when relocatable over -the-horizon radar or other intelligence sources provide information about a suspicious flight to personnel at the ABD command center, who then consider various questions to determine whether the track is involved in illegal drug trafficking activities. Once a track is determined to be suspicious (checklist step 1), a surveillance aircraft, with a crew of Colombian Air Force personnel and one U.S. government contractor, tries to visually locate it (step 5). The length of time it takes to find the suspicious aircraft can vary. Once located, the ABD aircrews try to determine its identity and order it to land in English and Spanish over the radio or through the use of visual signals (step 7). If the suspicious aircraft continually fails to respond, an ABD aircrew member gives a verbal warning that deadly force will be used (step 9). An interceptor aircraft called to the scene, with a Colombian Air Force crew, fires warning shots and direct shots if the suspect fails to follow orders (steps 10 and 14). ander) All use of force by the interceptor is pre- approved by the Commander of the Colombian Air Force. Abbreviations: ATOI-A track of interest COL-Colombia CNP-Colombian National Police I-Initiates action N-Noted, but no action required RR-Response required SAR-Search and rescue UAS-Unidentified assumed suspect USG-U.S. government records crash site. To review the changes made to the ABD program to address safety concerns and to determine whether these safeguards were followed, we reviewed ABD program documentation provided by the Department of State's Bureau for International Narcotics and Law Enforcement Affairs (State/INL) and the Narcotics Affairs Section (NAS) at the U.S. Embassy, Bogota, and the Department of Defense's Joint Interagency Task Force- South (JIATF-South). We also discussed the new safeguards with knowledgeable U.S. officials at State and Defense in Washington, D.C.; Bogota, Colombia; and Key West, Florida; officials from the Colombian government and Colombian Air Force in Bogota; and ARINC contractors located in Bogota and an ABD air base in Apiay, Colombia. We also interviewed officials involved in the negotiation of the agreement between the United States and Colombia prior to restarting the program. To evaluate the program's progress in attaining U.S. and Colombian objectives, we examined data regarding law enforcement activities; suspicious tracks; aircraft pursued, located, and fired at. This data was documented by NAS in reports prepared monthly for State/INL containing the number of missions flown that month and their results. However, complete data for August and September 2003 was unavailable, and the data for October 2003 to March 2004 did not include the number of tracks pursued and identified. By using an event log prepared by NAS with narratives of ABD missions beginning in August 2003, we extrapolated some of the data and corroborated all law enforcement activities and aircraft fired on. We also compared the number of suspicious tracks recorded by NAS with JIATF-South's count. The numbers reported were not the same for most months. We used the NAS count of suspicious tracks because it is more inclusive of tracks detected by Colombia and does not include tracks that were later determined to be friendly aircraft. We interviewed cognizant officials at State/INL, NAS, and JIATF-South about the data. Further, we discussed the numbers of suspicious tracks with the Colombian Air Force. Based on our ability to corroborate most of the data with multiple sources, we determined that it was sufficiently reliable for our purposes. We traveled to Colombia in April 2005 and met with NAS officials and other cognizant U.S. Embassy, Bogota, officials, and with ARINC managers at their offices at the Government of Colombia's Ministry of Defense in Bogota. We also visited an ABD air base in Apiay where we met with ARINC contractors serving as monitors onboard the surveillance aircraft. Additionally, we visited the Colombian Air Force's ABD command center in Bogota where we interviewed both ARINC contractors and Colombian Air Force officials. We witnessed the start of an ABD mission at the command center and reviewed video recordings of previous ABD missions at the U.S. Embassy. The following are GAO's comments on the Department of State's letter dated August 23, 2005. 1. State officials provided us draft performance measures for the ABD program that they told us were developed in April 2005 with representatives from Defense and the Colombian government. 2. We recognized the U.S. role of program oversight and the Colombian government's role of operating and managing the program throughout the report. 3. We made no substantive changes. This section addressed only the initial identification of a suspect track. Our analysis found that three of the six criteria used to determine if a track is suspicious were subjective. The checklist and other steps taken to further identify suspect aircraft are discussed elsewhere in the report. 4. We gave examples of the criteria used to determine if an aircraft is suspected of drug trafficking. 5. A discussion of U.S. government intelligence support to the ABD program was not within the scope of our report.
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In the 1990s, the United States operated a program in Colombia and Peru called Air Bridge Denial (ABD). The ABD program targeted drug traffickers that transport illicit drugs through the air by forcing down suspicious aircraft, using lethal force if necessary. The program was suspended in April 2001 when a legitimate civilian aircraft was shot down in Peru and two U.S. citizens were killed. The program was restarted in Colombia in August 2003 after additional safeguards were established. To date, the United States has provided about $68 million in support and plans to provide about $26 million in fiscal year 2006. We examined whether the ABD program's new safeguards were being implemented and its progress in attaining U.S. and Colombian objectives. The United States and Colombia developed additional safeguards for the renewed ABD program to avoid the problems that led to the accidental shoot down in Peru. The safety measures aim to reinforce and clarify procedures, bolster safety monitoring, enhance language skills of ABD personnel, and improve communication channels. We found the safeguards were being implemented by the Colombians and U.S. safety monitors. In addition, the program managers perform periodic reviews and evaluations, including an annual recertification of the program, and have made efforts to improve civilian pilots' awareness of the ABD program's procedures. Our analysis of available data indicates that the ABD program's results are mixed, but the program's progress cannot be readily assessed because performance measures with benchmarks and timeframes do not exist. The stated objective for the program--for the Colombian National Police to take control of suspicious aircraft--seldom happens. During October 2003 through July 2005, the Colombian Air Force located only 48 aircraft out of about 390 suspicious tracks pursued; and the military or police took control of just 14 aircraft--four were already on the ground. Only one resulted in a drug seizure. However, many of the suspicious aircraft land in remote locations controlled by insurgent groups that require time to enter safely. Yet, the air force rarely involves the police besides calling them at the start of a mission and before firing at the suspicious aircraft. In addition, many of the suspicious tracks are near border areas with Brazil and Venezuela, which is too far from an ABD air base for aircraft to intercept without refueling. Nevertheless, the number of suspicious tracks has apparently declined from 49 to 30 per month, but the track counts may not be consistent over time because they are based on subjective criteria, such as whether an aircraft has inexplicably deviated from its planned flight path. According to U.S. and Colombian officials, the reduction in suspicious tracks indicates that Colombia is deterring traffickers and regaining control of its airspace.
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VHA provides a broad range of primary and specialized health care, as well as related medical and social support services through a network of more than 1,200 medical facilities. In carrying out its responsibilities, VHA uses "miscellaneous obligations" to obligate (or administratively reserve) estimated funds against appropriations for the procurement of a variety of goods and services when specific quantities and time frames are uncertain. According to VA policy, miscellaneous obligations can be used to record estimated obligations to facilitate the procurement of goods and services, such as fee-based medical and nursing services and beneficiary travel. In fiscal year 2007, VHA recorded over $6.9 billion of miscellaneous obligations for the procurement of mission-related goods and services. According to VHA fiscal year 2007 data, almost $3.8 billion (55.1 percent) of VHA's miscellaneous obligations was for fee-based medical services and another $1.4 billion (20.4 percent) was for drugs and medicines. The remainder funded, among other things, state homes for the care of disabled veterans, transportation of veterans to and from medical centers for treatment, and logistical support and facility maintenance for VHA medical centers nationwide. In September 2008, we reported that VA policies and procedures were not designed to provide adequate controls over the authorization and use of miscellaneous obligations with respect to (1) oversight by contracting officials, (2) segregation of duties, and (3) supporting documentation for the obligation of funds. Collectively, these flaws increased the risk of fraud, waste, and abuse. Our case studies at three medical centers showed, for example, that VA did not have procedures in place to document any review by contracting officials, and none of the 42 obligations we reviewed had such documented approval. Effective oversight and review by trained, qualified officials is a key factor in helping to ensure that funds are used for their intended purposes. Without control procedures to help ensure that contracting personnel review and approve miscellaneous obligations prior to their creation, VHA is at risk that procurements do not have the necessary safeguards. In addition, our analysis of VA data identified 145 miscellaneous obligations, amounting to over $30.2 million, that appeared to have been used in the procurement of such items as passenger vehicles; furniture and fixtures; office equipment; and medical, dental and scientific equipment. VA officials told us, however, that the acquisition of such assets should be done by contracting rather than through miscellaneous obligations. Our 2008 report also cited inadequate segregation of duties. Federal internal control standards provide that for an effectively designed control system, key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. These controls should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and accepting any acquired assets. In 30 of the 42 obligations reviewed, one official performed two or more of the following functions: requesting, approving, or recording the miscellaneous obligation of funds, or certifying delivery of goods and services and approving payment. In two instances involving employee grievance settlements, one official performed all four of these functions. In 2007, the VA OIG noted a similar problem in its review of alleged mismanagement of funds at the VA Boston Healthcare System. For example, according to OIG officials, they obtained documents showing that a miscellaneous obligation was used to obligate $200,000. This miscellaneous obligation was requested, approved, and obligated by one fiscal official. The OIG concluded that Chief of the Purchasing and Contracting Section and four other contracting officers executed contract modifications outside the scope of original contracts and the Chief of the Fiscal Service allowed the obligation of $5.4 million in expired funds. In response to the OIG recommendations, VA officials notified contracting officers that the practice of placing money on a miscellaneous obligation for use in a subsequent fiscal year to fund new work was a violation of appropriations law, and that money could no longer be "banked" on a miscellaneous obligation absent a contract to back it up. Similarly, an independent public accountant's July 2007 report found, among other things, that the segregation of duties for VA's miscellaneous obligation process was inadequate. Without the proper segregation of duties, risk of errors, improper transactions, and fraud increases. Our 2008 case studies also identified a lack of adequate supporting documentation at the three medical centers we visited. Specifically, VA policies and procedures were not sufficiently detailed to require the type of information needed such as purpose, vendor, and contract number that would provide crucial supporting documentation for the obligation. In 8 of 42 instances, we could not determine the nature, timing, or the extent of the goods or services being procured from the description in the purpose field. As a result, we could not confirm that the miscellaneous obligations were for bona fide needs or that the invoices reflected a legitimate use of federal funds. Our report concluded that without basic controls in place over billions of dollars in miscellaneous obligations, VA is at significant risk of fraud, waste, and abuse. In the absence of effectively designed key funds and acquisition controls, VA has limited assurance that its use of miscellaneous obligations is kept to a minimum, for bona fide needs, and in the correct amounts. We made four recommendations, concerning review by contracting officials, segregation of duties, supporting documentation, and oversight mechanisms. These recommendations aimed at reducing the risks associated with the use of miscellaneous obligations. In response to our recommendations, in January of 2009, VA issued Volume II, Chapter 6, of VA Financial Policies and Procedures-- Miscellaneous Obligations, which outlines detailed policies and procedures aimed at addressing control deficiencies identified in our September 2008 report. Key aspects of the policies and procedures VA developed in response to our four recommendations included: Review of miscellaneous obligations by contracting officials--The request and approval of miscellaneous obligations are to be reviewed by contracting officials, and the contracting reviews are to be documented. Segregation of duties--No one official is to perform more than one of the following key functions: requesting the miscellaneous obligation; approving the miscellaneous obligation; recording the obligation of funds; or certifying the delivery of goods and services or approving payment. Supporting documentation for miscellaneous obligations--New procedures require providing the purpose, vendor, and contract number fields before processing obligation transactions, including specific references, the period of performance, and the vendor name and address. Oversight mechanism to ensure control policies and procedures are fully and effectively implemented--Each facility is now responsible for performing independent quarterly oversight reviews of the authorization and use of miscellaneous obligations. Further, the results of the independent reviews are to be documented and recommendations tracked by facility officials. The policies and procedures also note that the Office of Financial Policy is to conduct quarterly reviews of VA miscellaneous obligation usage to ensure compliance with the new requirements. As part of its fiscal year 2009 review activities, VA's Office of Business Oversight (OBO) Management Quality Assurance Service (MQAS) evaluated VA compliance with new VA policies and procedures concerning the use of miscellaneous obligations--Financial Policies and Procedures, Volume II, Chapter 6, Miscellaneous Obligations. According to its executive summary report, the MQAS reviewed 476 miscellaneous obligations at 39 different medical centers, health care systems, and regional offices in fiscal year 2009. The MQAS found 379 instances of noncompliance with the new policies and procedures. Examples include: Inadequate oversight of miscellaneous obligations by contracting officials--Many miscellaneous obligations were not submitted for the required approval by the Head of Contracting Activity. Further, some miscellaneous obligation were used for invalid purposes, including employee tuition, utilities, general post, lab tests, and blood products. Segregation of duties-- Many miscellaneous obligations had inadequate segregation of duties concerning the requesting, approving, and recording of miscellaneous obligations, and the certifying receipt of goods and services and approving payment. For example, the MQAS identified 48 instances where two individuals performed all four of these functions. Supporting documentation for miscellaneous obligations--Some miscellaneous obligations also lacked adequate supporting documentation concerning the vendor name, performance period, and the contract number. These noncompliance issues were similar to those we identified in our September 2008 report on VHA miscellaneous obligations. Overall, MQAS found that there was a lack of timely dissemination of the new miscellaneous obligation policy, and issued 34 recommendations to VA facility officials. Fiscal year 2010 facility-level recommendations included the need to develop standard operating procedures for implementing the policy, to provide training for new accounting personnel, to require documentation establishing segregation of duties, and to institute facility-level quarterly reviews. According to the MQAS Associate Director, VHA facilities are in the process of taking corrective actions to address the MQAS recommendations. In November of 2009, we reported that VA had three long-outstanding material weaknesses in internal control over financial reporting identified during VA's annual financial audits. Financial management oversight--reported as a material weaknesses since fiscal year 2005. This issue was also identified as a significant deficiency in fiscal years 2000 through 2004. This weakness stemmed from a variety of control deficiencies, including the recording of financial data without sufficient review and monitoring, a lack of sufficient human resources with the appropriate skills, and a lack of capacity to effectively process a significant volume of transactions. Financial management system functionality--reported since fiscal year 2000--is linked to VA's outdated legacy financial systems affecting VA's ability to prepare, process, and analyze financial information that is timely, reliable, and consistent. Legacy system deficiencies necessitated significant manual processing of financial data and a large number of adjustments to the balances in the system. IT security controls--also reported since fiscal year 2000--resulted from the lack of effective implementation and enforcement of an agencywide information security program. Security weaknesses were identified in the areas of access control, segregation of duties, change control, and service continuity. We also found that while VA had corrective action plans in place intended to result in near-term remediation of its significant deficiencies, many corrective action plans did not contain the detail needed to provide VA officials with assurance that the plans could be effectively implemented on schedule. Eight of the 13 plans we reviewed lacked key information regarding milestones for completion of specific action steps and/or validation activities. 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. VA recognized the need to better oversee and coordinate agencywide oversight activities for financial reporting material weaknesses, and began to staff a new office responsible for, in part, assisting VA and the three administrations and staff offices in executing and monitoring corrective actions plans. Our report concluded that actions to provide a rigorous framework for the design and oversight of corrective action plans will be essential to ensuring the timely remediation of VA's internal control weaknesses, and that continued support from senior VA officials and administration CFOs would be critical to ensure that key corrective actions are developed and implemented on schedule. We made three recommendations to help improve corrective action plan development and oversight. VA concurred with the recommendations and said that it took some actions to address the recommendations, including developing a manual with guidance on corrective action planning and monitoring, creating a corrective action plan repository, and establishing a Senior Assessment Team of senior VA officials as the coordinating body for corrective action planning, monitoring, reporting, and validation of deficiencies identified during financial audits. VA's independent auditor fiscal year 2009 financial audit report included the three material weaknesses that have been reported as deficiencies since 2000. In addition, it also included a new material weakness concerning compensation, pension, and burial liabilities. Furthermore, VA's reporting indicated remediation timetables for the previously reported material weaknesses appear to be slipping. In the fiscal year 2009 Performance and Accountability Report, VA officials noted that in fiscal year 2009 they had closed 10 of the underlying significant deficiencies reported in fiscal year 2008, but that their timetables had slipped for remediating the IT security controls and financial management oversight material weaknesses to 2010 and 2012, respectively. In addition, milestones for remediating the new material weakness--compensation, pension, and burial liabilities--had yet to be determined. According to the independent auditor, the causes for the fiscal year 2009 material weaknesses related to challenges to implement security policies and procedures, a lack of sufficient personnel with the appropriate knowledge and skills, a significant volume of transactions, and decentralization. These findings are consistent with those we identified in our 2009 report and are all long-standing issues at the VA. The auditor noted that VA did not consistently monitor, identify, and detect control deficiencies. The auditor recommended that VA assess the resource and control challenges associated with operating in a highly decentralized accounting function, and develop an immediate interim review and monitoring plan to detect and resolve deficiencies. In summary, while we have not independently validated the status of VA's actions to address our 2008 and 2009 reports' findings concerning VA's controls over miscellaneous obligations and financial reporting, VA's recent inspections and financial audit report indicate that the serious, long-standing deficiencies we identified are continuing. Effective remediation will require well-designed plans and diligent and focused oversight by senior VA officials. Further, the extent to which such serious weaknesses continue raises questions concerning whether VA management has established an appropriate "tone at the top" necessary to ensure that these matters receive the full, sustained attention needed to bring about their full and effective resolution. Until VA's management fully addresses our previous recommendations, VA will continue to be at risk of improper payments, waste, and mismanagement. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information about this testimony, please contact Susan Ragland, Director, Financial Management and Assurance at (202) 512-9095, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Major contributors to this testimony included Glenn Slocum, Assistant Director; Richard Cambosos; Debra Cottrell; Daniel Egan; Patrick Frey; W. Stephen Lowrey; David Ramirez; Robert Sharpe; and George Warnock. 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 September 2008, GAO reported internal control weaknesses over the Veteran Health Administration's (VHA) use of $6.9 billion in miscellaneous obligations in fiscal year 2007. In November 2009, GAO reported on deficiencies in corrective action plans to remediate financial reporting control deficiencies. This testimony is based on these previous reports that focused on (1) VHA miscellaneous obligation control deficiencies and (2) Department of Veterans Affairs (VA) financial reporting control deficiencies and VA plans to correct them. For its review of VHA miscellaneous obligations, GAO evaluated VA's policies and procedures and documentation, interviewed cognizant agency officials, and conducted case studies at three VHA medical centers. For its review of financial reporting control deficiencies, GAO evaluated VA financial audit reports from fiscal years 2000 to 2008 and analyzed related corrective action plans. In September 2008, we reported that VHA recorded over $6.9 billion of miscellaneous obligations for the procurement of mission-related goods and services in fiscal year 2007. We also reported that VA policies and procedures were not designed to provide adequate controls over the authorization and use of miscellaneous obligations, placing VA at significant risk of fraud, waste, and abuse. We made four recommendations with respect to (1) oversight by contracting officials, (2) segregation of duties, (3) supporting documentation for the obligation of funds, and (4) oversight mechanisms. In January 2009, VA issued new policies and procedures aimed at addressing the deficiencies identified in GAO's September 2008 report. In November of 2009, we reported that VA's independent public auditor had identified two of VA's three fiscal year 2008 material weaknesses--in financial management system functionality and IT security controls--every year since fiscal year 2000 and the third--financial management oversight--each year since fiscal year 2005. While VA had corrective action plans in place that intended to result in near-term remediation of its internal 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. For example, 8 of 13 plans lacked key information about milestones for steps to achieve the corrective action and how VA would validate that the steps taken had actually corrected the deficiency. While VA began to staff a new office responsible for, in part, assisting VA and the three administrations in executing and monitoring corrective action plans, we made three recommendations to improve corrective action plan development and oversight. VA concurred with our recommendations and took some steps to address them. In fiscal year 2009, VA's own internal VA inspections and financial statement audit determined that the internal control deficiencies identified in our prior reports on miscellaneous obligations and material weaknesses identified in prior financial audits continued to exist. VA conducted 39 inspections, which identified problems with how VHA facilities had implemented VA's new miscellaneous obligation policies and procedures. Similarly, VA's independent auditor reported that VA continued to have material weaknesses in financial management system functionality, IT security controls, and financial management oversight in fiscal year 2009. To the extent that the deficiencies we identified continue, it will be critical that VA have an effective "tone at the top" and mechanisms to monitor corrective actions related to deficient internal controls. In its September 2008 report, GAO made four recommendations to improve VA's internal controls over miscellaneous obligations. In its November 2009 report, GAO made three recommendations to improve VA corrective action plans to remediate financial reporting control deficiencies. VA generally concurred with these recommendations and has since reported taking actions to address the recommendations.
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Federal agencies reported improper payments of an estimated $125.4 billion in fiscal year 2010. This estimate represents about 5.5 percent of the $2.3 trillion of reported outlays for the related programs in fiscal year 2010. The $125.4 billion estimate is an increase of $16.2 billion from federal agencies' prior year reported estimate of $109.2 billion. Estimated improper payment amounts for both of these years may include estimates based on prior years' data, if current reporting year data were not available, as allowed by OMB guidance. The $125.4 billion in estimated federal improper payments reported for fiscal year 2010 was attributable to over 70 programs spread among 20 agencies. As shown in table 1, the highest reported improper payment estimated amounts were associated with 10 programs. Specifically, the 10 programs accounted for about $118 billion or 94 percent of the total estimated improper payments reported for fiscal year 2010. It is important to recognize that the $125.4 billion in improper payments federal agencies reported in fiscal year 2010 is not intended to be an estimate of fraud in federal agencies' programs and activities. Rather, reported improper payment estimates include many types of overpayments, underpayments, and payments that were not adequately documented. Agencies cited a number of causes for the estimated $125.4 billion in reported improper payments, including insufficient documentation, incorrect computations, changes in program requirements, and in some cases fraud. Increases in the estimated amounts of improper payments reported for fiscal year 2010 were primarily attributable to increases in estimated improper payments related to four major programs: (1) Department of Labor's Unemployment Insurance program, (2) Department of the Treasury's Earned Income Tax Credit program, (3) Department of Health and Human Services' (HHS) Medicaid program, and (4) HHS' Medicare Advantage program. Agencies reported that the increases in the estimates for these programs were primarily attributable to an increase in program outlays. That was the case for the Medicaid and Medicare Advantage programs even though these two programs reported lower error rates. Both Unemployment Insurance and Earned Income Tax Credit programs reported higher program outlays and higher error rates for fiscal year 2010 when compared to fiscal year 2009. Since the implementation of IPIA in 2004, federal agencies have consistently identified new programs or activities as risk-susceptible and reported estimated improper payment amounts. fiscal year 2005--17 new programs or activities, fiscal year 2006--15 new programs or activities, fiscal year 2007--19 new programs or activities, fiscal year 2008--10 new programs or activities, fiscal year 2009--5 new programs or activities, and fiscal year 2010--2 new programs or activities. In addition, federal agencies have reported progress since 2004 in reducing improper payment amounts and payment error rates in some programs and activities. From the initial implementation of IPIA in 2004 through 2010, 28 programs have consistently reported estimated improper payment error rates for each year. Of these 28, 17 agency programs reported reduced error rates in comparison with their initial or baseline error rates reported in fiscal year 2004. Following are examples of agencies reporting reductions in program error rates and estimated improper payment amounts (along with corrective actions to reduce improper payments) in their fiscal year 2010 PARs, AFRs, or annual reports. HHS reported that the fiscal year 2010 Head Start program's estimated improper payment amount decreased from the fiscal year 2009 amount of $213 million to $123 million, which represented a decrease in the error rate of 1.3 percentage points to a 1.7 percent error rate. HHS reported that it reduced payment errors by issuing additional guidance for employees on verifying income eligibility and a standard template form to help guide grantees in the enrollment process. The U.S. Department of Agriculture (USDA) reported that the fiscal year 2010 estimated improper payment amount for the Marketing Assistance Loan program decreased from the fiscal year 2009 reported amount of $85 million to $35 million, which represented a decrease in the error rate of 1.75 percentage points to a 0.81 percent error rate. USDA reported that corrective actions taken to reduce improper payments included providing additional training and instruction on improper payment control procedures, and integrating employees' individual performance results related to reducing improper payments into annual performance ratings. Despite reported progress in reducing estimated improper payment amounts and error rates for some programs and activities during fiscal year 2010, federal agencies' reporting indicates the federal government still faces challenges in this area. Agency reporting highlighted challenges that remain in meeting the requirements of IPIA, including determining the full extent of improper payments across the federal government and in reasonably assuring that effective actions are taken to reduce improper payments. Specifically, some federal agencies' fiscal year 2010 reporting did not include information demonstrating that (1) risk assessments were conducted on all of their programs and activities, and (2) improper payment estimates were developed and reported for all risk-susceptible programs. IPIA required agencies to annually review all of their programs and activities to identify their risk of susceptibility to significant improper payments. However, two agencies--the United States Postal Service and the Department of Transportation--did not report on risk assessments of their programs and activities. The agencies either did not report any information on risk assessments in their PARs, AFRs, or annual reports, or included some risk assessment-related information (such as listing risk factors), but not on the results of any assessments of risk for all of their programs and activities. Further, IPIA required agencies to estimate improper payments for each program identified as susceptible to significant improper payments during the risk assessment process. However, three agencies did not report estimated improper payment amounts for fiscal year 2010 for seven risk- susceptible programs with significant amounts of outlays. Most notably, HHS has yet to report a comprehensive improper payment estimate amount for the Medicare Prescription Drug Benefit program, which had about $59 billion in outlays in fiscal year 2010. However, HHS expects to report a comprehensive estimate for this program in fiscal year 2011. While none of the seven risk-susceptible programs reported an improper payment estimated amount in fiscal year 2010 or 2009, all but one-- Medicare Prescription Drug Benefit program--reported an improper payment estimated amount for fiscal year 2008. During fiscal year 2010, a number of actions were taken intended to strengthen the framework for reducing and reporting improper payments. First, in November 2009, the President issued Executive Order 13520, Reducing Improper Payments. This order was intended to focus on increasing transparency and accountability for reducing improper payments and creating incentives for reducing improper payments. Under the Executive Order, OMB established a Web site (www.PaymentAccuracy.gov) and designated 14 high-error programs to focus attention on the programs that significantly contribute to the federal government's improper payments. The Web site provides information on (1) the programs' senior accountable officials responsible for efforts to reduce improper payments; (2) current, targeted, and historical estimated rates of improper payments; (3) why improper payments occur in the programs; and (4) what federal agencies are doing to reduce improper payments and recover overpayments. The President also issued two memoranda in March and June 2010, intended to expand agency efforts to recapture improper overpayments using recapture audits, and directing the establishment of a Do Not Pay List to help prevent improper payments to ineligible recipients, respectively. In addition, in 2010, the President set goals, as part of the Accountable Government Initiative, for federal agencies to reduce overall improper payments by $50 billion, and recapture at least $2 billion in improper contract payments and overpayments to health providers, by the end of fiscal year 2012. In July 2010, Congress passed and the President signed IPERA. This legislation was intended to enhance reporting and the reduction of improper payments. In addition to amending the IPIA improper payment estimation requirements, IPERA established additional requirements related to (1) federal agency management accountability; (2) recovery auditing aimed at identifying and reclaiming payments made in error; (3) compliance and noncompliance determinations based on an inspector general's assessment of an agency's adherence to IPERA requirements and reporting that determination; and (4) an opinion on internal controls over improper payments. For example, regarding management accountability, IPERA requires agency managers, programs, and, where appropriate, states and localities, to be held accountable for achieving the law's goals. This includes management's use of the annual performance appraisal process to assess whether improper payment reduction targets were met and whether sufficient internal controls were established and maintained. In addition, IPERA included a new, broader requirement for agencies to conduct recovery audits, where cost-effective, for each program and activity with at least $1 million in annual program outlays. This IPERA provision significantly reduces the threshold requirement for conducting recovery audits from $500 million to $1 million and expands the scope for required recovery audits to all programs and activities. Previously, recovery audits were only required for agencies whose annual contract obligations exceeded the threshold. Another new IPERA provision calls for federal agencies' inspectors general to annually determine whether their respective agencies are in compliance with key IPERA requirements and to report on their determinations. In closing, given the pressures resulting from today's fiscal environment, the need to ensure that federal dollars are spent as intended is critical. While the increase in governmentwide improper payment estimates is alarming, federal agencies' efforts to more comprehensively report on estimated improper payments represent a positive step to improve transparency over the full magnitude of federal improper payments for which corrective actions are necessary. With more federal dollars flowing into risk-susceptible programs, establishing effective accountability measures to prevent and reduce improper payments, and to recover overpayments, becomes an even higher priority. However, measuring improper payments and designing and implementing actions to reduce and prevent them are not simple tasks. Nonetheless, the ultimate success of the governmentwide effort to prevent and reduce improper payments hinges on the level of sustained commitment the agencies and the administration places on implementing the requirements established by IPERA, the Executive Order, and other guidance. We view the recent actions taken by Congress and the administration as positive steps toward improving transparency over and reducing improper payments. However, it is too soon to determine whether the activities called for in the Executive Order, Presidential memoranda, and IPERA will achieve their goal of reducing improper payments while continuing to ensure that federal programs serve and provide access to intended beneficiaries. Moreover, congressional efforts to oversee agencies will be essential to ensure that agencies are taking the appropriate action to fully implement these administrative and legislative requirements to improve accountability, achieve targeted goals, and reduce overall improper payments. Chairman Platts, Ranking Member Towns, 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 more information regarding this testimony, please contact, Kay L. Daly, Director, Financial Management and Assurance, at (202) 512-9312 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 testimony. Individuals making key contributions to this testimony included Shirley Abel, Assistant Director; Sabrina Springfield, Assistant Director; Liliam Coronado; Nicole Dow; Vanessa Estevez; Crystal Lazcano; Chelsea Lounsbury; Kerry Porter; Debra Rucker; and Danietta Williams. Medicare and Medicaid Fraud, Waste, and Abuse: Effective Implementation of Recent Laws and Agency Actions Could Help Reduce Improper Payments. GAO-11-409T. Washington, D.C.: March 9, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. For our report on the U.S. government's consolidated financial statements for fiscal year 2010, see U.S. Department of the Treasury. 2010 Financial Report of the United States Government. Washington, D.C.: December 21, 2010, pp. 221-249. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. 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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GAO's work over the past several years has highlighted long-standing, widespread, and significant problems with improper payments in the federal government. Fiscal year 2010 marked the 7th year of implementation of the Improper Payments Information Act of 2002 (IPIA). IPIA requires executive-branch agencies to identify programs and activities susceptible to significant improper payments, estimate annual amounts improperly paid, and report these estimates and actions taken to reduce them. On July 22, 2010, the Improper Payments Elimination and Recovery Act of 2010 (IPERA) was enacted. IPERA amended IPIA and expanded requirements for recovering overpayments across a broad range of federal programs. This testimony addresses (1) progress federal agencies have reported in estimating and reducing improper payments in fiscal year 2010, (2) challenges that continue to hinder full reporting of improper payment information, and (3) recent efforts by Congress and the executive branch intended to improve transparency and accountability for reporting, reducing, and recovering improper payments. This testimony is primarily based on prior GAO reports. GAO summarized available fiscal year 2010 improper payment information reported by federal executive-branch agencies and actions taken by the executive branch and Congress intended to improve transparency over, accountability for, and reduction of improper payments. Federal agencies reported an estimated $125.4 billion in improper payments for fiscal year 2010. The $125.4 billion estimate of improper payments federal agencies reported in fiscal year 2010 was attributable to over 70 programs spread among 20 agencies. Federal agencies' fiscal year 2010 estimated improper payment amount is an increase of $16.2 billion from federal agencies' prior year reported estimate of $109.2 billion. (1) Progress Reported in Estimating and Reducing Improper Payments. Since the initial implementation of IPIA in fiscal year 2004, federal agencies have consistently identified new programs or activities as risk-susceptible and reported estimated improper payment amounts. In addition, federal agencies have reported progress in reducing improper payments and payment error rates in some programs and activities. From fiscal years 2004 through 2010, 28 programs have consistently reported estimated improper payment error rates for each year. Of these 28, 17 agency programs reported reduced error rates in comparison with their initial or baseline error rates reported in fiscal year 2004. (2) Challenges Remain in Meeting Legislative Requirements to Fully Report Improper Payments Information. Agency reporting highlighted challenges that remain in meeting the requirements of IPIA, including determining the full extent of improper payments across the federal government and in reasonably assuring that effective actions are taken to reduce improper payments. Specifically, two agencies did not report on risk assessments of their programs and activities and three agencies did not develop and report on improper payments estimates for seven risk-susceptible programs with significant amounts of outlays. (3) Recent Efforts to Address Improper Payments. During fiscal year 2010, a number of changes and initiatives were put in place that are intended to strengthen the framework for reducing and reporting improper payments. For example, the President issued Executive Order 13520, Reducing Improper Payments. The President also issued two memoranda intended to expand agency efforts to recapture overpayments and directed that a Do Not Pay List be established to help prevent improper payments. Further, IPERA was enacted. In addition to amending the IPIA existing requirements, IPERA establishes additional requirements, among others, related to (1) federal agency management accountability; and (2) recovery auditing aimed at identifying and reclaiming payments made in error. We view these actions as positive steps; however, it is too soon to determine whether these activities will achieve their goal of reducing improper payments while continuing to ensure that federal programs serve and provide access to intended beneficiaries.
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The Veterans' Education Assistance Act of 1984 created the current Montgomery GI bill program. Under the GI bill program (Title 38 United States Code Chapter 30), veterans who have met their duty obligation and were honorably discharged are eligible to receive GI benefits. Active-duty personnel are also eligible to use GI benefits. In fiscal year 2000, approximately $923 million was paid to veterans through the GI bill program. The GI bill program is a contributory program, which requires service members, upon enlistment, to contribute $100 per month for their first 12 months of service. Although service members have the option to decline participation at enlistment, almost all are enrolling in the GI bill program. In fiscal year 1999, 96 percent of all active-duty eligible enlistees enrolled in the GI bill program. GI benefits end 10 years from last discharge, and if veterans do not use their GI benefit within that time period, the amount is not refunded to them. Veterans may use GI benefits for a variety of postsecondary education programs, including an undergraduate or graduate degree; courses that lead to a certificate or diploma from a business, technical, or vocational school; correspondence training; on-the-job training or apprenticeships; and vocational flight training. The monthly benefit amount will vary depending on the type of coursework in which the veteran enrolls and whether the student attends part-time or full-time. For veterans who enroll full-time in an undergraduate degree program in academic year 2001-02, the monthly GI benefit is $672 per month for a maximum of 36 months--a total of $6,048 for each of 4 academic years. The Veterans Education and Benefits Expansion Act of 2001 (P.L. 107-103) increases the monthly GI benefit to $800 per month as of January 1, 2002. Additionally, the law increases the GI benefit to $900 per month on October 1, 2002 and to $985 per month beginning on October 1, 2003--a total of $8,100 in 2002-03 and $8,865 in 2003-04. Most veterans use their GI benefits to pursue an undergraduate degree. For example, in fiscal year 2001, 88 percent of GI bill beneficiaries were pursuing an undergraduate degree. In addition, 62 percent of GI bill beneficiaries were enrolled in school full-time. Title IV of HEA of 1965, as amended in 1998, authorizes the federal government's financial aid programs for postsecondary education. Title IV programs include the following: Pell grant--grants to undergraduate students who are enrolled in a degree or certificate program and have financial need. Subsidized Stafford loan--loans made to students enrolled at least half- time in an eligible program of study and have demonstrated financial need. The federal government pays the interest costs on the loan while the student is in school. Unsubsidized Stafford loan--loans made to students enrolled at least half-time in an eligible program of study. Although the terms and conditions of the loan (e.g., interest rates) are the same as those for subsidized loans, the federal government does not pay the interest costs on the loan while the student is in school. Students are therefore responsible for all interest costs. PLUS loans--loans made to parents of dependent undergraduate students enrolled at least half-time in an eligible program of study. Borrowers are responsible for paying all interest on the loan. Campus-based aid--allocated to participating institutions by the U.S. Department of Education. The institutions then award the following aid to students: Supplemental Educational Opportunity Grant (SEOG)--grants for undergraduate students with financial need. Priority for this aid is given to Pell grant recipients. Perkins loans--low-interest (5 percent) loans to undergraduate and graduate students. Interest does not accrue while the student is enrolled at least half-time in an eligible program. Priority is given to students who have exceptional financial need. Work-study--students are provided on- or off-campus jobs in which they earn at least the current federal minimum wage. The institution or off-campus employer pays a portion of their wages. Education is responsible for administering $46 billion a year through these programs. As shown in figure 1, most of these funds are subsidized and unsubsidized Stafford loans. In addition to the Title IV programs, there are tax provisions that students and their families may be eligible to use for postsecondary education. The Taxpayer Relief Act of 1997 (P.L. 105-34) created several provisions to help families pay for postsecondary education, such as the HOPE tax credit, Lifetime Learning tax credit, and the student loan interest deduction. The act also created tax-exempt savings accounts, called education individual retirement accounts (IRA), to help families save for college. See table 1 for further detail about the tax provisions created under the Taxpayer Relief Act. The act also made changes to the tax treatment of state tuition savings plans, extended the exclusion for educational assistance provided by employers from students' taxable incomes, and exempted IRA distributions for qualified higher education expenses from early withdrawal penalties. In 2001, the Economic Growth and Tax Relief Reconciliation Act (P.L. 107- 16) expanded and modified several of the tax provisions previously mentioned. Most notably, the act created a new tax deduction for tuition and fees for taxpayers, even those who do not itemize. In 2002 through 2005, taxpayers will have the option of using either the HOPE tax credit or the tuition deduction. The 2001 act also made changes to the student loan interest deduction and education IRAs. To obtain financial aid under Title IV programs, students must apply using the Free Application for Federal Student Aid (FAFSA). Information from the FAFSA is used to determine the amount of money--called the expected family contribution (EFC)--that a student, or student's family, is expected to contribute to the student's education. A student is classified as either financially dependent on his or her parents or independent in the financial aid process. This classification is important because it affects the factors used to determine a student's EFC. For dependent students, the EFC is based on both the student and parent's income and assets, as well as whether the family has other children enrolled in college. For independent students, the EFC is based on the student's and, if married, spouse's income and assets and whether the student has any dependents other than a spouse. By law, veteran students are automatically classified as independent students, and GI benefits are not included as veterans' income for purposes of calculating EFC. Once EFC is established, this information is compared to the cost of the institution at which the student will attend to determine a student's financial need. In the federal financial aid process, an institution's cost of attendance includes tuition and fees, room and board, books, supplies, transportation, and miscellaneous personal expenses. The type of institution that a student attends will affect the cost of attendance. Typically, public 2-year institutions cost significantly less than public 4- year institutions or private 4-year institutions. For example, on average, the annual cost to attend a public 2-year college as a commuter student was $7,024 compared with $11,338 for resident students at public 4-year institutions and $24,946 for resident students at private 4-year institutions. If the EFC is equal to or greater than the cost of attendance, then the student is not considered to have financial need for federal aid programs. If the EFC is less than cost of attendance, then the student is considered to have financial need. Financial aid administrators at the school the student is attending then create a federal financial aid package that could include grants, loans, and work-study. The basic premise for awarding need-based aid is that a student's "total financial aid package must not exceed a student's need." Veterans are an exception to this rule, and in some cases, those who receive GI benefits may receive a combined federal aid package of GI benefits and need-based aid, such as Pell grants and subsidized Stafford loans, that is greater than their financial need. Figure 2 highlights these key steps in determining a student's financial need for Title IV programs. Most students, whether receiving a GI benefit or not, enroll in a public 2- population and 89 percent of GI bill students enroll in a public institution, while 19 percent of all students and 11 percent of GI bill students enroll in a private institution. Due to the fact that small proportions of the general student population and GI bill students enroll at private 2-year institutions, we focused our analysis on the other three types of institutions. Veterans' eligibility for some federal grants, loans, and tax incentives may be affected by the receipt of GI benefits. Veterans can apply for federal Title IV aid; however, receiving GI benefits may affect their eligibility for some Title IV aid. Pell grant aid is awarded to students based mainly on income. The amount awarded to students is the difference between the maximum Pell grant award for that academic year and the student's EFC. GI benefits are not included in the formula used to calculate EFC and therefore receiving them does not affect veterans' eligibility for Pell grants. For all other Title IV aid, EFC and the amount of other financial assistance students receive is subtracted from the cost of attendance to determine financial need. Depending on the aid program, GI benefits may or may not be considered as another source of financial assistance for veteran students, thus affecting veterans' eligibility for these programs. By law, GI benefits are specifically excluded as another source of assistance for veteran students when awarding subsidized Stafford loans. Since GI benefits are excluded from the calculations used to award subsidized Stafford loans, veterans and nonveterans are equally eligible for these loans. On the other hand, when determining eligibility for unsubsidized Stafford loans and campus-based aid, GI benefits are considered another source of assistance. Regulations issued in 1999 allow financial aid administrators some flexibility to exclude the value of GI benefits in the calculations for campus-based aid, but only if the GI bill student also receives a subsidized Stafford loan. If this flexibility is used, veteran students' eligibility for campus-based aid may not be affected by receipt of GI benefits. With regard to various federal tax incentives available for postsecondary education, receiving GI benefits does not prevent veterans from claiming such benefits, but may affect the amount they would be eligible to claim. On average, veterans and nonveterans with similar characteristics are awarded about the same amount of federal Title IV aid, and when GI benefits are included, the total amount of federal assistance for postsecondary education is greater for veterans than nonveterans. When GI benefits are combined with Pell grant and Stafford loan aid, veterans receive aid packages that include a lower proportion of loans than nonveterans. Veterans receive smaller campus-based aid awards than nonveteran dependents, but more than nonveteran independent students at 4-year institutions. Although the actual amount claimed in HOPE and Lifetime Learning tax credits by veteran and nonveteran students is unknown, there are several factors that affect the amount a student may be eligible to claim. At each type of institution, veterans are awarded total federal aid packages of Pell grant, Stafford loans, and GI benefits that are greater than those awarded to nonveteran students. When veterans and nonveterans have similar characteristics, such as family income, they are awarded on average the same Pell grant and subsidized Stafford loan aid. In contrast, veterans and nonveterans who have similar characteristics are awarded different amounts of unsubsidized Stafford loans. This is largely due to the fact that GI benefits are included in the formula used to award unsubsidized Stafford loans. The only exception is at private 4-year institutions where veteran and nonveteran independent students are awarded the same amount of unsubsidized Stafford loan aid because the average cost of attendance is much greater at these institutions, thus making veterans eligible for unsubsidized Stafford loans. When comparing total federal aid packages of Pell grants, Stafford loans, and GI benefits, veterans' aid packages have a lower percentage of loans and a larger percentage of grant aid than nonveterans' at each type of institution. As shown in figure 4, among students who attended public 2- year institutions, veterans received aid packages that were greater than nonveterans and consisted of primarily grants. Both nonveteran independent and dependent students at public two-year institutions typically received federal aid packages that were comprised primarily of loans. Among students attending public 4-year institutions, veterans also received federal aid packages that were larger than nonveterans and most veterans' packages had a lower percentage of loan aid than nonveteran students, as shown in figure 5. Only low-income, nonveteran dependent students received an aid package with a greater proportion of grant aid than loan aid. Among middle-income students, nonveteran independents were awarded almost the same amount of aid as veterans; however, nonveteran independents' aid package was 78 percent loans while veterans' aid package was 39 percent loans. Middle-income nonveteran dependents' federal aid package was comprised entirely of loans. Among students attending private 4-year institutions, veteran students were awarded total aid packages that were greater than those awarded to nonveterans. As shown in figure 6, veterans' aid packages were more evenly balanced between grants and loans, with the exception of high- income veteran students whose aid package was comprised of slightly more loans than grants. In several cases, nonveteran students at private 4- year institutions received aid packages that were entirely loans. See appendix I for detailed data on estimated federal Title IV aid awarded to veteran and nonveteran students at each type of institution. The amount of campus-based aid awarded to veteran and nonveteran students varied across type of institution attended and by a nonveteran student's dependency status. As shown in table 2, in academic year 1999- 2000 veteran students received lower awards than nonveteran dependent students at all institutions and nonveteran independent students at public 2-year institutions, while veterans who attended public 4-year and private 4-year institutions received larger campus-based aid awards than nonveteran independent students. Information on the exact amount that veteran and nonveteran students claimed for the HOPE and Lifetime Learning tax credits and the student loan interest deduction is not known; nonetheless there are several factors that are known to affect the amount one may be eligible to claim. The amount of HOPE or Lifetime Learning tax credit one may be eligible to claim is affected by several factors, including the amount of tuition and fees paid, amount of GI benefits and grant aid received, and family income and taxes owed. Generally, veteran and nonveteran students who pay higher tuition and required fees, such as students who attend private 4- year institutions or those with a tax liability greater than the HOPE credit, may claim the full credit of $1,500. Veterans and nonveterans who pay lower tuition and required fees may claim a partial HOPE tax credit. Additionally, veterans who receive GI benefits or nonveteran students who receive grants that equal or exceed the amount of tuition and fees paid may not claim a HOPE tax credit. Likewise, veterans and nonveterans who pay higher tuition and fees may claim the full Lifetime Learning credit of $1,000; while veterans who receive GI benefits or nonveterans who receive grant aid that equal or exceed the amount of tuition and fees paid may not claim a Lifetime Learning tax credit. Any student whose income is not higher than $55,000 ($75,000 if a joint filer) and who pays interest on a qualified education loan is eligible to deduct up to $2,500 per year for the first 60 months that interest has been paid on an education loan. In written comments on our draft report the Department of Veterans Affairs generally agreed with our reported findings. Veterans Affairs suggested that we include education awards provided through the AmeriCorps program in our review as well. Our analysis focused on comparing benefits that students receive in exchange for their military service to benefits that are awarded under Title IV of HEA and for which no service is required. We did not include AmeriCorps education awards in our review because they are not part of Title IV and because education awards are provided in exchange for community service. In addition, the number of students who earn AmeriCorps education awards is small compared to students who receive benefits through Title IV aid programs. In fiscal year 2000, about 27,000 participants earned an AmeriCorps education award compared to approximately 7.6 million students who received aid through Title IV programs in fiscal year 2001. Veterans Affairs' written comments are printed in appendix II. The Department of Education provided technical clarifications on our draft report and we have incorporated these where appropriate. We are sending copies of this report to the secretary of education and secretary of veterans affairs and other interested parties. We will also make copies available to others upon request. The report is available at GAO's homepage, http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8403. Other major contributors include Jeff Appel and Andrea Romich Sykes. The following three tables provide estimates of the amount of Pell grant, subsidized Stafford loan, and unsubsidized Stafford loan aid awarded to veteran and nonveteran students at public 2-year, public 4-year, and private 4-year institutions and the amount of GI benefits available in academic year 1999-2000.
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The Montgomery GI Bill provides a monthly stipend to pay postsecondary education expenses for veterans and eligible service members. Concerns have been raised about whether GI benefits adequately cover educational costs and whether the receipt of GI benefits affects other federal financial assistance available to postsecondary students under Title IV of the Higher Education Act and the Internal Revenue Code. Under Title IV, GI benefits do not affect the amount of aid veterans receive under the Pell grant and subsidized Stafford loan programs but may affect the amount they receive in unsubsidized loans and through campus-based aid programs. Depending on the program, GI benefits may be considered as another source of financial assistance for students, which may decrease a veteran student's financial need and thus the amount of need-based aid provided. With regard to available federal tax incentives, the receipt of GI benefits does not preclude veterans from claiming such benefits but may affect the amount they would be eligible to claim. On average, veterans and nonveterans with comparable characteristics are awarded similar amounts of federal Title IV aid. When GI benefits are included, the total amount of federal assistance is greater for veterans than it is for nonveterans. Moreover, veterans' total aid, including Pell Grants, Stafford loans, and GI benefits has a lower proportion of loans compared with nonveterans' packages. On average, veteran students received slightly lower average campus-based aid awards than did nonveteran dependent students, but they received more than nonveteran independent students at four-year institutions. The actual amount of HOPE and Lifetime Learning tax credits by veteran and nonveteran students is unknown. However, the amount of tuition and fees paid, amount of GI benefits and grant aid received, and family income and taxes owed will affect the amount of tax credit one may claim.
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DOD provides information to the public about its animal use projects through two main sources--an annual report to the Congress and the BRD. The annual report to the Congress provides information in a summary form on animal use activities, including numbers and types of animals used, general purposes for which animals were used, and DOD's animal care and use oversight procedures. DOD provided its first annual report in 1994 in response to the direction of the House Armed Services Committee, as contained in its Committee Report on the National Defense Authorization Act for the Fiscal Year 1993. In House Report 103-499, however, the House Armed Services Committee noted that DOD's annual report had not provided sufficient detail about its animal research programs and activities. The House Report directed DOD to "develop a mechanism for providing the Congress and interested constituents with timely information . . . about its animal use programs, projects, and activities, both intramural and extramural." One mechanism, according to the House Report, would be a database with information about the research goal and justification, cost, procedures, kinds and numbers of animals used, and information about the pain to which these animals are subjected. In response to that report, in October 1995 DOD established the BRD, a database about individual projects using animals that is accessible by the public through the Internet. For each ongoing DOD animal use project, it provides a project summary that includes the funding amount, the location of the research, and a brief statement of the project's research objectives and methods. Research projects cover a broad range of topics such as using animals in the development of vaccines to protect against biological warfare agents and technologies to improve treatment methods for combat casualty care. Information for the BRD is collected from DOD agencies and military commands, organizations, and activities involved in the performance and funding of animal care and use programs. Typically the researcher or the veterinary services department at each facility provides the information about each research project for the BRD and the annual report. This is information that facilities routinely maintain as part of the process of granting researchers the approval to conduct research and then subsequently ordering animals for the research project. The BRD includes research funded by DOD as well as research performed by DOD that is funded by external sources such as the National Institutes of Health and the Alzheimer Association. The BRD, which is updated annually, contained 805 project summaries for fiscal year 1996. It was updated to reflect fiscal year 1997 projects on October 1, 1998, one year after the fiscal year ended; project summaries for fiscal year 1996 were replaced by those for fiscal year 1997. DOD has made progress in making information available to the public on its animal research programs and activities. Prior to the creation of the BRD, information on animal research was contained as part of a larger Defense Technology Information Center (DTIC) database, which includes the broad range of DOD research and development projects. However, DOD did not require all of its animal research activities, such as those involving clinical training or investigations, to be reported to the DTIC database. DOD now requires all animal research projects to be reported separately in the BRD. In addition, the BRD is publicly available on the Internet, while the DTIC database has restricted public access. The fiscal year 1996 BRD had a number of problems, including inaccurate and incomplete disclosure of information about DOD's animal use projects. These problems stem from DOD not collecting certain valuable information from animal use facilities and not reporting certain other information that it did collect. Other problems of inaccuracy or inconsistency in the database were due to flawed data reported to DOD by facilities. The BRD is inaccurate with respect to the number of animal use projects. For example, in the course of performing our work, we found seven projects or research protocols that were not included in the database. These projects were performed at three different DOD organizations: the Armed Forces Radiobiology Research Institute, the Army's Landstuhl Regional Medical Center, and the Marine Corp's Camp Lejeune Field Medical Service School. The animals used included goats, sheep, rodents, and nonhuman primates. Alternatively, we identified 19 projects in the fiscal year 1996 BRD related to medical research for biological defense that did not involve the use of animals that year (although they did involve animals in other years). In addition, we identified one project that was reported twice in the database--two different DOD organizations reported the same project. Cost information provided in the BRD is not always accurate and consistent. For example, the fiscal year 1996 funding amount provided in the BRD for some projects covered a longer period than just fiscal year 1996. In other cases, the amounts of funding shown was inconsistent because the funding for some projects was listed as an abbreviated notation of a larger amount without providing adequate explanation. For example, in the case of the project erroneously reported twice, one project summary showed funding as "28," while the other showed the amount as "28000." These discrepancies make it difficult, if not impossible, to accurately determine from the BRD the cost of these animal research projects for the fiscal year. Additionally, the BRD does not disclose the funding source for the projects, making it impossible to determine which projects were funded by DOD and which by external sources. Furthermore, the BRD does not contain certain information identified in House Report 103-499. For instance, it does not provide the numbers and species of animals used for DOD projects nor does it include information about the pain to which animals were subjected. Summary information is provided for numbers and types of animals used and pain categories in DOD's annual reports to the Congress, but these reports lack information on individual programs and activities. Another type of information that was mentioned in the House report is generally absent in BRD project summaries. Few project summaries identify the military or nonmilitary justification of the project. Although some of the projects are directly tied to a military goal, such as developing more effective transfusion fluids for combat casualties, others are not tied to a military goal but are still being done under a specific congressional directive, such as DOD's extensive breast cancer research program. Without this information the Congress and the public cannot identify projects by the type of requirement they support. DOD does not collect information on the justification of each project as part of its data collection for the BRD. The version of the BRD available to the public also does not contain a data field that describes the broader animal use categories listed in DOD's annual report to the Congress on animal care and use. Examples of these categories are research on infectious diseases, research relating to combat casualty care, and training for medical personnel. The absence of this information prevents the public from identifying how individual research projects link together into these broader research areas. We also found variations in the levels of specificity reported on the projects in the BRD. Whereas most of the 805 project summaries represent an individual line of research, several summaries report broad groups of research projects. For example, the Uniformed Services University of Health Sciences placed 64 separate project summaries in the BRD reflecting detailed distinctions among its various clinical research activities, such as "Virulence Mechanisms of Salmonella Typhi." In contrast, Fitzsimons Army Medical Center reports only two clinical research project summaries that are described broadly as "Animal-Facilitated Clinical Medicine Studies in Support of Graduate Medical Education" and "Animal-Facilitated Clinical Surgical Studies in Support of Graduate Medical Education." These two summaries merged as many as 29 separate projects. DOD guidance to the animal use facilities on preparing project summaries allows facilities broad discretion in determining what constitutes a project. We identified one classified project in the BRD that involved research on animals for the development of a weapon system. While we found no problem with the information reported in the BRD for this project, it appears inconsistent with DOD's fiscal year 1996 annual animal care and use report to the Congress, which stated that no animals had been used for offensive weapons testing during fiscal year 1996. We recommend that the Secretary of Defense continue to take steps to improve the BRD. Specifically, the Secretary should improve the data collection and reporting procedures to ensure that the BRD contains accurate, detailed information about individual animal research projects, including information on the number and species of animals used in each project, the research goal and justification, and the pain categories for each project as identified in House Report 103-499. In addition, to improve public accountability, we recommend that the Secretary provide other information in the BRD, such as the appropriate animal use categories for each project, consistent with information reported in the DOD's annual reports to the Congress, and ensure that the information contained in the BRD be presented in a uniform manner for all projects. In written comments on a draft of this report (see app. I), DOD partially concurred with our first recommendation and concurred with our second recommendation. Specifically, DOD said it will provide additional training to on-site veterinarians who are responsible for submitting data, take steps to clarify funding information for individual project summaries, include animal use categories for each project summary, and require reporting of all projects that have any animal use. They stated that they will institute these changes prior to the fiscal year 1999 annual report. DOD, however, expressed a concern that our recommendation to provide further detail on the number and species of animals, the research goals and justifications, and pain categories for each project summary would require an extensive upgrade of the existing BRD software and hardware capacity, duplicate information that is already available in the DOD annual report on animal use activities, and would not improve animal welfare. DOD also contended that information in the BRD is uniformly presented. DOD also provided technical comments, which we incorporated where appropriate. The changes that DOD proposes adopting will improve the quality of the BRD. But we believe that additional detail on each project summary is necessary to respond to the original direction of the House Armed Services Committee as well as to improve public accountability. Moreover, we feel that this detail can be provided in the BRD without a significant increase in resource expenditures. As pointed out in this report, the number and species of animals used and the pain category of the research are collected on a routine basis by DOD research and training facilities as a means of monitoring and tracking animal use activities. Furthermore, much of this information is already gathered for the DOD annual report although it is only reported in terms of aggregate animal use and not by individual projects. DOD also needs to ensure a more consistent level of reporting of animal use activities. Facilities conducting clinical research, for example, should submit summaries for the BRD at a project rather than program level. Incorporating these additional changes would further improve what is an important source of information on animal welfare to the public. In the course of our work examining issues related to DOD's oversight of its animal research programs, we are reviewing the BRD because it contains information on individual animal use projects. As we reviewed information contained in the BRD, conducted interviews with DOD officials, reviewed relevant congressional reports, and performed data analyses to address the objectives for our study, we identified problems with information in the BRD. The BRD is prepared annually by DOD based on a questionnaire that it sends to those of its laboratories and contractors who use animals for research or training purposes. We reviewed the BRD in two forms. First, we selectively reviewed a version that is publicly available on the Internet (at http://ocean.dtic.mil/basis/matris/www/biowww/sf). Second, DOD supplied us with an electronic file that also identified the animal use category (for example, research on infectious diseases) on the 805 projects in the 1996 database. We reviewed all the projects in three animal use categories involving medical research--biological defense, combat casualty care, and ionizing radiation. These categories comprise approximately 22 percent of the 805 projects. We reviewed the summaries in these categories and compared the information contained in them with other sources, including DOD's annual report to the Congress on its animal care and use programs for 1996. We interviewed officials from DOD's Office of the Director of Defense for Research and Engineering; the Armed Forces Radiobiology Research Institute; the Uniformed Services University of the Health Sciences; the Office for Naval Research; the Naval Medical Research Institute; and Walter Reed Army Institute of Research in the Washington, D.C., area. We also interviewed officials from the U.S. Army Medical Research and Materiel Command in Frederick, Maryland; the Air Force Research Laboratory and the U.S. Army Clinical Investigations Regulatory Office in San Antonio, Texas; and the Army's Landstuhl Regional Medical Center in Landstuhl, Germany. We reviewed DOD documents and reports relevant to animal care and use as well as related congressional reports. Our review was not based on a random sample of records from the BRD and, as a result, we have not drawn conclusions about the extent to which certain of our observations are present in the database as a whole. We conducted our review from October 1997 to October 1998 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 from its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Defense, and other interested parties. We will also make copies available to others upon request. Please contact us if you or your staff have questions concerning this report. Kwai-Cheung Chan can be reached at (202) 512-3652. Stephen Backhus can be reached at (202) 512-7101. Other major contributors are listed in appendix II. Bruce D. Layton, Assistant Director Jaqueline Arroyo, Senior Evaluator Greg Whitney, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined several issues related to the Department of Defense's (DOD) administration of its animal research programs, focusing on: (1) the extent to which DOD's research using animals addresses validated military objectives, does not unnecessarily duplicate work done elsewhere, and incorporates methods to reduce, replace, and refine the use of animals; and (2) problems with the accuracy of information in the Biomedical Research Database (BRD). GAO noted that: (1) the BRD provides improved public access to information about DOD's use of animals in its research activities; (2) GAO found instances in which the information in the BRD was inaccurate, incomplete, and inconsistent, resulting in inadequate public disclosure; (3) specifically, the fiscal year 1996 BRD: (a) misstated the number of animal use projects because it omitted some projects that used animals and included others that did not involve animals; (b) did not include information, such as the numbers and types of animals used, that was identified in House Report 103-499; and (c) contained significant differences in specificity reported for the research projects; and (4) although GAO did not quantify the full extent of these problems, the problems it has identified suggest a need for DOD action to improve the accuracy and extent of the information in the database.
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As of December 2004, IRS classified approximately $7.7 billion in delinquent tax debt as potentially available for private debt collection-- $5.5 billion in low-priority work and $2.2 billion that was not likely to be assigned to IRS employees for collection. In the American Jobs Creation Act of 2004, Congress authorized IRS to contract with private sector debt collection companies to collect federal tax debts. Based on this authority, IRS awarded contracts in March 2006 to three PCAs for tax collection services. IRS began referring taxpayer cases to PCAs in September 2006. Because of legal restrictions, PCAs can only take certain defined steps to collect tax debts--including locating taxpayers, requesting full payment of the tax debt or offering taxpayers installment agreements if full payments cannot be made, and obtaining financial information from taxpayers. PCAs have limited authorities and are not allowed to adjust the amount of tax debts or to use enforcement powers to collect the debts, which IRS believes are inherently governmental functions to be performed only by IRS employees. Additionally, PCAs do not actually collect the debts, but instruct taxpayers to forward payments to IRS. PCAs are paid on a fee-for- service basis ranging from 21 percent to 24 percent of the debt collected based on the balance of the account at the time of referral. IRS only referred those cases in which the taxpayer had not disputed the debt (e.g., taxpayers who filed form 1040, 1040A, or 1040EZ and owe a balance) and delinquency exists for one or more tax periods. Under the IRS policy and procedures guide, PCAs are required, within 10 calendar days of receiving delinquent account information from IRS, to send a taxpayer notification letter to an address provided by IRS. This letter states that the taxpayer's account has been placed with an IRS contractor for collection. According to IRS guidance, no sooner than 2 days after the PCA sends the notification letter, PCA employees may attempt to contact the taxpayer by telephone. However, to comply with 26 U.S.C. SS 6103--which establishes a taxpayer's right to privacy of tax information--PCA employees must not disclose any tax information until they are certain the person with whom they are speaking is the taxpayer. When a PCA employee makes a call to a taxpayer and reaches an answering machine, the only information the employee may leave on a recording is his or her name (no pseudonyms), company name, telephone number, the name of the taxpayer the PCA is attempting to reach, and the fact that the PCA is calling about a debt (i.e., rather than specifically a tax debt). In August 2006, IRS began working with a consulting company to develop and administer a taxpayer survey for PCA contacts. On November 27, 2006, the consulting company began administering the survey. Under guidance issued by IRS, PCAs were instructed to invite every right party contact to take the survey. If the contacts agreed to take the survey, they were transferred to the automated survey line. For the first 3 months of survey administration, the consulting company was required to issue overall satisfaction scores every month, followed by a quarterly report containing responses to all survey questions with information subdivided by each PCA. According to IRS, early in 2007, IRS did not execute the option to renew one of the PCA contracts. As of the date of this testimony, only two of the PCAs we reviewed are now under contract with IRS. According to the PCAs, 37,030 tax debt cases were referred by IRS from September 2006 through February 2007. In addition, we were informed that the survey was not offered until November 27, 2006--almost 3 full months after PCAs began to contact taxpayers. PCAs reported a total number of 13,630 right party contacts from September 2006 through February 2007, with 6,793 of these contacts made after the survey was available. Because PCAs began calling taxpayers in September 2006 before the survey was available, about 50 percent of all right party contacts identified during the period of our review were not eligible to take the survey. According to the consulting company, the validity of the survey was based on the key underlying assumption that all right party contacts would be offered a chance to take the survey. Although IRS instructed the PCAs to offer the survey to all right party contacts, we could not obtain information on how many of the 6,793 contacts were offered the survey. One PCA reported that it offered the survey to 999 right party contacts and made 2,694 right party contacts during this period. Officials at this PCA told us that from November 27, 2006, through February 13, 2007, taxpayers were randomly selected to take the survey using a structured method that offered the survey to every first or third contact during a specified time of day. The second PCA told us that it offered the survey to all right party contacts, but it did not keep any records to substantiate this claim. The third PCA told us that the survey was offered to all right party contacts, unless the PCA representative was aware that the contact was driving, if the contact had stated that he or she needed to get off the phone, or the contact said he or she was late for something. This PCA also did not have records regarding how many right party contacts were offered the survey, but an official noted that they were implementing procedures to track this information in the future. See table 1 for a summary of the PCA approaches to offering the survey during the period of our review. Beginning in early April 2007, IRS officials reemphasized the need for PCAs to offer the survey to all right party contacts and to keep records in this regard. These instructions have been incorporated in additional guidance for the PCAs. The consulting company that administered the survey provided us with records indicating that of those offered the survey, 1,572 right party contacts agreed to be transferred to the automated survey system from November 27, 2006, through February 28, 2007. Of these, records further indicate that 1,011 individuals completed the survey. A consulting company representative told us that the company was not aware, until several months after the survey was first offered, that the PCAs had used differing methodologies for offering the survey and that not all right party contacts were offered it. Table 2 provides summary information on the data we gathered from IRS, the PCAs, and the consulting company. We also made several related observations during the course of our work: PCAs were given some information about taxpayers with delinquent debt, including the taxpayers' name, Social Security numbers, and last known addresses per IRS records. According to IRS, it did not provide PCAs with telephone numbers for the taxpayers as a matter of policy. As a result, in attempting to contact taxpayers by telephone, PCA representatives tried to determine the taxpayers' phone numbers through electronic searches, for example, through the Lexis-Nexis database. PCAs told us that they made a total of 252,173 outbound connected telephone calls from September 2006 through February 2007 in an attempt to resolve the 37,030 cases referred by IRS. PCAs indicated that 89,781 calls--or about 36 percent of all connected outbound calls--resulted in messages left on answering machines, voice mail, or with third parties. In an attempt to make contact with the right party, PCAs may have contacted a substantial number of taxpayers who were not part of the 37,030 cases referred to PCAs by IRS--these taxpayers represent a potentially large group of incorrect contacts. Incorrect contacts were not offered the survey. Examples of individuals who were not offered the survey would include individuals who refused to provide personal information to the PCAs and individuals who provided personal information but were not authenticated as part of the 37,030 IRS referrals. The overall satisfaction rating reported by the consulting company, and quoted by IRS, represents the answer to 1 question on a 20-question automated survey. The question was "Everything considered, whether you agree or disagree with the final outcome, rate your overall satisfaction with the service you received during this call." Respondents were allowed to rate their satisfaction on a scale of one to five--with one being "very dissatisfied" and five being "very satisfied." Of the survey questions, 15 related to customer satisfaction; the other questions were to gather more information about the respondents themselves. Those respondents who completed the entire survey had their results counted by the consulting company. Satisfaction ratings for other survey questions ranged from 81 percent (ease of understanding letters received from PCAs) to 98 percent (courtesy of PCA representatives). Officials at IRS and the consulting company confirmed that some right party contacts were offered (and may have taken) the survey more than once because they had multiple discussions with a PCA representative. Thus, some of the 1,011 right party contacts who completed the survey may represent duplicate respondents. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have at this time. For further information about this testimony, please contact Gregory D. 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. Key contributors to this testimony were John Ryan, Assistant Director; Bruce Causseaux, Jennifer Costello, Heather Hill, Wilfred Holloway, Jason Kelly, and Andrew McIntosh. 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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Every year the Internal Revenue Service (IRS) does not collect tens of billions of dollars in delinquent taxes. In 2004, Congress authorized IRS to use private collection agencies (PCA) to help collect some of these debts. To ensure that taxpayers are treated properly and that the program achieves the desired results, IRS contracted with a consulting company to perform a survey of right party contacts--those individuals who confirmed their identity and tax debt to PCAs over the telephone. The consulting company reported overall taxpayer satisfaction ratings from 94 to 96 percent for contacts made from November 2006 through February 2007. At the request of the Chairman, House Committee on Ways and Means, GAO attempted to obtain, for the period September 2006 through February 2007, the number of tax debt cases IRS referred to PCAs, right party contacts who were offered the taxpayer survey, and right party contacts who took the survey. GAO was also asked to report any other key observations related to the PCA program and taxpayer survey. To perform this work, GAO collected information and interviewed officials from IRS, the consulting group that administered the survey, and the PCAs. According to the PCAs, 37,030 tax debt cases were referred to them by IRS from September 2006 through February 2007. PCAs reported making contact with, and authenticating the identity of, 13,630 right party contacts. Of these, 6,793 were eligible to take the taxpayer survey which did not start until the end of November 2006. According to the consulting company, the validity of the survey was based on the key underlying assumption that all right party contacts would be offered a chance to take the survey. However, GAO could not determine the number of right party contacts offered the survey because not all PCAs kept records on who was offered it. Further, the three PCAs used different methods to determine which right party contacts were offered the survey. The consulting company that administered the survey told GAO that between November 27, 2006, and February 28, 2007, 1,572 of the individuals offered the survey, agreed to take the survey, and 1,011 of these individuals completed the survey. A consulting company representative told GAO that the company was not aware, until several months after the survey was first offered, that the PCAs used differing methodologies for offering the survey and that not all right party contacts were offered an opportunity to complete the survey. According to IRS, beginning in April 2007, PCAs began offering the survey to all right party contacts. Among other key observations, IRS advised GAO that they did not provide the PCAs with taxpayer telephone contact information for referred cases. As a result, in attempting to contact taxpayers by telephone, PCA representatives tried to determine the taxpayers' phone numbers through electronic searches. PCA representatives told GAO that they made a total of 252,173 outbound connected telephone calls from September 2006 through February 2007 in an attempt to make contact with the 37,030 tax debt cases IRS referred. PCAs did not offer the survey to incorrect contacts, such as individuals who provided personal information but were not authenticated as right party contacts.
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Approximately 88,000 miles in length, the nation's marine coastline is composed of a variety of coastal ecosystem types (see fig. 1). The potential effects of climate change on these ecosystems are complex and often difficult to predict, according to the 2014 National Climate Assessment. For example, climate scientists have indicated high confidence that climate change will increase the frequency and intensity of coastal storms, but the exact location and timing of these events is unknown. Similarly, the effects of sea level rise are expected to vary considerably from region to region and over a range of temporal scales, according to the assessment. The 2014 National Climate Assessment further indicated that marine coastal ecosystems are dynamic and sensitive to small changes in the environment, including warming air and ocean temperatures and sea- level rise. Climate change may cause shifts in species' distributions and ranges along coasts that may impact ecosystem character and functioning, according to the assessment. For example, eel grass, one type of submerged vegetation that provides coastal protection from storm surges, may die if water temperatures exceed its maximum tolerance level. Ecosystems along the coast are also vulnerable to climate change because many have been altered by human stresses, and climate change will likely result in further reduction or loss of the services that these ecosystems provide, according to the assessment. The federal government has a limited role in project-level planning central to helping increase the resiliency of marine coastal ecosystems to climate change because state and local governments are primarily responsible for managing their coastlines. However, the federal government plays a critical role in supporting state government efforts to increase resiliency to climate change, according to the President's State, Local, and Tribal Leaders Task Force on Climate Preparedness and Resilience. The federal role includes ensuring that federal policies and programs factor in potential risks from climate change, providing financial incentives for enhancing resilience, and providing information and assistance to help states and others better understand and prepare for climate risks. NOAA, as a key federal agency whose mission is, in part, to manage and conserve marine coastal ecosystems, has identified enhancing ecosystem resilience as an important part of its broader goal of building community resilience. NOAA works toward this goal, in part, through its administration of the CZMA. Specifically, NOAA's Office for Coastal Management administers the National Coastal Zone Management Program. To participate, states are to submit comprehensive descriptions of their coastal zone management programs--approved by states' governors--to NOAA for review and approval. As specified in the act, states are to meet the following requirements, among others, to receive NOAA's approval for their state programs: designate coastal zone boundaries that will be subject to state define what constitutes permissible land and water use in coastal propose an organizational structure for implementing the state program, including the responsibilities of and relationships among local, state, regional, and interstate agencies; and demonstrate sufficient legal authorities for the management of the coastal zone in accordance with the program, which includes administering land and water use regulations to control development to ensure compliance with the program and resolve conflicts among competing uses in coastal zones. The act provides the states flexibility to design programs that best address states' unique coastal challenges, laws, and regulations, and participating states have taken various approaches to developing and carrying out their programs. States' specific activities also vary, with some states focusing on permitting, mitigation, and enforcement activities, and other states focusing on providing technical and financial assistance to local governments and nonprofits for local coastal protection and management projects. If states make changes to their programs, such as changes to their coastal zone boundaries, enforceable policies, or organizational structures, states are to submit those changes to NOAA for review and approval. NOAA officials are responsible for, among other things, approving state programs and any program changes; administering federal funding to the states; and providing technical assistance to states, such as on the development of 5-year coastal zone enhancement assessment and strategy reports that identify states' priority needs and projects. One primary incentive to encourage states to develop coastal zone management programs and participate in the National Coastal Zone Management Program is states' eligibility to receive federal grants from NOAA to support the implementation and management of their programs. Specifically, NOAA provides two primary types of National Coastal Zone Management Program grants to participating states: Coastal zone management grants support the administration and management of state programs and require states to match federal contributions. Coastal zone enhancement grants support improvements in state programs in specified enhancement areas. Coastal zone enhancement grants do not require state matching funds and include both formula and competitive grants for projects of special merit. To be eligible for coastal zone enhancement grants, state coastal zone management programs are to develop an assessment of each of nine enhancement areas for their state every 5 years, including those areas that are a priority for the state. In conjunction with the assessment, state programs are to also develop a strategy for addressing the high priority needs for program enhancement within one or more enhancement area(s). NOAA reviews and approves this "assessment and strategy" document for each state and, if approved, states are eligible for formula grants and may also apply annually for competitive grants. In fiscal year 2016, a total of almost $50 million was allocated to the 22 participating marine coastal states for these two types of grants. By statute, a maximum of $10 million of the amount appropriated for CZMA management grants may be used for the coastal zone enhancement formula and competitive grants. States received a maximum of approximately $0.9 to $2.7 million per state for the two types of grants under the National Coastal Zone Management Program in fiscal year 2016. In addition, the CZMA authorizes NOAA to provide technical assistance, including by entering into financial agreements, to support the development and implementation of state coastal zone management program enhancements. The CZMA also established the National Estuarine Research Reserve System--a network of 28 coastal estuary reserves (25 of which are located in marine coastal states) managed through a state-federal partnership between NOAA and coastal states. NOAA provides financial assistance, coordination, national guidance for program implementation, and technical assistance, and coastal states are responsible for managing reserve resources and staff, providing matching funds, and implementing programs locally. The reserve system was established on the principle that long-term protection of representative estuaries provides stable platforms for research and education and the application of management practices that will benefit the nation's estuaries and coasts, according to its 2011-16 strategic plan. State coastal zone managers may take various actions to manage marine coastal ecosystems and help increase their resilience to the potential effects of climate change. For example, managers may target land acquisition and conservation activities to areas of higher ground adjacent to coastal wetlands, mangroves, and other natural habitats to allow the habitats to migrate so they do not disappear if sea levels rise. In addition, state coastal zone managers may remove physical barriers, such as concrete structures, that prevent beach migration over time in favor of installing living shorelines along areas with a low impact from waves. Living shorelines are natural habitats, or a combination of natural habitat and manmade elements, put in place along coastal shorelines to reduce shoreline erosion. Management decisions about what actions may be appropriate for a specific area often depend upon detailed information about the current and expected future conditions of the area in question, such as shoreline elevation data, expected rates of sea level rise, and how the ecosystem may be expected to respond to future environmental changes. As we concluded in our 2009 report on climate change and strategic federal planning, new approaches may be needed to match new realities, and old ways of doing business--such as making decisions based on the assumed continuation of past climate conditions--may not work in a world affected by climate change. NOAA is taking a variety of actions under the CZMA to support states' efforts to make their marine coastal ecosystems more resilient to climate change, and states generally view NOAA's actions as positive steps. According to NOAA officials, the agency's actions are largely embedded in its broader efforts to build community resilience, and through these efforts NOAA has emphasized the importance of healthy ecosystems, as there is increasing recognition of the critical role that ecosystems play in supporting resilient communities. The CZMA provides a foundation for managing marine coastal ecosystems and partnering with states to work towards the agency's goals of achieving resilient coastal communities and healthy coastal ecosystems, according to the officials. Within this context, NOAA is taking such actions as providing financial incentives and technical assistance and supporting research through the National Estuarine Research Reserve System to help coastal states understand the potential effects of climate change and plan or implement projects to respond to these effects and enhance marine coastal resilience. We found that state coastal zone managers generally had positive views of the actions NOAA is taking. NOAA has targeted some of the financial incentives it provides to states under the CZMA for activities aimed at addressing the impacts of climate change and enhancing marine coastal resilience. For example, within the National Coastal Zone Management Program for fiscal years 2016 to 2020, NOAA designated coastal hazards--physical threats to life and property, such as sea level rise--as an enhancement area of national importance. In so doing, NOAA indicated that coastal zone enhancement competitive grants would be focused on projects that will further support approved state strategies related to this enhancement area. NOAA also increased the total amount available for these competitive grants from $1 million in fiscal years 2014 and 2015 to $1.5 million for fiscal year 2016. NOAA officials said that many of the applications they received in 2015 and 2016 were for projects that were intended to directly or indirectly address climate risks and enhance the resilience of states' coastal ecosystems. For example, in 2015, NOAA awarded one grant for about $200,000 to a state to undertake a mapping study to identify vulnerable habitats along its coastline and use the results of the study to prioritize those habitats considered most vulnerable to climate change for the state's restoration and resilience efforts. In addition, starting in fiscal year 2015, NOAA initiated a Regional Coastal Resilience Grant Program to fund projects that focus on regional approaches to helping coastal communities address vulnerabilities to extreme weather events, climate hazards, and changing ocean conditions using resilience strategies. State and local governments, nonprofit organizations, and others are eligible to apply for these grants. NOAA awarded six applicants grants totaling $4.5 million in each of fiscal years 2015 and 2016, according to NOAA officials. Projects eligible for grants may be targeted to a variety of efforts that support resilience, including actions focused on marine coastal ecosystem resilience. For example, in 2016, NOAA awarded one grant for nearly $900,000 to a regional partnership of state governments, nonprofit organizations, and academia involved in a project aimed at mitigating the impacts of weather events on natural resources, among other things. Specifically, the project intends to assess potential coastal storm impacts and increase the implementation of nature-based infrastructure approaches to buffer the effects of coastal storms, among other things. Officials from all 25 state coastal zone management programs said that financial assistance provided by NOAA has been critical for planning projects designed to enhance marine coastal ecosystem resilience and reduce the potential impacts of climate change. Officials from nearly all state coastal zone management programs expressed concern, however, that the amount of financial assistance available is insufficient to address states' needs in implementing projects. For example, officials from 15 of the 25 state programs said that coastal zone management grants have been the primary source of funding from NOAA that they have used for efforts related to ecosystem resilience. However, these grants generally cannot be used to purchase land or for construction projects--activities the states identified as important for improving the resilience of their coastlines. In addition, officials from 20 of the 25 state programs said that they have had to leverage funds from multiple sources, such as state funds, nonprofit organizations, or other federal agencies, to implement projects aimed at enhancing ecosystem resilience. NOAA officials agreed that there is a high demand for funding for these types of projects, noting, for example, that the Regional Coastal Resilience Grant Program received 132 qualified applications requesting a total of $105 million during its first application period in fiscal year 2015, when a total of $4.5 million was available for the grants. Through its administration of the National Coastal Zone Management Program, NOAA has also provided technical assistance to coastal states to help them understand and address the potential impacts of climate change on marine coastal ecosystems. NOAA officials said they work regularly with state coastal zone managers and they look for opportunities to provide assistance to help the states take actions designed to enhance resilience. For instance, through their reviews of states' 5-year coastal zone enhancement assessment and strategy reports, NOAA officials said they identify information needs and priorities of state coastal zone management programs. For example, NOAA officials said they found that states had a common interest in knowing more about valuing the economic benefits of coastal ecosystems, such as estimating the financial benefit that ecosystems provide for flood control. As a result, NOAA officials said they presented information on this topic at a 2016 annual meeting with state coastal zone managers. This type of information can help states develop cost-benefit analyses that may more accurately capture the value of services provided by coastal ecosystems--as opposed to man-made infrastructure such as seawalls and levees--when states are exploring options for coastal projects, according to the officials. NOAA officials also said they share the states' needs and priorities that they identify with other NOAA offices, as well as with external partners such as other federal agencies and nonprofit organizations, to increase the awareness of state program needs and priorities and facilitate coordination and the alignment of resources across programs. NOAA provides a wide range of technical assistance in the form of technical information, guidance, and training related to better understanding and addressing the potential impacts of climate change on marine coastal ecosystems, including: Technical information. NOAA has provided various types of technical information to states to help them understand and incorporate climate information into their state coastal zone management programs. For example, in 2007, in partnership with nonprofit entities, NOAA helped develop a publically available repository of information--called the Digital Coast--to help state coastal zone managers and others analyze potential climate risks and determine how to address those risks. The Digital Coast provides information and tools on such topics as climate models and statistical analyses that coastal managers can use to incorporate climate information into their management activities. For instance, the Digital Coast contains an interactive tool that allows users to estimate sea level rise and simulate different sea level rise scenarios using elevation and surface data to help identify coastal areas that may be affected by rising sea levels in a changing climate. Coastal zone managers from one state said they used this tool to determine the vulnerability of their state's shoreline to potential sea level rise, which has helped them better target financial assistance to areas they identified as most vulnerable. Officials from all 25 state coastal zone management programs said that the technical information NOAA provides has generally helped them incorporate climate information into their state programs. However, officials from 20 of the 25 state programs said they often need more local or site-specific information for planning and implementing projects. The information NOAA provides is mostly at a national or regional scale, given staffing and resource levels, according to NOAA officials. These officials added that data available through the Digital Coast may be used as a starting point for coastal managers to modify and build in more site-specific elements. For example, one state customized a Digital Coast tool for estimating sea level rise to create a map outlining potential coastal flooding areas under various sea level rise scenarios at a site-specific scale within its state. Guidance. NOAA has developed several guidance documents to help state coastal zone managers and others identify specific ways marine coastal ecosystems may be used to help withstand the potential impacts of climate change and enhance the resilience of coastal areas. For example, in 2015, NOAA developed its Guidance for Considering the Use of Living Shorelines to provide information on how to use natural ecosystems, such as oyster reefs or marshes, to reduce coastal erosion caused by intense storms, wave erosion, or sea level rise. In addition, in 2016, NOAA issued a Guide for Considering Climate Change in Coastal Conservation. The guide provides coastal managers a step-by-step approach to considering climate change in coastal conservation planning, with links to relevant tools, information, and other resources. Officials from 19 of the 25 state coastal zone management programs said NOAA's guidance was generally useful, but officials from 14 of these programs said that NOAA's guidance alone is not sufficient to plan or implement actions that enhance ecosystem resilience and address climate change risks. Officials from one state, for example, said that NOAA's guidance on using living shorelines is helpful for general purposes such as educating the public on the benefits of this technique, but that the guidance does not cover all shoreline types, such as gravel beaches, exposed rocky shores, or tidal flats. NOAA officials said that using living shorelines as a strategy to enhance coastal resilience is a relatively new technique, and as coastal managers gain more experience with its use on different types of shorelines, NOAA plans to incorporate this information into the assistance it provides to coastal states. NOAA officials also said that the guidance was not intended to be a comprehensive source of technical information on living shoreline techniques, but rather to provide information on key technical and policy considerations in planning and designing shoreline management projects. Training. NOAA has developed instructor-led and online training on topics such as the use of marine coastal ecosystems for improving community resilience and understanding how to use the tools found in the Digital Coast as a way to plan for and take action to address the potential impacts of climate change. For example, from 2014 to 2016, NOAA provided training to over 250 state coastal zone managers and other state practitioners across the country on identifying various types of flooding in coastal areas and methods for mapping potential flooding scenarios. Similarly, during the same time period, NOAA officials said they offered 11 3-day climate adaptation workshops across the country that covered a variety of climate-related topics including methods for assessing the vulnerability of coastal areas and options for using ecosystems, such as wetlands, to provide flood protection. Officials from 16 of the 25 state coastal zone management programs told us that they viewed the training provided by NOAA on topics related to climate change and ecosystem resilience as helpful. NOAA officials said they take steps to ensure their training topics meet states' needs by discussing potential training topics with state coastal zone managers before developing courses and by collecting participant feedback after training courses are provided. For example, NOAA officials said they reach out to all training participants after each course to ask the participants the extent to which they believe they will be able to apply the training to their work. NOAA officials said that the National Estuarine Research Reserve System is important for marine coastal ecosystem resilience, in part, because the reserves serve as "living laboratories" for the study of estuaries and natural and man-made changes, including the impacts of climate change. For example, in 2014, coastal zone managers from one state partnered with the state's research reserve staff, along with NOAA and others, to study and map marsh migration patterns across the state's coastline to determine how marsh ecosystems may respond to rising sea levels. The study results were then incorporated into state efforts to help local communities plan for and take action to adapt to the effects of climate change, according to a state coastal zone manager. In the research reserve system's 2011-16 strategic plan, NOAA and the states identified climate change as one of three strategic areas of focus and investment for the 5-year period. Activities identified in the plan include, among others, generating and disseminating periodic analyses of water quality, habitat change, and the effects of climate change and other stressors at local and regional scales. Officials from 19 of the 25 state coastal zone management programs said that the work carried out through their respective research reserves plays an important role in furthering their understanding of how climate change may affect the structure and function of estuarine ecosystems. NOAA officials agreed that this research plays a critical role in supporting states' efforts to enhance coastal resilience to climate change. The officials said they are updating the reserve system's strategic plan for 2017, which they expect to complete in January 2017, and plan to continue highlighting climate change and resilience as key issues to focus their research at the reserves. We provided the Department of Commerce a draft of this report for review and comment. NOAA provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Commerce, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix I. Anne-Marie Fennell, (202) 512-3841 or [email protected]. In addition to the contact named above, Alyssa M. Hundrup (Assistant Director), Michelle Cooper, John Delicath, Cindy Gilbert, Jeanette M. Soares, and Rajneesh Verma made key contributions to this report. Also contributing were Michael Hill, Armetha Liles, Christopher Pacheco, Janice Poling, Steve Secrist, and Joseph Dean Thompson.
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Coastal areas--home to over half of the U.S. population--are increasingly vulnerable to catastrophic damage from floods and other extreme weather events that are expected to become more common and intense, according to the 2014 Third National Climate Assessment. This assessment further indicated that less acute effects from changes in the climate, including sea level rise, could also have significant long-term impacts on the people and property along coastal states. Marine coastal ecosystems--including wetlands and marshes--can play an important role in strengthening coastal communities' resilience to the impacts of climate change, such as protecting eroding shorelines from sea level rise. Under the CZMA, NOAA is responsible for administering a federal-state partnership that encourages states to balance development with the protection of coastal areas in exchange for federal financial assistance and other incentives. GAO was asked to review federal efforts to adapt to potential climate change effects on coastal ecosystems. This report provides information about NOAA's actions to support states' efforts to make marine coastal ecosystems more resilient to the impacts of climate change and states' views of those actions. GAO reviewed the CZMA and relevant NOAA policies and guidance; interviewed officials from NOAA headquarters and six regional offices; and conducted structured interviews with officials from the 25 state coastal zone management programs in all 23 marine coastal states. NOAA provided technical comments on this report. The Department of Commerce's National Oceanic and Atmospheric Administration (NOAA) is taking a variety of actions to support states' efforts to make their marine coastal ecosystems more resilient to climate change, and states generally view NOAA's actions as positive steps. The Coastal Zone Management Act (CZMA) provides a foundation for managing these ecosystems and partnering with states to work towards the agency's goals of achieving resilient coastal communities and healthy coastal ecosystems, according to NOAA officials. Through the federal-state partnership established under the CZMA, GAO found that NOAA has taken actions, including: Financial incentives. NOAA has targeted some of its financial incentives for activities aimed at addressing the impacts of climate change. For example, NOAA designated coastal hazards--physical threats to life and property, such as sea level rise--as the focus of CZMA competitive grants. States competed for a total of $1.5 million in grants in fiscal year 2016. Officials from all 25 state programs that GAO interviewed said funding provided by NOAA has been critical for planning projects related to ecosystem resilience, but also expressed concern that the amount of funding is insufficient to address states' needs in implementing projects. For instance, officials from 15 state programs further indicated that coastal zone management grants have been a primary source of funding from NOAA, but that they generally cannot be used to purchase land or for construction projects, activities states identified as important for improving coastal resilience. Technical assistance. NOAA has provided assistance largely through technical information, guidance, and training to help states better understand and address the potential impacts of climate change on marine coastal ecosystems. For example, NOAA helped develop an interactive digital tool to simulate different sea level rise scenarios. NOAA also developed guidance to help identify ways ecosystems may be used to enhance the resilience of coastal areas, such as using natural shorelines to buffer the effects of erosion. In addition, NOAA developed training on topics such assessing the vulnerability of coastal areas. State managers GAO interviewed had generally positive views of the technical assistance provided by NOAA. For example, officials from all 25 state programs said that the technical information NOAA provides has generally helped them incorporate climate information into their state programs. National Estuarine Research Reserve System. NOAA, in partnership with coastal states, manages 25 marine-based estuary reserves, in part, to study natural and man-made changes to estuaries (bodies of water usually found where rivers meet the sea), including the potential impacts of climate change. For example, in 2014, one state used its research reserve to study and map marsh migration patterns across the state's coastline to determine how these ecosystems may respond to rising sea levels. Officials from 19 of the 25 state programs said that work carried out through the research reserves plays an important role in furthering their understanding of how climate change may affect the structure and function of estuarine ecosystems.
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The HUBZone Act of 1997 (which established the HUBZone program) identified HUBZones as (1) qualified census tracts, which are determined by area poverty rate or household income; (2) qualified nonmetropolitan counties, which are determined by area unemployment rate or median household income; and (3) lands meeting certain criteria within the boundaries of an Indian reservation. Congress subsequently expanded the criteria for HUBZones to add former military bases and counties in difficult development areas outside the continental United States. To be certified to participate in the HUBZone program, a firm must meet the following criteria: when combined with its affiliates, be small by SBA size standards; be at least 51 percent owned and controlled by U.S. citizens; have its principal office--the location where the greatest number of employees perform their work--in a HUBZone; and have at least 35 percent of its employees reside in a HUBZone. SBA recertifies firms (that is, determines that firms continue to meet HUBZone eligibility requirements to participate in the program) every 3 years. As of August 2016, SBA had taken some actions to address but had not yet fully implemented our recommendation on better informing firms about programmatic changes that could affect their eligibility. In our February 2015 report, we described how HUBZone designations can change with some frequency. SBA generally updates HUBZone designations at least twice a year based on whether they meet statutory criteria (such as having certain income levels or poverty or unemployment rates). SBA generally uses data from other federal agencies to determine if areas still qualify for the HUBZone program. As a result of the updates, additional areas are designated for inclusion while other areas lose their designation. Areas that lose their designation begin a 3-year "redesignation" period during which firms in those areas can continue to apply to and participate in the program and receive contracting preferences. After the 3 years, firms in these areas lose their HUBZone certified firm status and the associated federal contracting award preferences. In 2015, we reported that 17 percent (871) of firms certified at the time were located in a redesignated area. However, we found that SBA's communications to firms about programmatic changes (including redesignation) generally had not been targeted or specific to firms that would be affected by the changes. In 2015, we found that SBA used a broadcast e-mail (which simultaneously sends the same message to multiple recipients) to distribute program information. According to SBA officials, the e-mail list initially included all certified firms, but firms certified since the list was created in 2013 and up to the time period covered by our 2015 report had not been automatically added to the list. Firms had to sign up through SBA's website to receive the e-mails. As a result, not all certified firms may have done so. Consequently, we recommended that SBA establish a mechanism to better ensure that firms are notified of changes to HUBZone designations that may affect their participation in the program. This recommendation was intended to address communications to all certified firms, whether newly certified or in the program for years. In response to the recommendation, SBA has improved notifications to newly certified firms. As we reported in March 2016, SBA revised its certification letters to firms. If SBA identifies during an application review that a firm's principal office is in a redesignated area, it indicates in the certification letter that the firm is in a redesignated area, explains the implications of the designation, and notes when the redesignated status will expire. However, we found in March 2016 that SBA had not yet implemented changes to ensure that all currently certified firms are notified of changes that could affect their program eligibility. It is important that all certified firms potentially affected by such changes receive information about the changes or are made aware in a timely fashion of any effects on their program eligibility. As of August 2016, SBA had plans to improve its notifications to all firms. SBA recently hired an employee whose responsibilities include helping SBA update its e-mail distribution list. As part of this effort, according to SBA officials, SBA plans to collect all the e-mail addresses for certified firms from its Dynamic Small Business Search database to create a new distribution list. SBA plans to begin adding newly certified firms to the list quarterly. Additionally, SBA officials told us that the agency intends to develop a technology solution similar to SBA One--a database now used to process loan applications--to include the HUBZone program to help collect information and documents from existing firms and address this recommendation. SBA expects to implement this solution by spring 2017. We found in February 2015 that SBA had addressed weaknesses in its certification process that we previously identified. However, as of August 2016, SBA had not yet taken steps to fully address our recommendation related to the HUBZone firm recertification process. In February 2015, we reported that SBA had changed its certification process to require all applicant firms to provide documentation supporting their eligibility and to require agency staff to perform a full document review to determine firms' eligibility for the program. Additionally, SBA had conducted site visits on 10 percent of its portfolio of certified firms every year in response to a prior GAO June 2008 recommendation. However, we also found deficiencies relating to the recertification process. First, in 2008 and again in 2015, we found that the recertification process had become backlogged--that is, firms were not being recertified within the 3-year time frame. As of September 2014, SBA was recertifying firms that had been first certified 4 years previously. While SBA initially eliminated the backlog following our 2008 report, according to SBA officials the backlog recurred due to limitations with the program's computer system and resource constraints. Second, in 2015 we found that SBA relied on firms' attestations of continued eligibility and generally did not request supporting documentation. SBA only required firms to submit a notarized recertification form stating that their eligibility information was accurate. SBA officials did not believe they needed to request supporting documentation from recertifying firms because all firms in the program had undergone a full document review, either at initial application or during SBA's review of its legacy portfolio in fiscal years 2010-2012. As a result, we concluded in 2015 that SBA lacked reasonable assurance that only qualified firms were allowed to continue in the HUBZone program and receive preferential contracting treatment. Consequently, we recommended that SBA reassess the recertification process and implement additional controls, such as developing criteria and guidance on using a risk-based approach to requesting and verifying firm information, allowing firms to initiate the recertification process, and ensuring that sufficient staff would be dedicated to the effort so that significant backlogs would not recur. In response to the recommendation, SBA made some changes to its recertification process. For example, instead of manually identifying firms for recertification twice a year, SBA automated the notification process, enabling notices to be sent daily for firms to respond to and attest that they continued to meet the eligibility requirements for the program. According to SBA officials, this change should ultimately help eliminate the backlog by September 30, 2016. However, as we discussed in our March 2016 report, SBA had not implemented additional controls (such as guidance for when to request supporting documents) for the recertification process because SBA officials believe that any potential risk of fraud would be mitigated by site visits to firms. The officials also cited resource limitations. Based on data that SBA provided, the agency visited about 10 percent of certified firms each year during fiscal years 2013-2015. SBA's reliance on site visits alone would not mitigate the recertification weaknesses that were the basis for our recommendation. In recognition of SBA's resource constraints, we said in our 2015 report and reiterated in 2016 that SBA could apply a risk-based approach to its recertification process to review and verify information from firms that appear to pose the most risk to the program. A lack of risk-based criteria and guidance for staff to request and verify firm information during the recertification process increases the risk that ineligible firms obtain HUBZone contracts. And as we stated in 2015 and reiterated in 2016, the characteristics of firms and the status of HUBZone areas--the bases for program eligibility--often can change, and need to be monitored. SBA officials told us that the agency intends to implement a technology- based solution similar to SBA One to address some of the ongoing challenges with the recertification process by spring 2017. The officials expect that the new solution will help them better assess firms and implement risk-based controls. As we reported in February 2015, potential changes to HUBZone designation criteria could be designed to provide additional economic benefits to some communities. However, changes that benefit some communities also could, through competitive market processes, reduce activity by HUBZone firms in existing HUBZones. Likewise, if the potential changes significantly increased the number of HUBZones, new areas could realize economic benefits. However, such changes also could result in diffusion--decreased targeting of areas of greatest economic distress--by lessening the competitive advantage on which small businesses may rely to thrive in economically distressed communities. An analysis we performed for our February 2015 report offers examples of the scope of the differences in economic conditions among HUBZone areas (qualified areas), redesignated areas, and non-HUBZone areas (nonqualified tracts or areas) . We analyzed the economic conditions of such areas as of 2012 and found that indicators for redesignated areas on average fell between those of qualified and non-qualified areas. For example, as shown in figure 1, qualified census tracts had poverty and unemployment rates of 32 percent and 14 percent, respectively; redesignated tracts had rates of 24 percent and 12 percent, respectively; and nonqualified tracts had rates of 11 and 8 percent, respectively. A similar pattern existed for nonmetropolitan counties. Therefore, while allowing redesignated areas with certified firms to remain eligible can generate economic benefits for such areas, such inclusion could limit the benefits realized by qualified areas with more depressed economic conditions. In our 2015 report, we explored the potential impact of altering some of the criteria used to designate HUBZones. We examined changes to thresholds for unemployment rate and for the number of census tracts that could qualify for the program in a given metropolitan area. For example, one way a nonmetropolitan county can qualify as a HUBZone is based on its unemployment rate. More specifically, the unemployment rate must be 140 percent or more of the average unemployment rate for the United States or for the state in which the county is located, whichever is less. Under the current definition, two counties in different states with the same unemployment rate would not necessarily both qualify as HUBZones, depending on the unemployment rate of the state in which they are located. In general, every county in a state with an unemployment rate less than the U.S. average would qualify as a HUBZone if its unemployment rate was at least 140 percent of the state's (even if it was less than the U.S. average). In contrast, counties in states with unemployment rates higher than the U.S. average must have an unemployment rate at least equal to 140 percent of the U.S. average to qualify as a HUBZone. Our application of hypothetical changes to the unemployment rate generally resulted in approximately the same number of areas qualifying compared to the current definition with two exceptions --applying the lowest unemployment rate to all states resulted in approximately four times as many counties qualifying, while applying the highest unemployment rate resulted in approximately eight times fewer counties qualifying (see table 1). Similarly, we analyzed the potential impact of removing the limit on the number of areas that could qualify as HUBZones pursuant to the definition of "qualified census tract" that was in effect at the time we issued our February 2015 report. We found that about 2,400 more census tracts would qualify as HUBZones if the 20 percent cap were not in place, an increase of 15 percent from the number of qualified tracts as of June 2014. Chairman Chabot and Ranking Member Velazquez, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Committee may have. If you or your staff have any questions about this testimony, please contact William B. Shear, Director, Financial Markets and Community Investment, at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Harry Medina (Assistant Director), Daniel Newman (Analyst-in-Charge), Pamela Davidson, John McGrail, and Barbara Roesmann. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The purpose of the HUBZone program is to stimulate economic development in economically distressed areas. SBA certified HUBZone firms are eligible for federal contracting benefits, including limited competition awards such as sole-source and set-aside contracts. Small firms in SBA's HUBZone program had almost $6.6 billion in obligations on active federal contracts for calendar year 2015. This testimony includes a discussion of (1) how SBA communicates changes in HUBZone designations to firms, including how SBA addressed GAO's 2015 recommendation to improve this process, and (2) SBA's certification and recertification processes for firms, including how SBA addressed GAO's 2015 recommendation to improve recertification. GAO relied on the work supporting its February 2015 report on SBA's oversight of the program ( GAO-15-234 ) and its March 2016 report on actions taken in response to GAO recommendations ( GAO-16-4232R ), as well as July and August 2016 interviews with SBA officials on efforts the agency had undertaken to implement GAO's recommendations. As of August 2016, the Small Business Administration (SBA) had taken steps to better inform firms about changes in the designations of Historically Underutilized Business Zones (HUBZones) but had not yet fully implemented GAO's February 2015 recommendation to improve this process. SBA primarily designates economically distressed areas as HUBZones, based on demographic data such as unemployment and poverty rates. The designations include certain census tracts and counties and are subject to periodic changes as economic conditions change. HUBZones that lose qualifying status due to changes in economic conditions become "redesignated" and undergo a 3-year transition period. After the 3-year period, HUBZone certified firms in these areas can no longer apply to and participate in the program and receive contracting preferences. GAO found in February 2015 that SBA's communications to firms about programmatic changes (including redesignation) generally were not specific to affected firms and thus some firms might not have been informed they would lose eligibility. GAO recommended SBA better ensure firms were notified of changes that might affect program participation. In response, SBA revised its approval letters to newly certified firms to include information about the consequences of redesignation (if applicable). But as of August 2016, SBA had not yet implemented changes to help ensure all currently certified firms would be notified of changes that could affect their program eligibility. SBA officials recently told GAO the agency intended to develop a technology solution by spring 2017 to help address GAO's recommendations. While SBA made changes to its certification and recertification processes, SBA had not fully addressed GAO's recommendation on recertification of firms. To receive initial certification, SBA requires all firms to provide documentation to show they meet the eligibility requirements. SBA also conducts site visits at selected firms (for example, based on the amount of federal contracts received). According to HUBZone regulations, firms wishing to remain in the program without any interruption must recertify their continued eligibility to SBA within 30 days after the third anniversary of their certification date and each subsequent 3-year period. But in 2015, GAO found SBA did not require firms seeking recertification to submit any information to verify continued eligibility and instead relied on firms' attestations of continued eligibility. GAO also found SBA had a backlog for recertifying firms. GAO recommended in February 2015 that SBA implement additional controls for recertification, including criteria for requesting and verifying firm information, and ensuring sufficient staffing for the process so that significant backlogs would not recur. As of August 2016, SBA had plans to eliminate the backlog, but had not issued guidance on requesting supporting documents. SBA officials stated that any potential risk of fraud during recertification would be mitigated by SBA's site visits of firms. But as GAO stated in 2015 and reiterated in 2016, SBA only conducts site visits to about 10 percent of certified firms on an annual basis and characteristics of firms often can change, therefore relying on site visits is not adequate to mitigate this risk.
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An assessment is a formal bookkeeping entry in which IRS records the amount of tax, penalty, or interest charged to a taxpayer's account each tax year. An assessment establishes the taxpayer's liability and IRS' right to collect. Taxpayers essentially assess themselves when they report these taxes on their tax returns. IRS may add to or subtract from tax amounts reported when its returns processing or enforcement programs identify errors. Taxpayers also may file an amended return or otherwise notify IRS of errors, which can change the amount assessed. An abatement is a formal bookkeeping entry to record a reduction of tax, penalty, or interest assessments on a taxpayer's account. Abatements reduce the amounts that taxpayers owe and that IRS has a right to collect. Section 6404 of the Internal Revenue Code authorizes IRS to abate an assessment under certain conditions. For example, IRS can abate an assessment because of errors made. A taxpayer can make an error on the original tax return, such as not claiming a deduction. Or, IRS may assess incorrect tax amounts when auditing a return or matching income reported by taxpayers with income reported by third parties (such as employers) on payments made to the taxpayers. Both taxpayers and IRS can initiate abatements. Taxpayers can request an abatement by filing an amended tax return (e.g., Form 1040X), by filing an IRS Form 843 (Claim for Refund and Request for Abatement), or by calling or writing to IRS. IRS can also initiate abatements. When, for example, an IRS auditor finds evidence that a taxpayer overstated the tax liability on a return, this evidence could lead to an abatement, depending on the results from the rest of the audit. To fulfill our objectives, we reviewed a stratified, random sample of 486 individual taxpayer abatements made in fiscal year 1998 due to errors by taxpayers, IRS, or third parties. Our sample includes abatements in which taxpayers elected to change their filing status or basis for deductions when the original assessment also changed. If a taxpayer had multiple abatements, we studied only the abatement that was drawn into our sample. We obtained the final sample of 486 abatements by first drawing a stratified sample of 500 abatements from a population of 2,351,194 abatements for individual taxpayers who had at least one abatement in 1998 associated with an error in the assessment. After reviewing the 500 IRS case files, we removed 14 sampled abatements that did not contain these errors, such as abatements due to net operating loss carry backs, debt discharges, and substitute returns. On the basis of our final sample, we estimated that the total population of 1998 abatements based on errors was about 2.3 million with a value of about $3.6 billion. Each abatement could be associated with more than one error. For each error, we collected information on which line item on the return was in error. For example, an error could involve lines for the primary taxpayer's SSN, a tax exemption, or a tax deduction. To the extent possible, we also collected information on whether taxpayer, IRS, or third-party actions led to an error. Because so many of the errors related to exemptions, we collected more information, such as whose exemption (taxpayer, spouse, dependent) was in error and what information was missing or incorrect. To develop data about IRS' costs to abate tax assessments made due to errors by taxpayers, IRS, or third parties, we used IRS' abatement files to identify the type and frequency of IRS activities associated with the recording, collecting, and abating of these assessments. We then talked to IRS officials about the unit costs of these activities and the magnitude of the overall costs for all activities. These officials represented IRS' Wage and Investment Division, IRS' Chief of Operations and IRS units that record, collect, or abate assessments, such as those that process or examine tax returns. We attempted to develop more reliable cost estimates but IRS was unable to provide sufficient data in time for including in this report. To describe the types of taxpayer costs, we recorded the types of activities associated with each sampled abatement case. We discussed these activities with IRS officials to understand the potential impacts on costs. On the basis of this work, we summarized the range of activities and of time (in calendar days) that taxpayers faced to get the tax assessments abated. We did not have enough information to compute taxpayers' costs. After our analysis, we sought feedback from IRS officials at the National Office on our sample results and the costs. We sought IRS documentation and views on options for reducing the number of assessments that involved exemptions and that were abated due to errors. We also sought views on these options from officials of four professional associations-- the American Institute of Certified Public Accountants, National Association of Enrolled Agents, National Association of Tax Practitioners, and National Society of Accountants. Because we selected the probability sample following random selection procedures, each estimate is surrounded by a 95-percent confidence interval. For example, the estimate that 86 percent of the abatements is due to taxpayer errors is surrounded by a 95-percent confidence interval of +/- 3 percentage points. This shows that we are 95-percent confident that the percentage of taxpayer errors in the actual population is between 82 and 89 percent. All percentage estimates have sampling errors of +/- 6 percentage points or less, unless otherwise noted. Estimates on numbers of abatements have sampling errors of +/- 6 percent or less of their values unless otherwise noted. We did work at IRS offices in Washington, D.C., and New Carrollton, MD, as well as IRS' Kansas City Service Center because of our staff's proximity. We did our work from November 1999 through December 2000 in accordance with generally accepted government auditing standards. We discussed our draft report with representatives of the IRS Commissioner on March 23, 2001. IRS officials agreed that our recommendations had merit and said they would review ways to implement them. Their written comments arrived too late to be reprinted in this report. We traced most abated income tax assessments in fiscal year 1998 to individual taxpayer errors. These errors usually involved claims for tax exemptions for the taxpayers, spouses, or dependents. Taxpayers usually erred by not providing any information or by providing inaccurate information. With exemption claims, these errors usually involved SSNs for dependent exemptions. We estimated that 86 percent of the 2.3 million abated assessments arose from taxpayer errors, and 6 percent arose from IRS errors. Sources for the remaining errors were third parties or could not be determined due to insufficient data in IRS' abatement case files. We further analyzed how the errors were made. For taxpayer errors, about 74 percent of the abated tax assessments were associated with taxpayers not correctly reporting an item on the tax return; and about 22 percent were associated with taxpayers omitting the item from the return. For IRS errors associated with abated tax assessments, most of the errors occurred when the IRS unit that processes tax returns did not accept valid information from these returns. Third-party errors generally arose due to errors in the Social Security Administration database used by IRS to validate names and SSNs related to the exemption claims. For fiscal year 1998, an estimated 50 percent of errors that led to the 2.3 million abated tax assessments involved exemptions claimed on income tax returns for taxpayers, spouses, or dependents. The remaining abated assessments involved errors with many other types of claims at much lower percentages. The next two most frequent errors--Schedule A deductions (e.g., real estate taxes) and the other income line on the tax return--each accounted for around 10 percent. Of the exemption errors, we estimated that about 96 percent involved dependent exemptions; and the rest involved exemptions for the spouse of the primary taxpayer filing the tax return. For dependent exemptions, about 32 percent of the errors were missing SSNs; and about 50 percent were incorrect SSNs. The remaining errors involved the names of the dependents or could not be determined due to insufficient data. These errors in names and SSNs occurred in many ways. For example, in one instance, an exemption for a dependent was disallowed because the taxpayer used the spouse's SSN instead of the dependent's. Other dependent exemption errors either occurred because no SSN was reported, SSNs were transposed, or an SSN was reported as a progression of numbers (i.e., 123-456-789). Examples also included a taxpayer who used the same SSN for two different dependents and a taxpayer who used the last four digits of an SSN for two dependents. Other errors related to the dependent's last name not matching SSA records and a spousal exemption disallowed because the spouse's last name did not match SSA data. The exemption errors were not limited to a type of taxpayer. An estimated 256,000 or more taxpayers with incomes below $25,000 made such errors as well as about 107,000 taxpayers with incomes over $100,000. Most exemption errors came from individuals who had no business income, but about 47,000 taxpayers who had business income made exemption errors. IRS did not track its costs to record, collect, and then abate the 2.3 million tax assessments that were made due to errors by taxpayers, IRS, or third parties. IRS agreed that these overall costs could be substantial, totaling at least tens of millions of dollars annually. IRS was unable to provide accurate cost data for developing more reliable estimates in time for this report. However, IRS agreed that having such accurate cost information is important and plans to develop it. We identified three broad activities--recording, collecting, and abating the tax assessments--associated with IRS' costs. Table 1 shows the frequencies of these broad activities. IRS incurred additional costs to record an estimated 1.3 million of the 2.3 million tax assessments abated due to errors. In such cases, IRS did more work to make additional tax assessments. IRS' usual costs include those to record the tax assessment originally reported on the tax returns. The additional costs would have been avoided if the errors and additional assessments had not been made. The other 1 million tax assessments did not incur additional recording costs. Various IRS units can be involved in recording increases or decreases to the original tax assessment reported on the tax return. IRS' processing units can increase the original assessment because of more obvious errors, such as invalid SSNs. IRS post-processing units also can make additional tax assessments that will be recorded. For example, when the taxpayer files an amended tax return or third-party reports indicate that a taxpayer did not report all income, IRS' adjustment units can increase the assessment. IRS' examination units can increase assessments during audits when taxpayers do not provide documents to support their tax return. The cost to record tax assessments is higher when a post-processing unit does the work to create an assessment. The greatest cost is associated with examination units because their auditors have higher pay grades, audit more complex cases, and need more time to work cases compared to nonaudit staff. IRS attempted to collect an estimated 609,000 of the 2.3 million abated tax assessments. IRS could have avoided the associated collection costs if the tax assessment, which was abated because of errors, had not been made. For the portion that was abated of the other 1.7 million tax assessments, IRS did not take collection action. The process for collecting any unpaid assessment has three steps. The process starts with a series of computer-generated notices demanding payment or information to otherwise resolve the unpaid assessment. If the unpaid assessment is not resolved, IRS might try to call the taxpayer through its Automated Collection System. If still unresolved, IRS might assign a field collector to visit the taxpayer. The costs of the collection activity increase substantially with each step. For example, each notice costs a fraction of what a field collector visit costs. IRS also incurred additional costs to abate the 2.3 million tax assessments. Abatements involve three types of costs, as described below. First, IRS incurs costs to process abatement requests. These costs are relatively low compared to later steps. Abatement requests include formal claims (Form 1040X or Form 843) and informal requests when taxpayers call or write IRS requesting abatements. Compared with informal requests, formal claims are more costly because of the extra costs to record them on IRS' masterfile of taxpayer accounts to show the pending formal request. Second, IRS incurs costs to make and record the abatement decision. Some abatement decisions are made in IRS examination units while the bulk are done in nonexamination units. The unit cost of abatements made in examination units is higher because, among other reasons, they use higher-graded (or paid) staff. Third, IRS incurs costs for some abatements when issuing a refund check that otherwise would have been unnecessary. This check is for tax amounts overpaid by individuals because of the assessment made in error. Taxpayers also incurred costs when tax assessments were made and then abated. However, the amount is currently unknown. IRS' abatement files lacked sufficient information on taxpayers' activities, efforts to contact IRS, and time spent in order to estimate taxpayer costs. Further, taxpayers usually do not record and maintain such information. As part of its multiyear effort to estimate taxpayer compliance burdens, IRS is designing a methodology intended to estimate taxpayer costs for abatements and other post-filing activities. Although we could not measure the costs to taxpayers, we were able to estimate the number of taxpayers involved in two actions that imposed some level of burden. For both types of actions, taxpayers incurred costs in time and money, especially if they used a paid preparer. Of the 2.3 million abated assessments, an estimated 609,000 involved IRS contacts with taxpayers to collect an assessment before it was abated, of which the vast majority were IRS notices; and an estimated 575,000 involved amended tax returns that taxpayers filed to correct errors and request the tax abatements. The amount of variation in taxpayer costs also cannot be quantified currently. Taxpayer costs can vary, depending on the actions and time required to correct the error and abate the tax assessment. Taxpayer actions could include finding the error, gathering documents to support the abatement, communicating with IRS, providing any requested documentation, and responding to IRS notices. Contacts with IRS could be as inexpensive as a toll-free telephone call or as costly as paying the fees of tax professionals to work with IRS. In terms of calendar time required, most abatements we reviewed took 3 months or less to be approved, but some took much longer. At one extreme in our sample, IRS notified a taxpayer through a collection notice that it had assessed additional taxes after disallowing a dependent exemption while processing the tax return. The taxpayer called IRS to provide the dependent's correct SSN. After verifying the SSN, IRS made the abatement 21 days after the date of the collection notice. At the other extreme in our sample, IRS disallowed two dependent exemptions, assessed additional tax, and sent a collection notice. The taxpayer eventually provided sufficient documents to support the exemptions and justify the abatement. However, the abatement took 493 days from the date of the first collection notice. During this time, IRS sent multiple correspondence and collection notices to the taxpayer about the unpaid assessment and abatement request. IRS files also showed variation in the amount of taxpayer documentation and number of IRS contacts required for abatements. In another case from our sample, multiple exchanges between IRS and a taxpayer took 245 days from the first collection notice to the abatement. IRS had notified the taxpayer that an additional tax form was needed, and the taxpayer's representative returned the completed form to IRS showing no additional tax due. About 1 month later, IRS sent its version of the form showing additional tax due followed by four subsequent bills. The taxpayer hired a second representative who wrote IRS, sent documents, and faxed a form showing no additional tax due. IRS assigned the case to an IRS office that resolves difficult cases. The second representative faxed another copy of the form to this office to get the tax assessment abated. IRS has taken steps to avoid exemption errors or correct certain types of exemption errors earlier during returns processing rather than through the abatement process. However, IRS has not taken other steps that could potentially correct more errors earlier. If the errors were not made or were corrected earlier, IRS would not create tax assessments that need to be abated, which could reduce taxpayer and IRS costs. We focused on reducing exemption errors because, as discussed earlier, they accounted for half of the 2.3 million assessments that were abated in fiscal year 1998. After reviewing our data on the number of exemption errors that lead to abatements, IRS took a step intended to prevent some of the errors. For tax year 2000 returns, IRS revised tax return instructions to state that (1) the name and SSN entered on the tax return should agree with the Social Security card to avoid losing the exemption as well as tax benefits, such as the Earned Income Credit and (2) taxpayers should call the Social Security Administration to resolve any discrepancy. IRS made the revisions because a test of expanded SSN matching for spouse exemptions claimed on joint tax returns revealed errors with the names and SSNs of the spouses. IRS officials believe that these revisions will help reduce such errors, but the actual effects will not be known until after tax year 2000 returns are processed. IRS recently decided to revise its procedures during returns processing in an effort to correct some of the remaining exemption errors earlier. However, the largest category of exemption errors, errors with the dependent exemption, will not be corrected by the revisions. These revised procedures involve IRS' math-error program. About one million of the exemption-related tax assessments were created during returns processing through IRS' math-error program. In this program, IRS uses computers to find arithmetic errors on tax returns as well as errors in reporting SSNs, exemptions, and certain other items. When it finds math errors on paper returns, IRS processes the return, assesses the tax, and contacts the taxpayer to disclose the reason for the additional tax assessment and to request payment. Afterward, IRS uses its abatement process to correct any errors and eliminate the tax assessments. Further changes to the math-error program could help to correct errors earlier and avoid assessing taxes that will be abated. Specifically, after IRS' computerized processing detects exemption errors, computerized checks of previous tax returns could help to correct simple errors, such as transposed SSNs or misspelled or changed names. IRS now does these checks after returns processing when abatements are requested. To notify taxpayers of the corrections and need to avoid such errors, IRS could send so-called "soft notices"--notices that do not ask taxpayers to provide information or pay additional taxes. If the name or SSN were changed or missing, IRS could suspend processing and contact taxpayers. In effect, this would treat paper returns the same as electronic returns. As noted earlier, IRS does not accept electronic returns with math errors. If the contacts do not resolve the errors or if more effort is required, IRS could continue its practice of disallowing the exemptions and assessing additional taxes. After we shared the results of our work with IRS, IRS decided to change its procedures, effective January 28, 2001, to correct name and SSN errors with claims for spousal exemptions earlier. IRS officials decided to do the checks for correcting these errors during returns processing. Before disallowing exemptions and assessing additional taxes, IRS staff are to check spouses' names and SSNs on tax returns against IRS and Social Security Administration computer data in an attempt to correct the errors. Recently, an IRS official told us that IRS is considering taking two other steps to correct exemption errors during returns processing. The first step would be doing earlier checks for erroneous dependent exemptions. The second step would be to contact taxpayers for any type of exemption error that had not been corrected by the checks. This same official said that IRS had concerns about the time and costs to contact taxpayers during returns processing in order to correct exemption errors. However, IRS did not provide any documentation or details on how or when decisions about these earlier checks and contacts would be made. Considering steps to correct exemption errors earlier is worthwhile because of the potential benefits to a large number of taxpayers. While neither the benefits to taxpayers nor the costs to IRS can be quantified, some information is known. First, IRS already abates almost all tax assessments created through the math-error program for exemption errors in missing or inaccurate names or SSNs. According to our analysis, IRS abated at least 87 percent of the additional tax assessments for name or SSN errors in exemptions claimed on tax year 1997 returns. In deciding whether to approve abatements requested by taxpayers, IRS checks previous tax returns and contacts taxpayers, as needed. Since abatements are requested for almost all of these assessments, IRS is already doing the checks and contacts. Second, although taxpayers' costs have not been quantified, correcting the exemption errors earlier could reduce the costs that taxpayers incur to correct errors through abatements. To the extent that the earlier checks correct the errors, fewer taxpayers would be contacted. Even if contacted, taxpayers would likely have an easier time finding or compiling records or working with tax representatives because the errors would be found sooner. Some taxpayers (about 26 percent of the cases we reviewed) would no longer face IRS collection actions. The extent to which taxpayer costs would be reduced could be influenced by, among other factors, how many exemption errors continue to be made after IRS clarified its instructions for claiming exemptions. In discussing taxpayer burdens, representatives we interviewed from four groups of tax professionals generally favored the idea of doing the checks and contacts earlier to avoid tax assessments that have to be abated. They said that taking care of the errors earlier would reduce taxpayer burden, particularly when the errors lead to a series of written and telephone contacts to get the taxes abated. Third, IRS could reduce annual operating costs by correcting exemption errors earlier rather than later through abatements. We could not estimate the amount of operating cost savings because available data did not allow us to quantify the costs associated with exemption errors separately from the costs for other types of errors. Even so, by correcting errors earlier, IRS would no longer incur costs to record and collect the tax assessments that would be abated. Nor would IRS incur some of the costs of making abatements, including the costs of processing abatement requests or issuing refunds after abatements are granted. Other costs savings could occur from using lower paid staff, rather than audit staff, to make the checks and contacts earlier. Whether IRS would have overall cost savings depends on the costs to implement the earlier checks and contacts. These one-time costs would offset IRS' operating cost savings to some extent. Implementation costs could include, if needed, new equipment, computer programming, moving equipment or staff, and training. IRS did not have data on the magnitude of these one-time costs. Finding ways to reduce the remaining 1.1 million assessments that are abated due to nonexemption errors will be challenging. As discussed earlier, these remaining abated assessments involve a variety of errors that occur infrequently. Since little is known about these errors or their causes, a promising first step towards reducing the errors would be to do research on their causes and on ways to avoid the errors. Doing research on the nonexemption errors has the potential to benefit a large number of taxpayers. However, research also incurs costs, which we did not attempt to estimate. Such costs would depend on the design, scope, and depth of the studies. Approximately one million taxpayers per year, as well as IRS, incur costs to abate tax assessments created due to exemption errors. Avoiding the errors, or correcting them earlier, could reduce the burden on taxpayers of complying with tax laws. IRS has taken one step intended to help taxpayers avoid these errors-- revising instructions for claiming exemptions. In another step, aimed at correcting some exemption errors that continue to be made, IRS decided to do checks of name and SSN errors for spousal exemption claims during returns processing. In addition, IRS is considering implementing earlier--during returns processing--checks for dependent exemption errors and taxpayer contacts if the checks do not correct exemption errors. Considering doing such checks and contacts earlier is worthwhile. While the cost savings to IRS are not known, a large number of taxpayers could benefit. However, IRS did not provide us with any details or documentation about how or when decisions would be made. Little is known about how to reduce nonexemption errors that lead to assessments being abated. Because over one million taxpayers were burdened by such assessments, research to reduce the errors is worth considering. Regarding name and SSN errors, we recommend that the Commissioner of Internal Revenue make a determination on whether the costs and benefits justify implementing earlier--during returns processing--(1) checks for dependent exemption errors and (2) taxpayer contacts, as needed, for the remaining errors in any type of exemption claim. Regarding the nonexemption errors that lead to assessments that are later abated, we recommend that the Commissioner of Internal Revenue determine whether research to identify causes and solutions is justified. We discussed our draft report on March 23, 2001, with IRS officials from Wage and Investment who were representing the IRS Commissioner. They agreed to implement both of our recommendations. First, they said that IRS would review the costs and benefits of doing checks and contacts during returns processing for dependent exemption errors. Second, they said that IRS would review available data on nonexemption errors to determine the merits of researching their causes, and solutions. IRS was unable to provide written comments in time for inclusion in this report. We are sending copies of this report to Representative Charles B. Rangel, Ranking Minority Member, House Committee on Ways and Means; Representative William J. Coyne, Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means; and Senator Charles E. Grassley, Chairman, and Senator Max S. Baucus, Ranking Member, Senate Committee on Finance. We also are sending copies to the Honorable Paul H. O'Neill, Secretary of the Treasury; the Honorable Charles O. Rossotti, Commissioner of Internal Revenue; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. Copies of this report will be made available to others upon request. If you have any questions concerning this report, please contact Tom Short or me at (202) 512-9110. Key contributors to this work are listed in appendix I. In addition, Royce Baker, Larry Dandridge, Thomas Venezia, James Fields, Anne Rhodes-Kline, Sam Scrutchins, Thomas Bloom, and Rodney Hobbs contributed to this report.
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About one million taxpayers per year, as well as the Internal Revenue Service (IRS), incur costs to abate tax assessments created due to tax exemption errors. Avoiding the errors, or correcting them earlier, could reduce the burden on taxpayers of complying with tax laws. IRS has taken one step intended to help taxpayers avoid these errors--revising instructions for claiming exemptions. In another step, aimed at correcting some exemption errors that continue to be made, IRS decided to check name and social security number errors for spousal exemption claims during returns processing. In addition, IRS is considering implementing earlier--during returns processing--checks for dependent exemption errors and taxpayer contacts if the checks do not correct exemption errors. Doing such checks and contacts earlier is worthwhile. Although the cost savings to IRS are unknown, many taxpayers would benefit. However, IRS did not provide GAO with any details or documentation about how or when decisions would be made. Little is known about how to reduce nonexemption errors that lead to assessments being abated. Because more than one million taxpayers were burdened by such assessments, research to reduce the errors is worth considering.
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When providers at VAMCs determine that a veteran needs outpatient specialty care, they request and manage consults using VHA's clinical consult process. Clinical consults include requests by physicians or other providers for both clinical consultations and procedures. A clinical consultation is a request seeking an opinion, advice, or expertise regarding evaluation or management of a patient's specific clinical concern, whereas a procedure is a request for a specialty procedure such as a colonoscopy. Clinical consults are typically requested by a veteran's primary care provider using VHA's electronic consult system. Once a provider sends a request, VHA requires specialty care providers to review it within 7 days and determine whether to accept the consult. If the specialty care provider accepts the consult--determines the consult is needed and is appropriate--an appointment is made for the patient to receive the consultation or procedure. In some cases, a provider may discontinue a consult for several reasons, including that the care is not needed, the patient refuses care, or the patient is deceased. In other cases the specialty care provider may determine that additional information is needed, and will send the consult back to the requesting provider, who can resubmit the consult with the needed information. Once the appointment is held, VHA's policy requires the specialty care provider to appropriately document the results of the consult, which would then close out the consult as completed in the electronic system. VHA's current guideline is that consults should be completed within 90 days of the request. If an appointment is not held, staff are to document why they were unable to complete the consult. In 2012, VHA created a database to capture all consults systemwide and, after reviewing these data, determined that the data were inadequate for monitoring consults. One issue identified was the lack of standard processes and uses of the electronic consult system across VHA. For example, in addition to requesting consults for clinical concerns, the system was also being used to request and manage a variety of administrative tasks, such as requesting patient travel to appointments. Additionally, VHA could not accurately determine whether patients actually received the care they needed or if they received the care in a timely fashion. According to VHA officials, approximately 2 million consults (both clinical and administrative consults) were unresolved for more than 90 days. Subsequently, VA's Under Secretary for Health convened a task force to address these and other issues regarding VHA's consult system, among other things. In response to task force recommendations, in May 2013, VHA launched the Consult Management Business Rules Initiative to standardize aspects of the consult process, with the goal of developing consistent and reliable information on consults across all VAMCs. This initiative requires VAMCs to complete four specific tasks between July 1, 2013, and May 1, 2014: Review and properly assign codes to consistently record consult requests in the consult system; Assign distinct identifiers in the electronic consult system to differentiate between clinical and administrative consults; Develop and implement strategies for requesting and managing requests for consults that are not needed within 90 days--known as "future care" consults; and Conduct a clinical review as warranted, and as appropriate, close all unresolved consults--those open more than 90 days. At the time of our December 2012 review, VHA measured outpatient medical appointment wait times as the number of days elapsed from the patient's or provider's desired date, as recorded in the VistA scheduling system by VAMCs' schedulers. In fiscal year 2012, VHA had a goal of completing new and established patient specialty care appointments within 14 days of the desired date. VHA established this goal based on its performance reported in previous years. To facilitate accountability for achieving its wait time goals, VHA includes wait time measures--referred to as performance measures--in its Veterans Integrated Service Network (VISN) directors' and VAMC directors' performance contracts, and VA includes measures in its budget submissions and performance reports to Congress and stakeholders. The performance measures, like wait time goals, have changed over time. Officials at VHA's central office, VISNs, and VAMCs all have oversight responsibilities for the implementation of VHA's scheduling policy. For example, each VAMC director, or designee, is responsible for ensuring that clinics' scheduling of medical appointments complies with VHA's scheduling policy and for ensuring that any staff who can schedule medical appointments in the VistA scheduling system have completed the required VHA scheduler training. In addition to the scheduling policy, VHA has a separate directive that establishes policy on the provision of telephone service related to clinical care, including facilitating telephone access for medical appointment management. Our ongoing work identified examples of delays in veterans receiving requested outpatient specialty care at the five VAMCs we reviewed. VAMC officials cited increased demand for services, and patient no- shows and cancelled appointments, among the factors that hinder their ability to meet VHA's guideline for completing consults within 90 days. Specifically, several VAMC officials discussed a growing demand for both gastroenterology procedures, such as colonoscopies, as well as consultations for physical therapy evaluations. Additionally, officials noted that due to difficulty in hiring and retaining specialists for these two clinical areas, they have developed periodic backlogs in providing services. Officials at these facilities indicated that they try to mitigate backlogs by referring veterans for care with non-VA providers. However, this strategy does not always prevent delays in veterans receiving timely care. For example, officials from two VAMCs told us that non-VA providers are not always available. Examples of consults that were not completed in 90 days include: For 3 of 10 gastroenterology consults we reviewed for one VAMC, we found that between 140 and 210 days elapsed from the dates the consults were requested to when the patient received care. For the consult that took 210 days, an appointment was not available and the patient was placed on a waiting list before having a screening colonoscopy. For 4 of the 10 physical therapy consults we reviewed for one VAMC, we found that between 108 and 152 days elapsed, with no apparent actions taken to schedule an appointment for the veteran. The patients' files indicated that due to resource constraints, the clinic was not accepting consults for non-service-connected physical therapy evaluations. In 1 of these cases, several months passed before the veteran was referred to non-VA care, and he was seen 252 days after the initial consult request. In the other 3 cases, the physical therapy clinic sent the consults back to the requesting provider, and the veterans did not receive care for that consult. For all 10 of the cardiology consults we reviewed for one VAMC, we found that staff initially scheduled patients for appointments between 33 and 90 days after the request, but medical files indicated that patients either cancelled or did not show for their initial appointments. In several instances patients cancelled multiple times. In 4 of the cases VAMC staff closed the consults without the patients being seen; in the other 6 cases VAMC staff rescheduled the appointments for times that exceeded the 90-day timeframe. Our ongoing work also identified variation in how the five VAMCs we reviewed have implemented key aspects of VHA's business rules, which limits the usefulness of the data in monitoring and overseeing consults systemwide. As previously noted, VHA's business rules were designed to standardize aspects of the consult process, thus creating consistency in VAMCs' management of consults. However, VAMCs have reported variation in how they are implementing certain tasks required by the business rules. For example, VAMCs have developed different strategies for managing future care consults--requests for specialty care appointments that are not clinically needed for more than 90 days. At one VAMC, officials reported that specialty care providers have been instructed to discontinue consults for appointments that are not needed within 90 days and requesting providers are to track these consults outside of the electronic consult system and resubmit them closer to the date the appointment is needed. These consults would not appear in VHA's systemwide data once they have been discontinued. At another VAMC, officials stated that appointments for specialty care consults are scheduled regardless of whether the appointments are needed beyond 90 days. These future care consults would appear in VHA consult data and would eventually appear on a timeliness report as consults open greater than 90 days. Officials from this VAMC stated that they continually have to explain to VISN officials who monitor the VAMC's consult timeliness that these open consults do not necessarily mean that care has been delayed. Officials from another VAMC reported piloting a strategy in its gastroenterology clinic where future care consults are entered in an electronic system separate from the consult and appointment scheduling systems. Approximately 30 to 60 days before the care is needed the requesting provider is notified to enter the consult request in the electronic consult system for the specialty care provider to complete. In addition, oversight of the implementation of VHA's business rules has been limited and has not included independent verification of VAMC actions. VAMCs were required to self-certify completion of each of the four tasks outlined in the business rules. VISNs were not required to independently verify that VAMCs appropriately completed the tasks. Without independent verification, VHA cannot be assured that VAMCs implemented the tasks correctly. Furthermore, VHA did not require that VAMCs document how they addressed unresolved consults that were open greater than 90 days, and none of the five VAMCs in our review were able to provide us with specific documentation in this regard. VHA officials estimated that as of April 2014, about 450,000 of the approximately 2 million consults (both clinical and administrative consults) remained unresolved systemwide. VAMC officials noted several reasons that consults were either completed or discontinued in this process of addressing unresolved consults, including improper recording of consult notes, patient cancellations, and patient deaths. At one of the VAMCs we reviewed, a specialty care clinic discontinued 18 consults the same day that a task for addressing unresolved consults was due. Three of these 18 consults were part of our random sample, and our review found no indication that a clinical review was conducted prior to the consults being discontinued. Ultimately, the lack of independent verification and documentation of how VAMCs addressed these unresolved consults may have resulted in VHA consult data that inaccurately reflected whether patients received the care needed or received it in a timely manner. Although VHA's business rules were intended to create consistency in VAMCs' consult data, our preliminary observations identified variation in managing key aspects of consult management that are not addressed by the business rules. For example, there are no detailed systemwide VHA policies on how to handle patient no-shows and cancelled appointments, particularly when patients repeatedly miss appointments, which may make VAMCs' consult data difficult to assess. For example, if a patient cancels multiple specialty care appointments, the associated consult would remain open and could inappropriately suggest delays in care. To manage this type of situation, one VAMC developed a local consult policy referred to as the "1-1-30" rule. The rule states that a patient must receive at least 1 letter and 1 phone call, and be granted 30 days to contact the VAMC to schedule a specialty care appointment. If the patient fails to do so within this time frame, the specialty care provider may discontinue the consult. According to VAMC officials, several of the consults we reviewed would have been discontinued before reaching the 90-day threshold if the 1-1-30 rule had been in place at the time. Three VAMCs included in our review also noted some type of policy addressing patient no-shows and cancelled appointments, each of which varied in its requirements. Without a standard policy across VHA addressing patient no-shows and cancelled appointments, VHA consult data may reflect numerous variations of how VAMCs handle patient no-shows and cancelled appointments. In December 2012, we reported that VHA's reported outpatient medical appointment wait times were unreliable and that inconsistent implementation of VHA's scheduling policy may have resulted in increased wait times or delays in scheduling timely outpatient medical appointments. Specifically, we found that VHA's reported wait times were unreliable because of problems with recording the appointment desired date in the scheduling system. Since, at the time of our review, VHA measured medical appointment wait times as the number of days elapsed from the desired date, the reliability of reported wait time performance was dependent on the consistency with which VAMC schedulers recorded the desired date in the VistA scheduling system. However, VHA's scheduling policy and training documents were unclear and did not ensure consistent use of the desired date. Some schedulers at VAMCs that we visited did not record the desired date correctly. For example, the desired date was recorded based on appointment availability, which would have resulted in a reported wait time that was shorter than the patient actually experienced. At each of the four VAMCs we visited, we also found inconsistent implementation of VHA's scheduling policy, which impeded scheduling of timely medical appointments. For example, we found the electronic wait list was not always used to track new patients that needed medical appointments as required by VHA scheduling policy, putting these patients at risk for delays in care. Furthermore, VAMCs' oversight of compliance with VHA's scheduling policy, such as ensuring the completion of required scheduler training, was inconsistent across facilities. VAMCs also described other problems with scheduling timely medical appointments, including VHA's outdated and inefficient scheduling system, gaps in scheduler and provider staffing, and issues with telephone access. For example, officials at all VAMCs we visited reported that high call volumes and a lack of staff dedicated to answering the telephones affected their ability to schedule timely medical appointments. VA concurred with the four recommendations included in our December 2012 report and reported continuing actions to address them. First, we recommended that the Secretary of VA direct the Under Secretary for Health to take actions to improve the reliability of its outpatient medical appointment wait time measures. In response, VHA officials stated that they implemented more reliable measures of patient wait times for primary and specialty care. In fiscal years 2013 and 2014, primary and specialty care appointments for new patients have been measured using time stamps from the VistA scheduling system to report the time elapsed between the date the appointment was created--instead of the desired date--and the date the appointment was completed. VHA officials stated that they made the change from using desired date to creation date based on a study that showed a significant association between new patient wait times using the date the appointment was created and self-reported patient satisfaction with the timeliness of VHA appointments. VA, in its FY 2013 Performance and Accountability Report, reported that VHA completed 40 percent of new patient specialty care appointments within 14 days of the date the appointment was created in fiscal year 2013; in contrast, VHA completed 90 percent of new patient specialty care appointments within 14 days of the desired date in fiscal year 2012. VHA also modified its measurement of wait times for established patients, keeping the appointment desired date as the starting point, and using the date of the pending scheduled appointment, instead of the date of the completed appointment, as the end date for both primary and specialty care. VHA officials stated that they decided to use the pending appointment date instead of the completed appointment date because the pending appointment date does not include the time accrued by patient no-shows and cancelled appointments. Second, we recommended that the Secretary of VA direct the Under Secretary for Health to take actions to ensure VAMCs consistently implement VHA's scheduling policy and ensure that all staff complete required training. In response, VHA officials stated that the department is in the process of revising the VHA scheduling policy to include changes, such as the new methodology for measuring wait times, and improvements and standardization of the use of the electronic wait list. In the interim, VHA distributed guidance, via memo, to VAMCs in March 2013 describing this information and also offered webinars to VHA staff on eight dates in April and May of 2013. To assist VISNs and VAMCs in the task of verifying that all staff have completed required scheduler training, VHA has developed a database that will allow a VAMC to identify all staff that have scheduled appointments and the volume of appointments scheduled by each; VAMC staff can then compare this information to the list of staff that have completed the required training. However, VHA officials have not established a target date for when this database would be made available for use by VAMCs. Third, we recommended that the Secretary of VA direct the Under Secretary for Health to take actions to require VAMCs to routinely assess scheduling needs for purposes of allocation of staffing resources. VHA officials stated that they are continuing to work on identifying the best methodology to carry out this recommendation, but stated that the database that tracks the volume of appointments scheduled by individual staff also may prove to be a viable tool to assess staffing needs and the allocation of resources. VHA officials stated that they needed to discuss further how VAMCs could use this tool, and that they had not established a targeted completion date for actions to address this recommendation. Finally, we recommended that the Secretary of VA direct the Under Secretary for Health to take actions to ensure that VAMCs provide oversight of telephone access, and implement best practices to improve telephone access for clinical care. In response, VHA required each VISN director to require VAMCs to assess their current telephone service against the VHA telephone improvement guide and to electronically post an improvement plan with quarterly updates. VAMCs are required to routinely update progress on the improvement plan. VHA officials cited improvement in telephone response and call abandonment rates since VAMCs were required to implement improvement plans. Additionally, VHA officials said that the department has also contracted with an outside vendor to assess VHA's telephone infrastructure and business process. VHA expects to receive the first report in approximately 2 months. Although VA has initiated actions to address our recommendations, we believe that continued work is needed to ensure these actions are fully implemented in a timely fashion. Furthermore, it is important that VA assess the extent to which these actions are achieving improvements in medical appointment wait times and scheduling oversight as intended. Ultimately, VHA's ability to ensure and accurately monitor access to timely medical appointments is critical to ensuring quality health care to veterans, who may have medical conditions that worsen if access is delayed. Chairman Miller, Ranking Member Michaud, 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 Bonnie Anderson, Assistant Director; Janina Austin, Assistant Director; Rebecca Abela; Jennie Apter; Jacquelyn Hamilton; David Lichtenfeld; Brienne Tierney; and Ann Tynan. 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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Access to timely medical appointments is critical to ensuring that veterans obtain needed medical care. Over the past few years there have been numerous reports of VAMCs failing to provide timely care to patients, including specialty care, and in some cases, these delays have resulted in harm to patients. In December 2012, GAO reported that improvements were needed in the reliability of VHA's reported medical appointment wait times, as well as oversight of the appointment scheduling process. Also in 2012, VHA found that systemwide consult data could not be adequately used to determine the extent to which veterans experienced delays in receiving outpatient specialty care. In May 2013, VHA launched the Consult Management Business Rules Initiative with the aim of standardizing aspects of the consults process. This testimony highlights (1) preliminary observations from GAO's ongoing work related to VHA's management of outpatient specialty care consults, and (2) concerns GAO raised in its December 2012 report regarding VHA's outpatient medical appointment scheduling, and progress made implementing GAO's recommendations. To conduct this work, GAO reviewed documents and interviewed officials from VHA's central office. Additionally, GAO interviewed officials from five VAMCs for the consults work and four VAMCs for the scheduling work that varied based on size, complexity, and location. GAO shared the information it used to prepare this statement with VA and incorporated its comments as appropriate. GAO's ongoing work examining VHA's management of outpatient specialty care consults identified examples of delays in veterans receiving outpatient specialty care, as well as limitations in the Department of Veterans Affairs' (VA), Veterans Health Administration's (VHA) implementation of new consult business rules designed to standardize aspects of the clinical consult process. For example, for 4 of the 10 physical therapy consults GAO reviewed for one VAMC, between 108 and 152 days elapsed with no apparent actions taken to schedule an appointment for the veteran. For 1 of these consults, several months passed before the veteran was referred for care to a non-VA health care facility. VA medical center (VAMC) officials cited increased demand for services, and patient no-shows and cancelled appointments among the factors that lead to delays and hinder their ability to meet VHA's guideline of completing consults within 90 days of being requested. GAO's ongoing work also identified variation in how the five VAMCs reviewed have implemented key aspects of VHA's business rules, such as strategies for managing future care consults--requests for specialty care appointments that are not clinically needed for more than 90 days. Such variation may limit the usefulness of VHA's data in monitoring and overseeing consults systemwide. Furthermore, oversight of the implementation of the business rules has been limited and did not include independent verification of VAMC actions. Because this work is ongoing, we are not making recommendations on VHA's consult process at this time. In December 2012, GAO reported that VHA's outpatient medical appointment wait times were unreliable. The reliability of reported wait time performance measures was dependent in part on the consistency with which schedulers recorded desired date--defined as the date on which the patient or health care provider wants the patient to be seen--in the scheduling system. However, VHA's scheduling policy and training documents were unclear and did not ensure consistent use of the desired date. GAO also reported that inconsistent implementation of VHA's scheduling policy may have resulted in increased wait times or delays in scheduling timely medical appointments. For example, GAO identified clinics that did not use the electronic wait list to track new patients in need of medical appointments as required by VHA policy, putting these patients at risk for not receiving timely care. VA concurred with the four recommendations included in the report and, in April 2014, reported continued actions to address them. For example, in response to GAO's recommendation for VA to take actions to improve the reliability of its medical appointment wait time measures, officials stated the department has implemented new patient wait time measures that no longer rely on desired date recorded by a scheduler. VHA officials stated that the department also is continuing to address GAO's three additional recommendations. Although VA has initiated actions to address GAO's recommendations, continued work is needed to ensure these actions are fully implemented in a timely fashion. Ultimately, VHA's ability to ensure and accurately monitor access to timely medical appointments is critical to ensuring quality health care to veterans, who may have medical conditions that worsen if access is delayed.
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Before I discuss these issues in detail, let me sketch the background of the EAS and SCASDP programs. Mr. Chairman, as you know, Congress established EAS as part of the Airline Deregulation Act of 1978 to help areas that face limited service. The act guaranteed that for 10 years communities served by air carriers before deregulation would continue to receive a certain level of scheduled air service by authorizing DOT to require carriers to continue providing service at these communities. If an air carrier could not continue that service without incurring a loss, DOT could then use EAS funds to award that carrier a subsidy. In 1987, Congress extended the program for another 10 years, and in 1998, it eliminated the sunset provision, thereby permanently authorizing EAS. To be eligible for this subsidized service, communities must meet three general requirements. They (1) must have received scheduled commercial passenger service as of October 1978, (2) may be no closer than 70 highway miles to a medium- or large-hub airport, and (3) must require a subsidy of less than $200 per person (unless the community is more than 210 highway miles from the nearest medium- or large-hub airport, in which case no average per-passenger dollar limit applies). Air carriers apply to DOT for EAS subsidies. DOT selects a carrier and sets a subsidy amount to cover the difference between the carrier's projected cost of operation and its expected passenger revenues, while providing the carrier with a profit element equal to 5 percent of total operating expenses, according to statute. Funding for EAS has come from a combination of permanent and annual appropriations. The Federal Aviation Reauthorization Act of 1996 (P.L. 104-264) permanently appropriated the first $50 million of such funding-- for EAS and safety projects at rural airports--from the collection of overflight fees. Congress has appropriated additional funds from the general fund on an annual basis. The Department of Transportation's reauthorization proposal suggests changing the source of program funding to a mandatory appropriation of $50 million per year from the Airport and Airway Trust Fund. A new, small aviation fuel tax would be used to generate this $50 million. Furthermore, according to DOT officials, since $50 million would not sufficiently support all currently subsidized service, communities would be ranked in order of isolation, with Alaskan communities at the top of the list. Thus, some of the EAS communities currently receiving EAS subsidies under the roughly $100 million Congress has appropriated in recent years, might no longer receive air service. Turning now to SCASDP, Congress authorized it as a pilot program in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21), to help small communities enhance their air service. AIR-21 authorized the program for fiscal years 2002 and 2003, and subsequent legislation reauthorized the program through fiscal year 2008 and eliminated the "pilot" status of the program. The Office of Aviation Analysis in DOT's Office of the Secretary is responsible for administering the program. The law establishing SCASDP allows DOT considerable flexibility in implementing the program and selecting projects to be funded. The law defines basic eligibility criteria and statutory priority factors, but meeting a given number of priority factors does not automatically mean DOT will select a project. SCASDP grants may be made to single communities or a consortium of communities, although no more than four grants each year may be in the same state. Both small hubs and non hubs are eligible for this program. Thus, small hubs, such as Buffalo Niagara International Airport in Buffalo, New York, which enplaned over 2.4 million passengers in 2005, and small, nonhub airports, such in Moab, Utah (with about 2,600 enplanements) are eligible. SCASDP grants are available in the 50 states, the District of Columbia, Puerto Rico, and U.S. territories and possessions. DOT's SCASDP awards have been geographically dispersed. Figure 1 shows the location of all SCASDP grants awarded as of August 31, 2006, as well as communities receiving EAS subsidies as of April 1, 2007. Mr. Chairman, as you know EAS provides service to many communities that otherwise would not receive air service. However, the increase in the number of communities receiving subsidies and the cost of these subsidies raise concerns over the funding needed to provide this service in an environment of federal deficits. For example, the funding for EAS has grown from $25.9 million in 1997 to $109.4 million in 2007. Furthermore, the federal median subsidy for providing air service to EAS communities is about $98 per passenger; the subsidies varied among communities from about $13 to over $677 per passenger in 2006. Finally, the number of air carriers flying smaller aircraft suitable for EAS communities may decrease and some industry officials are beginning to voice concerns about the availability of appropriate planes to provide small community air service in the future. In fiscal year 2007, EAS provided subsidies to 145 communities. In fiscal year 2005, the most recent year for which passenger data is available, the EAS program supported over 1 million passengers. As we have noted in past reports, if EAS subsidies were removed, air service might end at many small communities. Since air carriers have to show financial data to support a subsidy calculation--proving the service is not profitable to run--it is likely that if the subsidy is no longer available commercial air service would end. Several factors may help explain why some small communities, especially nonhubs, face relatively limited air service. First, small communities can become cost-cutting targets of air carriers because they are often a carrier's least profitable operation. Consequently, many network carriers have cut service to small communities, replaced by regional carriers. Second, the "Commuter Rule" that FAA enacted in 1995 brought small commuter aircraft under the same safety standards as larger aircraft--a change that made it more difficult to economically operate smaller aircraft, such as 19-seat turboprops. For example, the Commuter Rule required commuter air carriers that flew aircraft equipped with 10 or more seats to improve ground deicing programs and carry additional passenger safety equipment. Additionally, the 2001 Aviation and Transportation Security Act instituted the same security requirements for screening passengers at smaller airports as it did for larger airports, sometimes making travel from small airports less convenient than it had been. Third, regional carriers have used fewer turboprops in favor of regional jets, which had a negative effect on small communities that have not generated the passenger levels needed to support regional jet service. Finally, many small communities experience passenger "leakage"--that is, passengers choosing to drive longer distances to larger airports instead of using closer small airports. Low-cost carriers have generally avoided flying to small communities but have offered low fares that encourage passengers to drive longer distances to take advantage of them. Mr. Chairman, although less than the 405 communities served with the help of EAS subsidies in 1980, the number of communities served by EAS has grown over the past 10 years, as has the amount of funds appropriated for the program. As shown in table 1, for fiscal year 2007, EAS is providing subsidies to air carriers to serve 145 communities--an increase of 50 communities over the 1997 low point. The funding for EAS has also grown from $25.9 million in 1997 to $109.4 million in 2007. Excluding Alaska, this amounts to an average of about $754,500 per EAS community in fiscal year 2007. Appendix I lists EAS communities and their current subsidy amounts. While the total number of communities receiving service through EAS subsidies has generally increased, some communities have dropped from the program. For example, according to DOT officials 11 communities that had EAS subsidized service in 2006 were no longer in the program in 2007. Four of these were terminated by DOT because their subsidy rose above the EAS cap--Bluefield, WV; Enid, OK; Moses Lake, WA; and Ponca City, OK. Seven communities secured non-subsidized service. These communities included Hana, HI; Kalaupapa, HI; Kamuela, HI; Pierre, SD; Riverton, WY; Rock Springs, WY; and Sheridan, WY. The level of subsidy per passenger at EAS communities varies greatly. At some locations, the level of subsidy per passenger is modest. For example, in 2006, of the 110 airports receiving EAS service for which data were available, 30 communities had subsidies of less than $50 per passenger. Some communities with relatively low subsidies per passenger included Escanaba, MI ($12.96) and Morgantown, WV ($13.68) both with almost 36 passengers per day. In contrast, 30 communities also had subsidies per passenger greater than $200. The highest subsidy at that time was $677 for Brookings, SD, and Lewistown, MT had an average subsidy of almost $473. These two areas had fewer than 3 passengers per day. Airports may maintain EAS service when subsidies exceed $200 dollars if they are more than 210 highway miles from a large or medium hub. As would be expected, a low number of passengers are associated with high subsidies. Of the 110 airports receiving EAS service for which data were available, 17 airports had fewer than 5 passengers per day. Such airports typically have a subsidy per passenger greater than $200--15 of the 17 exceed the $200 threshold. Communities with less than 5 passengers per day also constitute half those with subsidies exceeding $200 (15 of 30). In contrast, 47 communities had at least 20 passengers per day, more than the capacity of a single 19-seat aircraft flight. All 47 of these airports had subsidies of less than $100 per passenger. See Appendix II for EAS Subsidies per Enplanement. DOT and industry officials we interviewed raised questions about the future of the EAS service as currently provided. As of April 1, 2007, 12 regional air carriers served the subsidized communities in the continental United States. The carriers serving the communities in the continental United States typically used turboprop aircraft seating 19 passengers, whereas in Alaska and Puerto Rico, the most commonly used aircraft seated 4 to 9 passengers. DOT and industry officials pointed out that 19-seat aircraft are no longer being manufactured, and some of the current EAS carriers appear to be migrating to the use of larger aircraft. DOT officials noted that EAS carriers are getting out of the business that uses 19-seat aircraft, and are moving into larger aircraft. In addition, industry consultants noted that as the current fleet of 19-seat aircraft ages, maintenance costs will likely rise, which will make operating 19-seat aircraft more expensive. Because 19- seat aircraft are the backbone of EAS service in the contiguous 48 states, their aging or discontinuation would significantly affect the program. Figure 2 shows an example of a 19-seat Turbo Prop aircraft commonly used to provide EAS service. Finally, DOT and industry officials with whom we spoke were not convinced that the emerging technology of Very Light Jets (VLJs) could fill this gap, especially in the short term. They noted that current business models discussed for VLJs did not anticipate their use for the kind of small communities served by EAS. DOT did provide a SCASDP grant to Bismarck, ND for developing a business model for point to point, reservation responsive air service using VLJs. The grantee has developed the business plan; however, given the lack of operating VLJs, they changed the type of aircraft the business would use until the aircraft become more available. We will be completing a more comprehensive report on VLJs for the subcommittee later this year. Mr. Chairman, we found that SCASDP grantees pursued several goals and strategies to improve air service, and that air service was sustained after the grant expired in a little less than half of the 23 completed projects in 2005--the time of our initial review. The DOT IG's office began reviewing completed grants in March 2007 which should provide more information on the results of completed grants. Although the program has seen some success, the number of applications for SCASDP grants has declined for a variety of reasons. At the time of our initial review of SCASDP, in 2005, it was too soon to determine the overall effectiveness of the program because there was not much information available about the "post" grant period. Once awarded, it may take several years for grants to be implemented and completed. There have been 182 grant awards made in the 5 years of the program. Of these, 74 grants are completed as of April 1, 2007--34 from 2002, 19 from 2003, and 21 from 2004. No grants from 2005 or 2006 are yet completed. In addition, as of April 4, 2007, DOT had terminated seven grants it initially awarded. See Appendix III for a list of all SCASDP grants from 2002 through 2006. Our review of the 23 projects completed by September 30, 2005, found some successful results. The kinds of improvements in service that resulted from the grants included adding an additional air carrier, destination, or flights; or changing the type of aircraft serving the community. In terms of numbers, airport officials reported that 19 of the 23 grants resulted in service or fare improvements during the life of the grant (see fig.3). In addition, during the course of the grant, enplanements rose at 19 of the 23 airports. After the 23 SCASDP grants were completed, 14 resulted in improvements that were still in place. Three of these improvements were not self-sustaining; thus 11 self-sustaining improvements were in place after the grants were completed. Since our review of the 23 completed projects, 51 more have been completed for a total of 74. We reviewed the fifty-nine available final reports. A review of the grantees' final reports for these projects indicated that 48 increased enplanements as a result of their SCASDP grant. For SCASDP grants DOT awarded from 2002 though 2004, we surveyed airport officials to identify the goals they had for their grants. We found that grantees had identified a variety of project goals to improve air service to their community. These goals included adding flights, airlines, and destinations; lowering fares; upgrading the aircraft serving the community; obtaining better data for planning and marketing air service; increasing enplanements; and curbing the loss of passengers to other airports. (See fig. 4 for the number and types of project goals identified by airport directors.) Finally, in our 2005 report, we recommended DOT evaluate the SCASDP grants after more were completed to identify promising approaches and evaluate the effectiveness of the program. DOT officials told us that they asked the DOT IG to conduct such a study, which the IG began in March 2007. DOT expects to have preliminary observations available by the middle of May. Results from this work may help identify potential improvements and "lessons learned." To achieve their goals, grantees have used many strategies, including subsidies and revenue guarantees to the airlines, marketing, hiring personnel and consultants, and establishing travel banks in which a community guarantees to buy a certain number of tickets. (See fig. 5.) In addition, other strategies that grantees have used are subsidizing the start- up of an airline, taking over ground station operations for an airline, and subsidizing a bus to transport passengers from their airport to a hub airport. Incorporating marketing as part of the project was the most common strategy used by airports. Some airline officials said that marketing efforts are important for the success of the projects. Airline officials also told us that projects that provide direct benefits to an airline, such as revenue guarantees and financial subsidies, have the greatest chance of success. According to these officials, such projects allow the airline to test the real market for air service in a community without enduring the typical financial losses that occur when new air service is introduced. They further noted that, in the current aviation economic environment, carriers cannot afford to sustain losses while they build up passenger demand in a market. The outcomes of the grants may be affected by broader industry factors that are independent of the grant itself, such as a decision on the part of an airline to reduce the number of flights at a hub. Since the inception of the program, there has been a steady decline in the number of applications. In 2002 (the first year SCASDP was funded) DOT received 179 applications for grants; and by 2006 the number of applications had declined to 75. Grant applications for 2007 are not due until April 27, 2007. According to a DOT official, almost all applications arrive on the last day, so the number of 2007 applications cannot be estimated at this time. DOT officials said that the past decline was, in part, a consequence of several factors, including: (1) many eligible airport communities had received a grant and were still implementing projects at the time; (2) the airport community as a whole was coming to understand the importance DOT places on fulfilling the local contribution commitment part of the grant proposal; and (3) statutory changes in 2003 that prohibited communities or consortiums from receiving more than one grant for the same project, and that established the timely use of funds as a priority factor in awarding grants. According to DOT officials, DOT has interpreted that a project is the "same project" if it employs the same strategy. For example, once a community has used a revenue guarantee, it cannot use a revenue guarantee on another project. A DOT official noted that, with many communities now completing their grants, they may choose to apply for another grant. Some communities have received second grants; however DOT officials indicate first time applicants get more weight in the grant selection process. Revisiting selection criteria may increase the access to SCASDP grants and increase service to small communities. Mr. Chairman, let me now turn to a discussion of options both for the reform of EAS and the evaluation of SCASDP. I raise these options, in part, because they link to our report on the challenges facing the federal government in the 21st century, which notes that the federal government's long-term fiscal imbalance presents enormous challenges to the nation's ability to respond to emerging forces reshaping American society, the United States' place in the world, and the future role of the federal government. In that report, we call for a more fundamental and periodic reexamination of the base of government, ultimately covering discretionary and mandatory programs as well as the revenue side of the budget. In other words, Congress will need to make difficult decisions including defining the role of the federal government in various sectors of our economy and identifying who will benefit from its allocation of resources. Furthermore, given that we have reported that subsidies paid directly to air carriers have not provided an effective transportation solution for passengers in many small communities, these programs may be ones for which Congress may wish to weigh options for reforming EAS and assess SCASDP's effectiveness once DOT completes its review of the program. In previous work, we have identified options for enhancing EAS and controlling cost increases. These options include targeting subsidized service to more remote communities than is currently the case, improving the matching of capacity with community use, consolidating service to multiple communities into regional airports, and changing the form of federal assistance from carrier subsidies to local grants; all of these options would require legislative changes. Several of these options formed the basis for reforms passed as part of Vision-100. For various reasons these pilot programs have not progressed, so it is not possible to assess their impact. Let me now briefly discuss each option, stressing at the outset that each presents potential negative, as well as positive, impacts. The changes might positively affect the federal government through lowered federal costs, and participating communities through increased passenger traffic at subsidized communities, and enhanced community choice of transportation options. Communities that could be negatively affected might include those in which passengers receive less service or might lose scheduled airline service. One option would be to target subsidized service to more remote communities. This option would mean increasing the highway distance criteria between EAS-eligible communities and the nearest qualifying airport, and expanding the definition of qualifying nearby airports to include small hubs. Currently, to be eligible for EAS-subsidized service, a community must be more than 70 highway miles from the nearest medium- or large-hub airport. In examining EAS communities, we found that, if the distance criterion were increased to 125 highway miles and the qualifying airports were expanded to include small-hub airports with jet service, 55 EAS-subsidized communities would no longer qualify for subsidies--and travelers at those communities would need to drive to the nearby larger airport to access air service. Limiting subsidized service to more remote communities could potentially save federal subsidies. For example, we found that about $24 million annually could be saved if service were terminated at 30 EAS airports that were within 125 miles of medium- or large-hub airports. This estimate assumed that the total subsidies in effect in 2006 at the communities that might lose their eligibility would not be obligated to other communities and that those amounts would not change over time. On the other hand, the passengers who now use subsidized service at such terminated airports would be inconvenienced because of the increased driving required to access air service at the nearest hub airport. In addition, implementing this option could potentially negatively impact the economy of the affected communities. The administration's reauthorization proposal also would prioritize isolated communities, but in a somewhat different way. Under its approach, if insufficient funding for all communities exists, the communities would be ranked in terms of driving distance to a medium or large hub, with the more isolated communities receiving funding before less isolated communities. This change would protect isolated communities, but could result in subsidies being terminated for communities with relatively low per passenger subsidies. Another option is to better match capacity with community use. Our past analysis of passenger enplanement data indicated that relatively few passengers fly in many EAS markets, and that, on average, most EAS flights operate with aircraft that are largely empty. In 2005, the most recent year for which data are available, 17 EAS airports averaged fewer than 5 passenger boardings per day. To better match capacity with community use, air carriers could reduce unused capacity--either by using smaller aircraft or by reducing the number of flights. Better matching capacity with community use could save federal subsidies. For instance, reducing the number of required daily subsidized departures could save federal subsidies by reducing carrier costs in some locations. Federal subsidies could also be lowered at communities where carriers used smaller--and hence less costly--aircraft. On the other hand, there are a number of potential disadvantages. For example, passenger acceptance is uncertain. Representatives from some communities, such as Beckley, West Virginia, told us that passengers who are already somewhat reluctant to fly on 19-seat turboprops would be even less willing to fly on smaller aircraft. Such negative passenger reaction may cause more people to drive to larger airports--or simply drive to their destinations. Additionally, the loss of some daily departures at certain communities would likely further inconvenience some passengers. Lastly, reduced capacity may have a negative impact on the economy of the affected community. Another option is to consolidate subsidized service at multiple communities into service at regional airports. For example, in 2002 we found that 21 EAS subsidized communities were located within 70 highway miles of at least one other subsidized community. We reported that if subsidized service to each of these communities were regionalized, 10 regional airports could serve those 21 communities. Regionalizing service to some communities could generate federal savings. However, those savings may be marginal, because the total costs to serve a single regional airport may be only slightly less than the cost to serve other neighboring airports. The marginal cost of operating the flight segments to the other airports may be small in relation to the cost of operating the first flight. Another potential positive effect is that passenger levels at the proposed regional airports could grow because the airline(s) would be drawing from a larger geographic area, which could prompt the airline(s) to provide better service (i.e., larger aircraft or more frequent departures). There are also a number of disadvantages to implementing this option. First, some local passengers would be inconvenienced, since they would likely have to drive longer distances to obtain local air service. Moreover, the passenger response to regionalizing local air service is unknown. Passengers faced with driving longer distances may decide that driving to an altogether different airport is worthwhile, if it offers better service and air fares. As with other options, the potential impact of regionalization on the economy of the affected communities is unknown. Regionalizing air service has sometimes proven controversial at the local level, in part because regionalizing air service would require some communities to give up their own local service for the potentially improved service at a less convenient regional facility. Even in situations where one airport is larger and better equipped than others (e.g., where one airport has longer runways, a superior terminal facility, and better safety equipment on site), it is likely to be difficult for the other communities to recognize and accept surrendering their local control and benefits. Some industry officials to whom we spoke indicated regional airports made sense, but selecting the airports would be highly controversial. Another option is to change carrier subsidies into local grants. We have noted that local grants could enable communities to match their transportation needs with individually tailored transportation options to connect them to the national air space system. As we previously discussed, DOT provides grants to help small communities to enhance their air service via SCASDP. Our work on SCASDP identified some positive aspects of the program that could be beneficial for EAS communities. First, for communities to receive a SCASDP grant, they had to develop a proposal that was directed at improving air service locally. In our discussion with some of these communities, it was noted that this approach required them to take a closer look at their air service and better understand the market they serve--a benefit that they did not foresee. In addition, in some cases developing the proposal caused the airport to build a stronger relationship with the community. SCASDP also allows for flexibility in the strategy a local community can choose to improve air service, recognizing that local facts and circumstances affect the chance of a successful outcome. In contrast, EAS has one approach--a subsidy to an air carrier. However, there are also differences between the two programs that make the grant approach problematic for some EAS communities; these differences should be considered. First, because SCASDP grants are provided on a one-time basis, their purpose is to create self-sustaining air service improvements. The grant approach is therefore best applicable where a viable air service market can be developed. This viability could be difficult for EAS communities to achieve because, currently, the service they receive is not profitable unless there is a subsidy. While some EAS communities might be able to transition to self-sustaining air service through use of one of the grants, for some communities this would not be the case. Such communities would need a new grant each year. In addition, the grant approach normally includes a local cash match, which may be difficult for some EAS communities to provide. This approach could systematically eliminate the poorest communities, unless other sources of funds--such as state support or local industry support--could be found for the match, or some provision for economically distressed communities is made. Congress authorized several pilot programs and initiatives designed to improve air service to small communities in Vision-100. These programs and initiatives have not progressed for various reasons. In two cases, communities have not indicated interest in the programs. In one instance Congress decided to prevent DOT from implementing the program. In three cases, DOT officials cited a lack of sufficient funds to implement the programs. Vision-100 authorized the Community Flexibility Pilot Program, which requires the Secretary of Transportation to establish a program for up to 10 communities that agree to forgo their EAS subsidy for 10 years in exchange for a grant twice the amount of one year's EAS subsidy. The funds may be used to improve airport facilities. DOT has solicited proposals for this program; however, according to a DOT official, no communities expressed any interest in participating. This is likely because no community was willing to risk the loss of EAS subsidies for 10 years in exchange for only 2 years of funding. Likewise, the Alternate Essential Air Service Pilot Program, which allows the Secretary of Transportation to provide assistance directly to a community, rather than paying compensation to the air carrier, elicited no interest from communities. Under the pilot program, communities could provide assistance to air carriers using smaller aircraft, on-demand air taxi service, provide transportation services to and from several EAS communities to a single regional airport or other transportation center, or purchase aircraft. The administration's draft FAA reauthorization bill would repeal these pilot programs. Another program, the EAS Local Participation Program, allows the Secretary of Transportation to select no more than 10 designated EAS communities within 100 miles, by road, of a small hub (and within the contiguous states) to assume 10 percent of their EAS subsidy costs for a 4- year period. However, Congress has prohibited DOT from obligating or expending any funds to implement this program since Vision-100 was enacted. The administration's draft FAA reauthorization bill would repeal this pilot program. Three additional initiatives authorized by Vision-100 have not been implemented, in part due to a lack of dedicated funding. Section 402 of Vision-100 allows DOT to adjust carrier compensation to account for significantly increased costs to carriers. For example, an air carrier that has a contract to provide air service can apply for an adjustment due to an increase in its costs. If this increase is granted, the air carrier has increased its revenue without having to competitively bid for the contract. The initiative also provided for a reversal of this adjustment if the costs subsequently declined. DOT officials indicated that a concern they have with this initiative is that an air carrier could win a 2-year contract with a low estimate, and open it again to obtain more funds without facing competition. Also, the Section 410 marketing incentive program, which could provide grants up to $50,000 to EAS communities to develop and execute a marketing plan to increase passenger boardings and usage of airport facilities, was not implemented. DOT officials explained that with the uncertainty of the number of communities that would need EAS subsidies and the cost of those subsidies, using EAS subsidy funding for this marketing incentive program could put the subsidies at risk. One industry group suggested dedicated funding might improve the use of this program. The administration's draft FAA reauthorization bill would repeal this marketing incentive program. Finally, Section 411 of Vision-100 authorized the creation of a National Commission on Small Community Air Service to recommend how to improve commercial air service to small communities and the ability of small communities to retain and enhance existing air service. This provision was likewise not implemented because funds were not specifically appropriated, according to DOT officials. Such a commission may have been helpful in developing approaches to deal with difficult policy decisions, such as regionalizing air service. DOT plans to host a symposium to bring industry experts together to identify regulatory barriers and develop ideas for improving air service to small communities which may be a step in the right direction. DOT officials acknowledge that this symposium should be held soon to inform reauthorization deliberations. In 2005, we recommended that DOT examine the effectiveness of SCASDP when more projects are complete; and the DOT IG recently began this evaluation. Since our report, an additional 48 grants have been completed and DOT will be able to examine the results from these completed grants. Such an evaluation should provide DOT and Congress with additional information about not only whether additional or improved air service was obtained, but whether it continued after the grant support ended. In addition, our prior work on air service to small communities found that once financial incentives are removed, additional air service may be difficult to maintain. This evaluation should provide a clearer and more complete picture of the value of this program. Any improved service achieved from this program could then be weighed against the cost to achieve those gains. In conducting this evaluation, DOT could find that certain strategies the communities used were more effective than others. For example, during our work, we found some opposing views on the usefulness of certain strategies for attracting improved service. DOT officials could use the results of the DOT IG's evaluation to identify strategies that have been effective in starting self-sustaining improvements in air service and they could share this information with other small community airports and, perhaps, consider such factors in its grant award process. In addition, DOT might find some best practices and could develop some lessons learned from which all small community airports could benefit. For example, one airport used a unique approach of assuming airline ground operations such as baggage handling and staffing ticket counters. This approach served to maintain airline service of one airline and in attracting additional service. In addition, the SCASDP program has shown that there is a strong demand on the part of small community airports to improve enplanements through various marketing strategies. Successful marketing efforts could increase enplanements, thus driving down the per passenger subsidy. Sharing information on approaches like these that worked (and approaches that did not) may help other small communities improve their air service, perhaps even without federal assistance. In conclusion, Mr. Chairman, Congress is faced with many difficult choices as it tries to help improve air service to small communities, especially given the fiscal challenges the nation faces. Regarding EAS, I think it is important to recognize that for many of the communities, air service is not--and might never be--commercially viable and there are limited alternative transportation means for nearby residents to connect to the national air transportation system. In these cases, continued subsidies will be needed to maintain that capability. In some other cases, current EAS communities are within reasonable driving distances to alternative airports that can provide that connection to the air system. It will be Congress' weighing of priorities that will ultimately decide whether this service will continue or whether other, less costly options will be pursued. In looking at SCASDP, I would emphasize that we have seen some instances in which the grant funds provided additional service, and some in which the funds did not work. Enough experience has now been gained with this program for a full assessment, and with that information the Congress will be in a position to determine if the air service gains that are made are worth the overall cost of the program. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact Dr. Gerald L. Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony and related work include Robert Ciszewski, Catherine Colwell, Jessica Evans, Colin Fallon, Dave Hooper, Alex Lawrence, Bonnie Pignatiello Leer, and Maureen Luna-Long. Airport Finance: Preliminary Analysis Indicates Proposed Changes in the Airport Improvement Program May Not Resolve Funding Needs for Smaller Airports. GAO-07-617T Washington, D.C.: March 28, 2007. Commercial Aviation: Programs and Options for the Federal Approach to Providing and Improving Air Service to Small Communities. GAO-06- 398T Washington, D.C.: September 14, 2006. Airline Deregulation: Reregulating the Airline Industry Would Reverse Consumer Benefits and Not Save Airline Pensions. GAO-06-630 Washington, D.C.: June 9, 2006. Commercial Aviation: Initial Small Community Air Service Development Projects Have Achieved Mixed Results. GAO-06-21 Washington, D.C: November 30, 2005 Commercial Aviation: Survey of Small Community Air Service Grantees and Applicants. GAO-06-101SP. Washington, D.C.: November 30, 2005 Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues. GAO-05-945 Washington, D.C.: September 30, 2005 Commercial Aviation: Legacy Airlines Must Further Reduce Costs to Restore Profitability. GAO-04-836 Washington, D.C.: August 11, 2004 Commercial Aviation: Issues Regarding Federal Assistance for Enhancing Air Service to Small Communities. GAO-03-540T. Washington, D.C.: March 11, 2003 Federal Aviation Administration: Reauthorization Provides Opportunities to Address Key Agency Challenges. GAO-03-653T. Washington, D.C.: April l0, 2003 Commercial Aviation: Factors Affecting Efforts to Improve Air Service at Small Community Airports. GAO-03-330 Washington, D.C.: January 17, 2003 Commercial Aviation: Financial Condition and Industry Responses Affect Competition. GAO-03-171T. Washington, D.C.: October 2, 2002. Options to Enhance the Long-term Viability of the Essential Air Service Program. GAO-02-997R. Washington, D.C.: August 30, 2002. Commercial Aviation: Air Service Trends at Small Communities Since October 2000. GAO-02-432. Washington, D.C.: March 29, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Congress established two key programs to help support air service to small communities--the Essential Air Service (EAS) providing about $100 million in subsidies per year and the Small Community Air Service Development Program (SCASDP) that provides about $20 million per year in grants. As part of its reauthorization of the Federal Aviation Administration (FAA), the Congress is examining the status and outcomes of these programs. This testimony discusses (1) the history and challenges of the EAS program, (2) the implementation and outcomes of the SCASDP and (3) options for reforming EAS and SCASDP. The testimony is based on previous GAO reports, interviews with Department of Transportation officials and industry representatives as well as program updates. EAS subsidies support air service to many small communities that would likely not have service if EAS subsidies are discontinued. Since 1997, funding for EAS has increased from $25.9 million in 1997 to $109.4 million in 2007 and the number of communities has generally increased. The federal government is spending a median of about $98 per passenger, with subsidies ranging from about $13 to $677 per passenger. Concerns exist about the costs of the program, particularly given the federal government's long-term structural fiscal imbalance. In addition, according to industry representatives, the number of air carriers flying aircraft suitable for EAS communities may decrease, raising concerns about the availability of appropriate aircraft to provide small community air service in the future. SCASDP grantees have used their grants to pursue a variety of goals and have used a variety of strategies, including marketing and revenue guarantees, to improve air service. Our analysis of the 23 grants completed by October 1, 2005, found that air service was sustained after the grant expired in a little less than half of the projects. Finally, although the program has seen some success, the number of applications for SCASDP grants has declined--from 179 in 2002 to 75 in 2006. As we have reported, options for reforming EAS, such as consolidating service into regional airports might make the program more efficient, but also could reduce service to some communities. Further, Congress may be able to use some "lessons learned" from marketing and other successful SCASDP strategies that may help it make the current programs more effective.
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Within the past 6 months, millions of Medicare beneficiaries have been making important decisions about their prescription drug coverage and have needed access to information about the new Part D benefit to make appropriate choices. CMS faced a tremendous challenge in responding to this need and, within short time frames, developed a range of outreach and educational materials to inform beneficiaries and their advisers about Part D. To disseminate these materials, CMS largely added information to existing resources, including written documents, such as Medicare & You; the 1-800-MEDICARE help line; the Medicare Web site; and support for SHIPs. However, CMS has not ensured that its communications to beneficiaries and their advisers are provided in a manner that is consistently clear, complete, accurate, and usable. Six months have passed since these materials were first made available to beneficiaries, and their limitations could result in confusion among those seeking to make coverage decisions. Although the initial enrollment period for Part D will end on May 15, 2006, CMS will continue to play a pivotal role in providing beneficiaries with information about the drug benefit during the year and in subsequent enrollment periods. CMS has an opportunity to enhance its communications on the Part D benefit. This would allow beneficiaries and their advisers to be better prepared when deciding whether to enroll in the benefit, and if enrolling, which drug plan to choose. In order to improve the Part D benefit education and outreach materials that CMS provides to Medicare beneficiaries, we are recommending that the CMS Administrator take the following four actions: Ensure that CMS's written documents describe the Part D benefit in a manner that is consistent with commonly recognized communications guidelines and that is responsive to the intended audience's needs. Determine why CSRs frequently do not search for available drug plans if the caller does not provide personal identifying information. Monitor the accuracy and completeness of CSRs' responses to callers' inquiries and identify tools targeted to improve their performance in responding to questions concerning the Part D benefit, such as additional scripts and training. Improve the usability of the Part D portion of the Medicare Web site by refining Web-based tools, providing workable site navigation features and links, and making Web-based forms easier to use and correct. We received written comments on a draft of this report from CMS (see app. III). CMS said that it did not believe our findings presented a complete and accurate picture of its Part D communications activities. CMS discussed several concerns regarding our findings on its written documents and the 1-800-MEDICARE help line. However, CMS did not disagree with our findings regarding the Medicare Web site or the role of SHIPs. CMS also said that it supports the goals of our recommendations and is already taking steps to implement them, such as continually enhancing and refining its Web-based tools. CMS discussed concerns regarding the completeness and accuracy of our findings in terms of activities we did not examine, as well as those we did. CMS stated that our findings were not complete because our report did not examine all of the agency's efforts to educate Medicare beneficiaries and specifically mentioned that we did not examine the broad array of communication tools it has made available, including the development of its network of grassroots partners throughout the country. We recognize that CMS has taken advantage of many vehicles to communicate with beneficiaries and their advisers. However, we focused our work on the four specific mechanisms that we believed would have the greatest impact on beneficiaries--written materials, the 1-800-MEDICARE help line, the Medicare Web site, and the SHIPs. In addition, CMS stated that our report is based on information from January and February 2006, and that it has undertaken a number of activities since then to address the problems we identified. Although we appreciate CMS's efforts to improve its Part D communications to beneficiaries on an ongoing basis, we believe it is unlikely that the problems we identified in this report could have been corrected yet given their nature and scope. CMS raised two concerns with our examination of a sample of written materials. First, it criticized our use of readability tests to assess the clarity of the six sample documents we reviewed. For example, CMS said that common multisyllabic words would inappropriately inflate the reading level. However, we found that reading levels remained high after adjusting for 26 multisyllabic words a Medicare beneficiary would encounter, such as Social Security Administration. CMS also pointed out that some experts find such assessments to be misleading. Because we recognize that there is some controversy surrounding the use of reading levels, we included two additional assessments to supplement this readability analysis--the assessment of design and organization of the sample documents based on 60 commonly recognized communications guidelines and an examination of the usability of six sample documents, involving 11 beneficiaries and 5 advisers. Second, CMS expressed concern about our examination of the usability of the six sample documents. The participating beneficiaries and advisers were called on to perform 18 specified tasks, after reading the selected materials, including a section of the Medicare & You handbook. CMS suggested that the task asking beneficiaries and advisers to calculate their out-of-pocket drug costs was inappropriate because there are many other tools that can be used to more effectively compare costs. We do not disagree with CMS that there are a number of ways beneficiaries may complete this calculation; however, we nonetheless believe that it is important that beneficiaries be able to complete this task on the basis of reading Medicare & You, which, as CMS points out, is widely disseminated to beneficiaries, reaching all beneficiary households each year. In addition, CMS noted that it was not able to examine our detailed methodology regarding the clarity of written materials--including assessments performed by one of our contractors concerning readability and document design and organization. We plan to share this information with CMS, once our report has become public. Finally, CMS took issue with one aspect of our evaluation of the 1-800-MEDICARE help line. Specifically, CMS said the 41 percent accuracy rate associated with one of the five questions we asked was misleading, because, according to CMS, we failed to analyze 35 of the 100 responses. However, we disagree. This question addressed which drug plan would cost the least for a beneficiary with certain specified prescription drug needs. We analyzed these 35 responses to this question and found the responses to be inappropriate. The CSRs would not provide us with the information we were seeking because we did not supply personal identifying information, such as the beneficiary's Medicare number or date of birth. We considered such responses inappropriate because the CSRs could have answered this question without personal identifying information by using CMS's Web-based prescription drug plan finder tool. Although CMS said that it has emphasized to CSRs, through training and broadcast messages, that it is permissible to provide the information we requested without requiring information that would personally identify a beneficiary, in these 35 instances, the CSR simply told us that our question could not be answered. CMS also said that the bulk of these inappropriate responses were related to our request that the CSR use only brand-name drugs. This is incorrect--none of these 35 responses were considered incorrect or inappropriate because of a request that the CSR use only brand-name drugs--as that was not part of our question. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days after its date. At that time, we will send 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 on 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 (312) 220-7600 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. Medicare & You (Section 6: Medicare Prescription Drug Coverage) Dual-eligible beneficiaries are Medicare beneficiaries who receive full Medicaid benefits for services not covered by Medicare. Medicare Advantage replaces the Medicare+Choice managed care program and expands the availability of private health plan options to Medicare beneficiaries. Do You Have a Medigap Policywith Prescription Drug Coverage? sold by private insurers to help pay for Medicare cost- sharing requirements, as well as for some services not provided by Medicare. tested the usability of sample documents with 16 participants--11 Medicare beneficiaries, including 1 disabled beneficiary who was under 65, and 5 advisers to beneficiaries. Everyone was asked to perform 18 specified tasks related to enrollment, coverage, costs, penalty, and informational resources. They were also asked to provide feedback about their experiences. Although the size of the group was small, research shows that as few as 5 individuals can provide meaningful insights into common problems. consistency with laws, regulations, and CMS guidance. benefit are written at a reading level that is difficult for many seniors. Reading levels for the sample documents were challenging for at least the 40 percent of seniors, who read at or below the 5th grade level. Reading level estimates for the sample texts1 ranged from 7th grade to postcollege level. Reading levels remain challenging for at least 40 percent of seniors even after adjusting for 26 multisyllabic words, such as Medicare, Medicare Advantage, and Social Security Administration. After the adjustment, the estimated reading level ranged from 8th to 12th grade. Estimates have a likely margin of error of +- two grades. documents demonstrated adherence to about half of the 60 commonly recognized written communications guidelines, on average. Desirable features: The documents were written with a respectful and polite tone, were free of cliches and slang, contained useful contact information, included concise and descriptive headings, and generally followed graphic and formatting guidelines. Undesirable features: The documents used too much technical jargon, often did not define difficult terms, included sentences and some paragraphs that were too long, did not use sufficient summaries to assist the reader in identifying key points. were frustrated by the documents' lack of clarity and often could not complete the 18 assigned tasks. One of the 18 assigned tasks was completed by all beneficiaries and advisers. Eleven of the 18 assigned tasks were completed by at least half of the beneficiaries and advisers. Four of the 18 assigned tasks were completed by 2 or fewer of the 11 beneficiaries. Nine of the 18 assigned tasks, were completed by 2 or fewer of the 5 advisers. computing projected total out-of-pocket costs for a plan that provided Part D's standard coverage (successfully completed by none of the 11 beneficiaries and 2 of the 5 advisers), evaluating whether it was possible to enroll in Medicare Part D and keep drug coverage from a retiree health plan (successfully completed by 2 beneficiaries and 2 advisers), and determining the course of action for dual-eligibles who are automatically enrolled in a plan that does not cover all drugs used (successfully completed by 4 beneficiaries and 1 adviser). to follow. Participants struggled with technical terms, such as "classes of commonly prescribed drugs" and "formulary," which is a list of drugs covered by a plan. Even when most participants were able to complete the tasks, they expressed confusion and frustration. relevant contact information, which could aid in identifying next steps for coverage decisions. All documents reviewed provided the dates of the start of initial program enrollment and coverage. cumulative effect of the penalty for missing the initial enrollment deadline. accurate and that the text was consistent with MMA, implementing regulations, and agency guidance. However, we noted a few misleading statements in Medicare & You. The document implied that if a beneficiary's doctor applied for an exception it would be granted, whereas exceptions to the formulary are granted at each plan sponsor's discretion. The document outlined the minimum requirements for standard coverage by Part D plans. However, it did not indicate that few plans offer this exact coverage and that beneficiaries should be prepared to compare plans with varying premiums, co-payments, and covered drugs to choose plans that best suit them. our five questions, we used three resources: the prescription drug finder tool on the Medicare Web site, the 1-800-MEDICARE scripts prepared by CMS and contractors for CSRs to use in responding to callers' questions, and input from CMS officials on the criteria we used to evaluate responses. To evaluate the promptness of the help line in answering calls, we recorded the length of time it took to connect to a CSR for each call. An accurate and complete response would identify the prescription drug plan that has the lowest estimated annual cost for the drugs the beneficiary uses. 2. Can a beneficiary who is in a nursing home and not on Medicaid sign up for a prescription drug plan? An accurate and complete response would indicate that such a beneficiary can choose whether to enroll in a Medicare prescription drug plan. An accurate and complete response would inform the caller that enrolling for the prescription drug benefit would depend on whether the beneficiary's Medigap plan was creditable--that is, whether the coverage it provided was at least as good as Medicare's standard prescription drug coverage--or noncreditable. The CSR response would also mention that the beneficiary's Medigap plan should have sent him/her information that outlines options. An accurate and complete response would indicate that a beneficiary has two options: (1) keep current health plan and join the prescription drug plan later with a penalty; or (2) drop current coverage and join a Medicare drug plan. 5. How do I know if a beneficiary qualifies for extra help? An accurate and complete response would refer the beneficiary to the Social Security Administration. completeness of responses to our five questions varied significantly, from 41 percent to 90 percent. CSRs accurately and completely answered question 5 (whether a beneficiary qualifies for extra help), which had a specific script, 90 percent of the time. CSRs accurately and completely answered question 2 (whether a beneficiary in a nursing home, who was not on Medicaid, could sign up for the drug benefit) 79 percent of the time--even though there was no specific script for the question. CSRs' responses for question 3 (whether a beneficiary with a Medigap policy could enroll in the drug benefit) were accurate and complete 66 percent of the time. Many of the responses were inaccurate because they did not provide adequate information about creditable and noncreditable coverage. The accuracy and completeness rate for question 4 (about retiree health insurance) was 58 percent. Many of the responses were inaccurate because the CSRs did not follow the available script or provide sufficient information about the implications of the beneficiary's decision. CSRs' responses to question 1 (which requires CSRs to use the prescription drug plan finder Web tool) were accurate and complete less than 50 percent of the time. The rate is largely caused by CSRs' inappropriate responses--35 out of 100 times-- that they were unable to answer the question without personal identifying information, such as the beneficiary's Medicare number or date of birth. inadvertently disconnected the call (19 calls). Intentional disconnections were programmed by the telephone company when wait times were projected to exceed 20 minutes (3 calls). The prescription drug plan finder Web tool used by CSRs was not operative at the time of our call (1 call). significantly, ranging from no wait to more than 55 minutes. About 75 percent of calls were connected in less than 5 minutes. For calls where we waited more than 5 minutes to speak to a CSR, the wait time ranged from 5 minutes to over 55 minutes. Sixty-two calls were on hold from 5 to 14 minutes, 59 seconds. Thirty-nine calls were on hold from 15 to 24 minutes, 59 seconds. Twenty-five calls were on hold 25 minutes or more. For both intentional and unintentional disconnections, we often waited more than 5 minutes before the disconnection occurred. In one case, we were placed on hold for 54 minutes before being disconnected. make information and services fully available to individuals with disabilities. Our review included an examination of CMS's March 2006 report assessing the compliance of its Medicare Web site with this federal requirement and discussions with CMS officials. NN/g performed the following three separate evaluations: Evaluation one: NN/g calculated an overall score of the site's usability, to reflect the ease of finding necessary information and performing various tasks. For this calculation, NN/g considered various factors, such as site navigation, customer support, and presentation of online forms. Evaluation two: NN/g evaluated in detail the usability of 137 detailed aspects of the Part D benefit portion of the Web site. Topics included Web design (e.g., home page, navigation, search function, graphics, and organization); tools (e.g., plan finder); writing style (e.g., tone, content, legibility, and readability); accessibility (e.g., availability of site version for the blind); and languages (e.g., links for users who have difficulty reading English). Evaluation three: NN/g conducted a total of 34 user tests to determine the ease of performing a variety of Web-related tasks, such as browsing the site, making a change in address, finding plan information under certain scenarios, comparing Medigap and Part D drug coverage, and determining how to join a plan. NN/g asked five Medicare beneficiaries--who were not disabled--and two advisers to beneficiaries to perform one or more user tests each using the Web site. At the end of the user tests, the seven participants were asked to provide feedback about their experiences. information to assist navigation was often not helpful--for example, text labels associated with links were not always functioning; and the writing style presented some challenges--for example, material was written at the 11th grade level. For evaluation three, the 34 user tests showed that the site was a challenge for the seven participants to use. For example: For 12 of the 34 tests, participants' initial reactions were that they would not be able to complete the tests and wanted to quit trying. On average, participants were able to proceed slightly more than halfway through each of the 34 tests. When asked for feedback on their experience with using the site, the seven participants, on average, indicated high frustration levels and low satisfaction. showed that two requirements were not met: The plan finder did not provide alternative text for all images--that is, there was no text for the screen reader to read. Therefore, images could not be translated into spoken words for the visually impaired. The plan finder did not allow screen readers to recognize form fields and translate forms into spoken words. As a result, visually impaired users would not have been able to complete Web-based forms. A CMS official told us that the agency made the necessary corrections on April 20, 2006, but we did not verify that these corrections were made. A SHIP grant year begins on April 1 of the year the funds become available. help line to SHIPs has increased significantly. The monthly average of number of calls referred to SHIPs increased from 16,000 referrals for May through September 2005 to approximately 43,000 for October and November 2005, the months around the time when enrollment in the Part D benefit began. According to CMS officials, this increased demand was influenced by callers seeking advice on choosing a drug plan. Unlike CSRs on the help line, SHIP counselors can offer individualized guidance to callers. to about 35,000 served in all of 2005. Florida, mostly during November and December of 2005, held at least six "phone bank" events--where SHIP counselors were available to take calls on the Part D benefit during live newscasts. Florida plans to hold two additional phone banks as the May 15 enrollment deadline approaches. New York reported nearly doubling its formal training sessions for SHIP counselors in 2005, to prepare them for the demand for services related to the Part D benefit. Texas counseled 45,719 clients and conducted 523 outreach events from November 15, 2005--the official start of the enrollment period--to March 22, 2006. Pennsylvania held over 3,000 enrollment events, which were attended by more than 130,000 people, from May 2005 to February 28, 2006. meetings with its regional offices, which interact directly with SHIP offices, to gauge SHIPs' ability to meet the demands of beneficiaries. In this report, we assessed (1) the extent to which the Centers for Medicare & Medicaid Services' (CMS) written documents describe the Medicare Part D prescription drug benefit in a clear, complete, and accurate manner; (2) the effectiveness of CMS's 1-800-MEDICARE help line in providing accurate, complete, and prompt responses to callers inquiring about the Part D benefit; (3) whether CMS's Medicare Web site presents information on the Part D benefit in a usable manner; and (4) how CMS has used State Health Insurance Assistance Programs (SHIP) to respond to the needs of Medicare beneficiaries for information on the Part D benefit. To obtain information on CMS's efforts to educate beneficiaries about Part D, we interviewed agency officials responsible for Part D written documents, the 1-800-MEDICARE help line, the Medicare Web site, and SHIPs. Following our briefing of congressional staff on April 19, 2006, the briefing slides were updated to reflect CMS's reported correction to the Medicare Web site to comply with section 508 of the Rehabilitation Act of 1973. We determined that the data used were sufficiently reliable for the purposes of this report. To assess the clarity, completeness, and accuracy of written documents, we compiled a list of all available CMS-issued Part D benefit publications intended to inform beneficiaries and their advisers and selected a sample of 6 from the 70 CMS documents available, as of December 7, 2005, for in- depth review, as shown in table 1. The sample Part D documents were chosen to represent a variety of publication types, such as frequently asked questions and fact sheets available to beneficiaries about the Part D drug benefit. We selected documents that targeted all beneficiaries or those with unique drug coverage concerns, such as dual-eligibles and beneficiaries with Medigap. To evaluate clarity, we contracted with the American Institutes for Research (AIR)--a firm with experience in evaluating written material. AIR evaluated the texts of the six sample documents using three methodologies: 1. three standard readability tests; 2. 60 commonly recognized written communications guidelines, including practices to aid senior readers; and 3. user testing with 11 Medicare beneficiaries and 5 advisers to beneficiaries, who performed 18 specified tasks related to enrollment, coverage, cost, penalty, and information resources and provided feedback about their experiences. We reviewed the sample documents for completeness to determine whether they contained sufficient information to allow the beneficiaries to identify (1) their next steps in determining whether to enroll and what plan to choose and (2) important factors, such as penalty provisions, that could affect their coverage decisions. To identify those important factors associated with the Part D benefit, we reviewed relevant laws, regulations, and 1-800-MEDICARE scripts prepared for customer service representatives (CSR) to read to callers and obtained information from advocacy groups. To evaluate the accuracy of information, we reviewed the sample materials for compliance with laws, regulations, and CMS guidance. To determine the accuracy and completeness of information provided regarding the Part D benefit, we placed a total of 500 calls to the 1-800- MEDICARE help line. We posed one of five questions about Part D in each call, so that each question was asked 100 times. Each question was pretested before we finalized its wording. We randomly placed calls at different times of the day and different days of the week from January 17 to February 7, 2006. Our calling times were chosen to match the daily and hourly pattern of calls reported by 1-800-MEDICARE in October 2005. We informed CMS officials that we would be placing calls; however, we did not tell them the questions we would ask or the specific dates and times that we would be placing our calls. To select the five questions, we considered topics identified in the Medicare Web site's frequently asked questions. In addition, we considered topics most frequently addressed by 1-800-MEDICARE CSRs based on help line reports. To evaluate the accuracy of CSRs' responses to our five questions, we used three resources: (1) the prescription drug plan finder tool on the Medicare Web site, (2) 1-800-MEDICARE scripts, and (3) input obtained from CMS officials on the criteria we used for evaluating CSR responses. Table 2 lists the questions we asked and the criteria we used to evaluate the accuracy of responses. When placing our calls, we identified ourselves as a beneficiary's relative, but did not provide CSRs with specific identifying information, such as a Medicare beneficiary number or date of birth. During our calls, CSRs were not aware that their responses would be included in a research study. We recorded the length of each call, including wait times, and the time it took before being connected to a CSR. We evaluated the accuracy and completeness of the responses by CSRs to the 500 calls by determining whether key information was provided. The results from our 500 calls are limited to those calls and are not generalizable to the universe of calls made to the help line. The questions we asked were limited to matters concerning the Part D benefit and do not encompass all of the questions callers might ask. We contracted with the Nielsen Norman Group (NN/g)--a firm with expertise in Web design--to assess the usability of the Part D information available on the Medicare Web site. This study consisted of three separate evaluations. First, NN/g compared the site's compliance with established usability guidelines to determine a usability score to reflect the ease of finding necessary information and performing various tasks. Specifically, to determine the usability scores, NN/g evaluated various aspects of the Web site using industry-recognized "good" Web design practices, as indicated by the contractor, and the collective body of knowledge from NN/g internal reports and experts, or NN/g usability guidelines. Second, NN/g determined the degree of difficulty associated with 137 detailed aspects of Web site design for the Part D portion of the site. The 137 aspects fall into the following general categories: overall Web design (e.g., home page, navigation, search function, graphics, and overall organization); tools (e.g., plan finder); writing style (e.g., content, tone, legibility, and readability); accessibility (e.g., availability of a version of the Web site for the blind); and languages (e.g., availability of languages other than English). NN/g determined the difficulty level in using each of the 137 aspects. NN/g noted aspects that had good design and would not be expected to cause confusion. For those aspects with a design that would be expected to cause confusion, NN/g ranked the associated difficulty level as high, medium, or low. Third, NN/g performed a qualitative evaluation on January 20 and 23, 2006, to test the ability of five Medicare beneficiaries and two beneficiary advisers to perform specified tasks related to Medicare beneficiaries using the Web site and to obtain feedback about participants' experiences. While the results are not statistically valid, these users provided important insights into the usability of the Medicare Web site. Participants were asked to "think out loud" as they worked through their tasks, while an NN/g facilitator observed their behavior and took notes. NN/g gave each task a score. At the end of their sessions, NN/g asked participants for input regarding their confidence in the answers they obtained from the Web site, and their overall satisfaction and frustration levels associated with using the site. Finally, we obtained the results of CMS's March 2006 review of its Web site's compliance with section 508 of the Rehabilitation Act of 1973, as amended. This law requires federal agencies to make the information on their Web sites accessible to people with disabilities. We also discussed the results of this review with agency officials and followed up with them to determine the status of CMS's corrective actions. To determine the role of SHIPs in helping Medicare beneficiaries understand Part D, we interviewed CMS officials who monitor SHIPs' activities. We also reviewed information that we obtained from CMS officials and other sources on the program, its funding, changes made in response to the introduction of Part D, and the impact of Part D on the demand for SHIP services. In addition, we interviewed SHIP officials in California, Florida, New York, Texas, and Pennsylvania--the five states with the largest Medicare populations--to obtain information on the experience of their SHIPs with Part D. We conducted our work from November 2005 through May 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, Susan T. Anthony and Geraldine Redican-Bigott, Assistant Directors; Ramsey L. Asaly; Enchelle Bolden; Laura Brogan; Shaunessye D. Curry; Chir-Jen Huang; M. Peter Juang; Ba Lin; Michaela M. Monaghan; Roseanne Price; Pauline Seretakis; Margaret J. Weber; and Craig H. Winslow made contributions to this report.
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On January 1, 2006, Medicare began providing coverage for outpatient prescription drugs through its new Part D benefit. Beneficiaries who enroll in Part D may choose a drug plan from those offered by private plan sponsors under contract to the Centers for Medicare & Medicaid Services (CMS), which administers the Part D benefit. Beneficiaries have until May 15, 2006, to enroll in the Part D benefit and select a plan without the risk of penalties. GAO was asked to review the quality of CMS's communications on the Part D benefit. GAO examined 70 CMS publications to select 6 documents for review and contracted with the American Institutes for Research to evaluate the clarity of these texts; made 500 calls to the 1-800-MEDICARE help line; and contracted with the Nielsen Norman Group to evaluate the usability of the Medicare Web site. The information given in the six sample documents that GAO reviewed describing the Part D benefit was largely complete and accurate, although this information lacked clarity. The documents were unclear in two ways. First, although about 40 percent of seniors read at or below the fifth-grade level, the reading levels of these documents ranged from seventh grade to postcollege. Second, on average, the six documents did not comply with about half of 60 common guidelines for good communication. For example, the documents used too much technical jargon and often did not define difficult terms, such as formulary. Moreover, 16 beneficiaries and advisers that GAO tested reported frustration with the documents' lack of clarity and had difficulty completing the tasks assigned to them. Although the documents lacked clarity, they informed readers of enrollment steps and factors affecting coverage decisions and were consistent with laws, regulations, and agency guidance. Customer service representatives (CSR) responded to the 500 calls GAO placed to CMS's 1-800-MEDICARE help line accurately and completely about two-thirds of the time. Of the remainder, 18 percent of the calls received inaccurate responses, 8 percent of the responses were inappropriate given the question asked, and about 3 percent received incomplete responses. In addition, about 5 percent of GAO's calls were not answered, primarily because of disconnections. Accuracy and completeness rates of CSRs' responses varied significantly across the five questions GAO asked. For example, while CSRs provided accurate and complete responses to calls about beneficiaries' eligibility for extra help 90 percent of the time, the accuracy rate for calls concerning the drug plan that would cost the least for a specified beneficiary was 41 percent. For this question, the CSRs responded inappropriately for 35 percent of the calls by explaining that they could not identify the least costly plan without the beneficiary's personal information--even though CSRs had the information needed to answer the question. The time GAO callers waited to speak with CSRs also varied, ranging from no wait time to over 55 minutes. For 75 percent of the calls--374 of the 500--the wait was less than 5 minutes. The Part D benefit portion of the Medicare Web site can be difficult to use. GAO's test of the site's overall usability--the ease of finding needed information and performing various tasks--resulted in scores of 47 percent for seniors and 53 percent for younger adults, out of a possible 100 percent. While there is no widely accepted benchmark for usability, these scores indicate that using the site can be difficult. For example, the prescription drug plan finder was complicated to use and some of its key functions, such as "continue" and "choose a drug plan," were often not visible on the page without scrolling down.
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FFRDCs were first established during World War II to meet specialized or unique research and development needs that could not be readily satisfied by government personnel or private contractors. Additional and expanded requirements for specialized services led to increases not only in the size of the FFRDCs but also the number of FFRDCs, which peaked at 74 in 1969. Today, 8 agencies, including DOD, fund 39 FFRDCs that are operated by universities, nonprofit organizations, or private firms under long-term contracts. Federal policy allows agencies to award these contracts noncompetitively. The Office of Federal Procurement Policy within the Office of Management and Budget (OMB) establishes governmentwide policy on the use and management of FFRDCs. Within DOD, the Director of Defense Research and Engineering is responsible for developing overall policy for DOD's 11 FFRDCs. The Director communicates DOD policy and detailed implementing guidance to FFRDC sponsors through a periodically updated management plan, and determines the funding level for each FFRDC based on the overall congressional ceiling on FFRDC funding and FFRDC requirements. Total funding for DOD's FFRDCs was $1.25 billion in fiscal year 1995. DOD categorizes each of its FFRDCs as a systems engineering and integration center, a studies and analyses center, or a research and development laboratory. Appendix II provides information on each FFRDC, including its parent organization, primary sponsor, DOD funding, and staffing levels for fiscal year 1995. The military services and defense agencies sponsor individual FFRDCs and award and administer the 5-year contracts, typically negotiated noncompetitively, after reviewing the continued need for the FFRDC. Unlike a private contractor, an FFRDC accepts restrictions on its ability to manufacture products and compete for other government or commercial business. These restrictions are intended to (1) limit the potential for conflicts of interest when FFRDC staff have access to sensitive government or contractor data and (2) allow the center to form a special or strategic relationship with its DOD sponsor. Management fees are discretionary funds provided to FFRDCs in addition to reimbursement for incurred costs, and these fees are similar to profits private contractors earn. Two issues that have remained unresolved for many years are what should management fee be provided for and how should FFRDCs use this fee. As far back as 1969, we concluded that nonprofit organizations such as FFRDCs incur some necessary costs that may not be reimbursed under the procurement regulations, and we recommended that the Bureau of the Budget (now known as OMB), develop guidance that specified the costs contracting officers should provide fees to cover. In 1993, the Office of Federal Procurement Policy agreed that governmentwide guidance on management fees for nonprofit organizations was needed, but it has not yet issued detailed guidance. In the absence of such governmentwide guidance, recurring questions continue to be raised about how FFRDCs use their fees. In its 1994 report, for example, the DOD Inspector General concluded that FFRDCs used $43 million of the $46.9 million in fiscal year 1992 DOD fees for items that should not have been funded from fees. The bulk of this $43 million funded independent research projects that should have been charged to overhead, according to the report. The remainder funded otherwise unallowable costs and future requirements, which the report concluded were not necessary for FFRDC operations. Similarly, as we recently reported, DCAA reviewed fiscal year 1993 fee expenditures at the MITRE Corporation and concluded that just 11 percent of the expenditures reviewed were ordinary and necessary to the operation of the FFRDC. DCAA reported that MITRE used fees to pay for items such as lavish entertainment, personal expenses for company officers, and generous employee benefits. In our recent work at The Aerospace Corporation, we found that the corporation used about $11.5 million of its $15.5 million management fee for sponsored research. Aerospace used the remainder of its fee and other corporate resources for capital equipment purchases; real and leasehold property improvements; and other unreimbursed expenditures, such as contributions, personal use of company cars, conference meals, trustee expenses, and new business development expenses. DOD's action plan recommended implementation of revised guidelines for management fee. Specifically, it recommended (1) moving allowable costs out of fee and reducing fee accordingly, and (2) establishing consistent policies on ordinary and necessary costs to be funded through fee. If effectively implemented, these actions should help to resolve many of the long-standing concerns over FFRDC use of management fee. Moving FFRDC-sponsored research out of fee would result in a substantial reduction of fee amount and should provide for more effective DOD oversight of FFRDC expenditures. This action would also subject all research to the Federal Acquisition Regulation cost principles applicable to cost-reimbursable items. Defining ordinary and necessary expenses which may be covered by fee is a more challenging issue, which may explain why the issue has gone unresolved for so long. However, until DOD issues specific guidance regarding ordinary and necessary expenses, debate will likely continue on whether fee can be used for such things as personal expenses for company officers, entertainment, and new business development. Although DOD's action plan identifies the need for clarifying guidance, our understanding is that such guidance has not been issued. As a robust private-sector professional services industry grew to meet the demand for technical services, it became apparent that industry had the capability to perform some tasks assigned to FFRDCs. As early as 1962, the Bell Report noted criticism that nonprofit systems engineering contractors had undertaken work traditionally done by private firms. A 1971 DOD report stated, "It is pointless to say that the [systems engineering FFRDCs'] function could not be provided by another instrumentality...." According to this report, private contractors could also do the same type of work as the studies and analyses FFRDCs. The report pointed to the flexibility of using the centers and their broad experience with sponsors' problems as reasons for continuing their use. More recently, the DOD Inspector General concluded that FFRDC mission statements did not identify unique capabilities or expertise, resulting in FFRDCs being assigned work without adequate justification. In a 1988 report, we pointed out that governmentwide policy did not require that FFRDCs be limited to work that industry could not do; FFRDCs could also undertake tasks they could perform more effectively than industry. FFRDCs are effective, we observed, partly because of their special relationship with their sponsoring agency. This special relationship embodies elements of access and privilege as well as constraints to limit their activities to those DOD deems appropriate. In 1995, the DSB and DOD's Action Plan elaborated on and refined the concept of the FFRDC special relationship. According to DOD, FFRDCs perform tasks that require a special or strategic relationship to exist between the task sponsor and the organization performing the task. Table 1 shows DOD's description of the characteristics of this special relationship. According to the DSB, this special relationship allows an FFRDC to perform research, development, and analytical tasks that are integral to the mission and operation of the DOD sponsor. The DSB and an internal DOD advisory group concluded that there is a continuing need for certain core work that requires the special relationship previously described. DOD concluded that giving such tasks to private contractors would raise numerous concerns, including questions about potential conflicts of interest. Accordingly, DOD has defined an FFRDC's core work as tasks that (1) are consistent with the FFRDC's purpose, mission, capabilities, and core competencies and (2) require the FFRDC's special relationship with its sponsor. The DOD advisory group estimated that this core work represented about 6 percent of DOD's research, development, and analytic effort. The DSB and the DOD advisory group also concluded that FFRDCs performed some noncore work that did not require a special relationship, and they concluded that this work should be transitioned out of the FFRDCs and acquired competitively. On the basis of these conclusions, DOD directed each sponsor to review its FFRDC's core competencies, identify and prioritize the FFRDC's core work, and identify the noncore work that should be transitioned out of the FFRDC. The core competencies the DOD sponsors identified appear to differ little from the scope of work descriptions that were in place previously. In several cases, sponsors seem to have simply restated the functions listed in an FFRDC's scope of work description. In other cases, the core competencies summarized the scope of work functions into more generic categories. In February 1996, the Under Secretary for Defense (Acquisition and Technology) reported that DOD sponsors had identified $43 million, or about 4 percent of FFRDC funding, in noncore work being performed at the FFRDCs. According to the Under Secretary, ongoing noncore work is currently being transferred out of the FFRDCs. Even though DOD states that it is important to ensure that tasks assigned to the FFRDC meet the core work criteria, we believe it will continue to be difficult to determine whether a task meets these criteria. FFRDC mission statements remain broad, and core competencies appear to differ little from the previous scope of work descriptions. As we stated in our 1988 report, the special relationship is the key to determining whether work is appropriate for an FFRDC. However, determining whether one or more of the characteristics of the special relationship is required for a task may be difficult, since the need for an element of the special relationship is normally relative rather than absolute. For example, we believe DOD would expect objectivity in any research effort, but it may be difficult to demonstrate that a particular task requires the special degree of objectivity an FFRDC is believed to provide. Uncertainty about whether an FFRDC's special relationship allows it to perform a task more effectively than other organizations also accompanies decisions to assign work to an FFRDC. In our 1988 report, we stated that full and open competition between all relevant organizations (FFRDCs and non-FFRDCs) could provide DOD assurance that it has selected the most effective source for the work. However, exposing FFRDCs to marketplace competition would fundamentally alter the character of the special relationship. While DOD has initiated a department-wide effort to define more clearly the work its FFRDCs will perform, the criteria DOD has developed remains somewhat general. Applying this criteria requires the making of judgements about the relative effectiveness of various sources for work in the absence of full information on capabilities which open competition would provide. It is doubtful that DOD's criteria will be satisfactory to those critics who are seeking a simple and unambiguous definition of work appropriate for FFRDCs. The question of whether accepting work from organizations other than its sponsor impairs an FFRDC's ability to provide objective advice has long been discussed. As early as 1962, the Bell Report raised this question but noted that no clear consensus had developed as to whether concerns about diversification were well founded. The report recognized that studies and analyses FFRDCs could effectively serve multiple clients but concluded that systems engineering organizations were primarily of value when they served a single client. During the early 1970s, DOD encouraged its FFRDCs to diversify into nonsponsor work. According to a 1976 DOD report, FFRDCs that did not diversify suffered efficiency and morale problems as their organizations shrank in the face of declining DOD research and development budgets. Nonetheless, this report recommended that the systems engineering FFRDCs limit themselves to DOD work and adjust their work forces in line with changes in the DOD budget. Regarding the MITRE Corporation, the report recommended that MITRE create a separate affiliate organization to carry out its nonDOD work. In 1994, Congress raised the issue that non-FFRDC affiliate organizations resulted in "...an ambiguous legal, regulatory, organizational, and financial situation," and directed that DOD prepare a report on non-FFRDC activities. More recently, however, the DSB concluded that FFRDCs and their parent companies should be allowed to accept work outside the core domain only when doing so was in the best interests of the country; the DSB did not propose criteria for determining when accepting nonsponsor work was in the country's best interests. Acceptance of nonsponsor work is now common at DOD's FFRDCs. Except for the Institute for Defense Analyses, each parent organization performs some non-DOD work either within the FFRDC or through an affiliate organization created to pursue non-FFRDC work. Currently, six of the eight parent organizations that operate FFRDCs also operate one or more non-FFRDC affiliates. Some of these affiliates are quite small: the Center for Naval Analyses Corporation's Institute for Public Research accounts for about 3 percent of the center's total effort. Other affiliates are more significant: the MITRE Corporation's two non-FFRDC affiliates accounted for about 11 percent of MITRE's total effort, and the RAND Corporation's 5 non-FFRDC divisions account for about 32 percent of its total effort. The Massachusetts Institute of Technology and Carnegie-Mellon University--parent organizations of the MIT Lincoln Laboratory and the Software Engineering Institute, respectively--each pursue a diverse range of non-FFRDC activities. DOD has recently become more active in seeking to oversee work its FFRDCs perform through non-FFRDC divisions. DOD sponsors have historically had the opportunity to oversee nonsponsor work performed within the FFRDC because the work is carried out under the FFRDC contracts that sponsors administer. This contract oversight mechanism is not available for non-FFRDC divisions. During 1995, for example, the Air Force expressed great reluctance to support The Aerospace Corporation's proposal to establish a non-FFRDC affiliate, indicating that the Air Force was concerned that it could not avoid the perception of a conflict of interest. Similarly, the MITRE Corporation sought permission to create a separate corporate division to perform non-FFRDC work. Recognizing that this arrangement could create a potential for conflicts of interest, DOD required MITRE to spin off a separate corporation to carry out its non-FFRDC activities. DOD required this new corporation to have a separate board of trustees and its own corporate officers. Further, DOD required that no work be subcontracted between the two entities to preclude the sharing of employees involved in DOD work--and knowledge developed in the course of DOD work--with the new corporation. DOD's recent update of its action plan stated that a new policy requires the use of stringent criteria for the acceptance of work outside the core by the FFRDC's parent corporation. According to DOD, this new policy will ensure focus on FFRDC operations by the parent and eliminate concerns regarding "unfair advantage" in acquiring of such work. Currently, DOD plans to revise its FFRDC management plan, which would provide for greater oversight of non-FFRDC affiliates at all centers. These changes would require FFRDCs to agree to conduct non-FFRDC activities only if the activities are (1) subject to sponsor review and approval, (2) in the national interest, and (3) do not give rise to real or potential conflicts of interest. Even though it endorsed the need for organizations such as FFRDCs, a DSB study recently concluded that the public mistrusted DOD's use and oversight of FFRDCs. A principal concern, according to the study, is that DOD assigns work to FFRDCs that can be performed as effectively by private industry and acquired using competitive procurement procedures. Further, DSB found that the lack of opportunities for public review and comment on DOD's process for managing and assigning work to FFRDCs--available in the competitive contracting process--invites mistrust. To address public skepticism about DOD's use and management of FFRDCs, DSB recommended the creation of an independent advisory committee of highly respected personnel from outside DOD. The committee would review the continuing need for FFRDCs, FFRDC missions, and DOD's management and oversight mechanisms for FFRDCs. DOD's action plan also recommended the establishment of an independent advisory committee to review and advise on FFRDC management. In late 1995, an independent advisory committee was established. The six committee members, who are either DSB members or consultants, represent both industry and government. The committee is responsible for reviewing and advising DOD on the management of its FFRDCs by providing guidelines on the appropriate scope of work, customers, organizational structure, and size of the FFRDCs; overseeing compliance with DOD's FFRDC Management Plan; reviewing sponsor's management of FFRDCs; reviewing the level and appropriateness of non-DOD and nonsponsor work performed by the FFRDCs; overseeing the comprehensive review process; and performing selected FFRDC program reviews. In January 1996, the advisory committee began a series of panel discussions at several FFRDCs, which were attended by DOD sponsor personnel and FFRDC officials. Representatives of our office attended the initial fact finding meetings and observed that the panel members appear to approach their task with the utmost seriousness and challenged the conventional wisdom by asking tough questions of both DOD and FFRDC officials. The advisory group plans to produce its first report in March 1996. Mr. Chairman, this completes my statement for the record. Defense Research and Development: Fiscal Year 1993 Trustee and Advisor Costs at Federally Funded Centers (GAO/NSIAD-96-27, Dec. 26, 1995). Federal Research: Information on Fees for Selected Federally Funded Research and Development Centers (GAO/RCED-96-31FS, Dec. 8, 1995). Federally Funded R&D Centers: Use of Fee by the MITRE Corporation (GAO/NSIAD-96-26, Nov. 27, 1995). Federally Funded R&D Centers: Use of Contract Fee by The Aerospace Corporation (GAO/NSIAD-95-174, Sept. 28, 1995). Defense Research and Development: Affiliations of Fiscal Year 1993 Trustees for Federally Funded Centers (GAO/NSIAD-95-135, July 26, 1995). Department of Defense Federally Funded Research and Development Centers, Office of Technology Assessment (OTA-BP-ISS-157, June 1995). Compensation to Presidents, Senior Executives, and Technical Staff at Federally Funded Research and Development Centers, DOD Office of the Inspector General (95-182, May 1, 1995). Comprehensive Review of the Department of Defense's Fee-Granting Process for Federally Funded Research and Development Centers, Director for Defense Research and Engineering, May 1, 1995. The Role of Federally Funded Research and Development Centers in the Mission of the Department of Defense, Defense Science Board Task Force, April 25, 1995. Addendum to Final Audit Report on Contracting Practices for the Use and Operations of DOD-Sponsored Federally Funded Research and Development Centers, DOD Office of the Inspector General (95-048A, Apr. 19, 1995). DOD's Federally Funded Research and Development Centers, Congressional Research Service (95-489 SPR, Apr. 13, 1995). Report on Department of Defense Federally Funded Research and Development Centers and Affiliated Organizations, Director for Defense Research and Engineering, April 3, 1995. Federally Funded R&D Centers: Executive Compensation at The Aerospace Corporation, (GAO/NSIAD-95-75, Feb. 7, 1995). Contracting Practices for the Use and Operations of DOD-Sponsored Federally Funded Research and Development Centers, DOD Office of the Inspector General (95-048, Dec. 2, 1994). Sole Source Justifications for DOD-Sponsored Federally Funded Research and Development Centers, DOD Office of the Inspector General (94-012, Nov. 4, 1993). DOD's Federally Funded Research and Development Centers, Congressional Research Service (93-549 SPR, June 3, 1993). Inadequate Federal Oversight of Federally Funded Research and Development Centers, Subcommittee on Oversight of Government Operations, Senate Governmental Affairs Committee (102-98, July 1992). DOD's Federally Funded Research and Development Centers, Congressional Research Service (91-378 SPR, Apr. 29, 1991). Competition: Issues on Establishing and Using Federally Funded Research and Development Centers (GAO/NSIAD-88-22, Mar. 7, 1988). Fiscal year 1995 dollars in millions Systems engineering and integration centers The Aerospace Corp. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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GAO discussed the Department of Defense's (DOD) efforts to improve the management of its federally funded research and development centers (FFRDC), focusing on the: (1) guidelines to ensure that management fees paid to FFRDC are justified; (2) core work appropriate for FFRDC; (3) criteria for the acceptance of work outside of the core by FFRDC parent corporations; and (4) establishment of an independent advisory committee to review DOD management, use, and oversight of FFRDC. GAO noted that: (1) the DOD action plan recommended that management fees be revised to move allowable costs out of fee, reduce fees, and establish policies on ordinary and necessary costs; (2) it is difficult to determine whether tasks assigned to FFRDC meet core work criteria because the mission statements are broad and the core competencies offer little deviation from previous work descriptions; (3) six of the eight parent organizations that operate FFRDC also operate one or more non-FFRDC affiliates; and (4) DOD established an independent advisory committee to review FFRDC work, customers, and organizational structure and size, oversee FFRDC compliance with the DOD FFRDC management plan, review sponsor's management of FFRDC, determine the level and appropriateness of non-DOD and non-sponsor work performed by FFRDC, monitor the comprehensive review process, and perform selected FFRDC program reviews.
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The Coast Guard has a wide variety of missions, related both to homeland security and its other responsibilities. Table 1 shows a breakout of these missions--both security and non-security related--as delineated under the Homeland Security Act of 2002. The Coast Guard has overall federal responsibility for many aspects of port security and is involved in a wide variety of activities. Using its cutters, boats, and aircraft, the Coast Guard conducts security patrols in and around U.S. harbors, escorts large passenger vessels in ports, and provides protection in U.S. waterways for DOD mobilization efforts. It also gathers and disseminates intelligence information, including gathering information on all large commercial vessels calling at U.S. ports; the agency monitors the movement of many of these vessels in U.S. territorial waters. It conducts port vulnerability assessments; helps state and local port authorities to develop security plans for protecting port infrastructure; and actively participates with state, local, and federal port stakeholders in a variety of efforts to protect port infrastructure and ensure a smooth flow of commerce. In international maritime matters, the Coast Guard is also active in working through the International Maritime Organization to improve maritime security worldwide. It has spearheaded proposals before this organization to implement electronic identification systems, ship and facility security plans, and the undertaking of port security assessments. The Coast Guard's homeland security role is still evolving; however, its resource commitments to this area are substantial and will likely grow. For example, under the recently enacted Maritime Transportation Security Act, the Coast Guard will likely perform numerous security tasks, such as approving security plans for vessels and waterside facilities, serving on area maritime security advisory committees, assessing antiterrorism measures at foreign ports, and maintaining harbor patrols. The Coast Guard has not yet estimated its costs for these activities; however, the President's fiscal year 2004 budget request includes over $200 million for new homeland security initiatives, including new patrol boats, additional port security teams, and increased intelligence capabilities. To provide for the orderly transition of the Coast Guard to DHS on March 1, 2003, the Coast Guard established a transition team last year that identified and began addressing issues that needed attention. Coast Guard officials told us that they patterned their transition process after key practices that we identified as important to successful mergers, acquisitions, and transformations. The agency's transition team consists of top management, led by the Chief of Staff, and enlists the assistance of numerous staff expertise throughout the agency through matrixing. According to Coast Guard officials, the scope of transition issues spans a wide variety of topics, including administrative and support functions, strategy, outreach and communication issues, legal considerations, and information management. The transition team focuses on both DHS- related issues and on issues related to maintaining an enduring relationship with the Department of Transportation (DOT). In addition to its own transition team, senior Coast Guard officials participated with OMB in developing the DHS reorganization plan late last year. Also, key Coast Guard officials participate on joint DHS and DOT transition teams that have been established to deal with transition issues in each department. We have testified that, despite the complexity and enormity of the implementation and transformation of DHS, there is likely to be considerable benefit over time from restructuring homeland security functions. These benefits include reducing risk and improving the economy, efficiency, and effectiveness of these consolidated agencies and programs. In the short term, however, there are numerous complicated challenges that will need to be resolved, making implementation a process that will take considerable time and effort. Reorganizations frequently encounter start-up problems and unanticipated consequences, and it is not uncommon for management challenges to remain for some time. Our past work on government restructuring and reorganization has identified a number of factors that are critical to success in these efforts. Coast Guard officials now involved in transition efforts told us that they are aware of these factors and are addressing many of them as they prepare to move to DHS. Our testimony today focuses on six of these factors--strategic planning, communication and partnership-building, performance management, human capital strategy, information management and technology, and acquisition management--and, based on past work, some of the key challenges the Coast Guard faces in addressing and resolving them. The strategic planning process involves assessing internal and external environments, working with stakeholders, aligning activities, processes, and resources in support of mission-related outcomes. Strategic planning is important within the Coast Guard, which now faces a challenge in merging past planning efforts with the new realities of homeland security. The events of September 11th produced a dramatic shift in resources used for certain missions. Cutters and patrol boats that were normally used offshore were quickly shifted to coastal and harbor security patrols. While some resources have been returned to their more traditional activities, others have not. For example, Coast Guard patrol boats in the nation's Northeast were still conducting security patrols many months later, reducing the number of fisheries patrols by 40-50 percent from previous years. Even now, the Coast Guard continues to face new security-related demands on its resources. Most notably, as part of the current military build-up in the Middle East, the Coast Guard has sent nine cutters to assist the DOD in the event of war with Iraq. While its greatly expanded homeland security role has already been merged into its day-to-day operations, the Coast Guard faces the need to develop a strategic plan that reflects this new reality over the long term. Where homeland security once played a relatively small part in the Coast Guard's missions, a new plan must now delineate the goals, objectives, strategies, resource requirements, and implementation timetables for achieving this vastly expanded role while still balancing resources among its various other missions. The agency is now developing a strategic deployment plan for its homeland security mission and plans to finish it sometime this year. However, development has not begun on a long-term strategy that outlines how it sees its resources--cutters, boats, aircraft, and personnel--being distributed across all of its various missions, as well as a timeframe for achieving desired balance among missions. We recommended in a recent report to this Subcommittee that the Coast Guard develop such a strategy to provide a focal point for all planning efforts and serve as a basis for spending and other decisions. The Coast Guard has taken this recommendation under advisement but has not yet acted on it. There is a growing realization that any meaningful results that agencies hope to achieve are likely to be accomplished through matrixed relationships or networks of governmental and nongovernmental organizations working together. These relationships exist on at least three levels. First, they exist within and support the various internal units of an agency. Second, they include the relationships among the components of a parent department, such as DHS. Third, they are also developed externally, to include relationships with other federal, state, and local agencies, as well as private entities and domestic and international organizations. Our work has shown that agencies encounter a range of barriers when they attempt coordination across organizational boundaries. Such barriers include agencies' concerns about protecting jurisdictions over missions and control of resources, differences in procedures, processes, data systems that lack interoperability, and organizational cultures that may make agencies reluctant to share sensitive information. Specifically, our work has shown that the Coast Guard faces formidable challenges with respect to establishing effective communication links and building partnerships both within DHS and with external organizations. While most of the 22 agencies moving to DHS will report to under secretaries for the department's various directorates, the Coast Guard will remain a separate entity reporting directly to the Secretary of DHS. According to Coast Guard officials, the Coast Guard has important functions that will require coordination and communication with all of these directorates, particularly the Border and Transportation Security Directorate. For example, the Coast Guard plays a vital role with Customs, Immigration and Naturalization Service, the Transportation Security Administration, and other agencies that are organized in the Directorate of Border and Transportation Security. Because the Coast Guard's homeland security activities require interface with these and a diverse set of other agencies organized within several DHS directorates, communication, coordination, and collaboration with these agencies is paramount to achieve department-wide results. Effective communication and coordination with agencies outside the department is also critical to achieving the homeland security objectives, and the Coast Guard must maintain numerous relationships with other public and private sector organizations outside DHS. For example, according to Coast Guard officials, the Coast Guard will remain an important participant in DOT's strategic planning process, since the Coast Guard is a key agency in helping to maintain the maritime transportation system. Also, the Coast Guard maintains navigation systems used by DOT agencies such as the Federal Aviation Administration. In the homeland security area, coordination efforts will extend well beyond our borders to include international agencies of various kinds. For example, the Coast Guard, through its former parent agency, DOT, has been spearheading U.S involvement in the International Maritime Organization. This is the organization that, following the September 11th attacks, began determining new international regulations needed to enhance ship and port security. Also, our work assessing efforts to enhance our nation's port security has underscored the formidable challenges that exist in forging partnerships and coordination among the myriad of public and private sector and international stakeholders. A performance management system that promotes the alignment of institutional, unit, and individual accountability to achieve results is an essential component for organizational success. Our work has shown performance management is a key component of success for high- performing, results-oriented organizations. High-performing organizations have recognized that a key element of a fully successful performance management system is aligning individual employees' performance expectations with agency goals so that employees can see how their responsibilities contribute to organizational goals. These organizations (1) define clear missions and desired outcomes, (2) measure performance as a way of gauging progress toward these outcomes, and (3) use performance information as a basis for decision-making. In stressing these actions, a good performance management system fosters accountability. The changed landscape of national security work presents a challenge for the Coast Guard's own performance management system. The Coast Guard has applied the principles of performance management for most of its missions, but not yet for homeland security. However, the Coast Guard has work under way to define its homeland security mission and the desired outcomes stemming from that mission. The Coast Guard expects to have such measures this year and begin collecting data to gauge progress in achieving them. Progress in this area will be key in the Coast Guard's ability to make sound decisions regarding its strategy for accomplishing its security mission as well as its various other missions. In any organization, people are its most important asset. One of the major challenges agencies face is creating a common organizational culture to support a unified mission, common set of core values, and organization- wide strategic goals. The Coast Guard, like the 21 other agencies moving to DHS, will have to adjust its own culture to work effectively within the department. The Coast Guard also faces other important new human capital challenges. For example, to deal with its expanded homeland security role and meet all of its other responsibilities, the Coast Guard expects to add thousands of new positions over the next 3 years. The Coast Guard acknowledges that such a large increase could well strain the agency's ability to hire, develop, and retain talent. Coast Guard officials acknowledge that providing timely training for the 2,200 new personnel it plans to bring on by the end of fiscal year 2003 and the additional 1,976 staff it plans to add by the end of fiscal year 2004 will likely strain its training capabilities. Compounding this challenge is that over the next decade, the Coast Guard is modernizing its entire fleet of cutters and aircraft with more modern, high technology assets that require a higher skill level to operate and maintain. One factor that often contributes to an organization's ineffectiveness or failure is the lack of accurate, complete, and timely information. Sometimes this lack of information contributes to the failure of a system or to cumbersome systems that cannot be effectively coordinated. In other instances, however, it can relate to the institutional willingness to share information across organizational boundaries. Concerns about information management have been well chronicled in the discussions about establishing DHS. Programs and agencies will be brought together from throughout the government, each bringing its own systems. Integrating these diverse systems will be a substantial undertaking. The Coast Guard is among several agencies moving to DHS that will bring with it existing information technology problems. For example, 14 years after legislation was passed requiring the Coast Guard to develop a vessel identification system to share vessel information, no such system exists, and future plans for developing the system are uncertain. Given today's heightened state of homeland security, such a system has even more potential usefulness. Coast Guard officials stated that law enforcement officials could use a vessel identification system to review all vessels that have been lost or stolen and verify ownership and law enforcement history. Sound acquisition management is central to accomplishing the department's mission. DHS is expected to spend billions annually to acquire a broad range of products, technologies, and services. Getting the most from this investment will depend on how well DHS manages its acquisition activities. Our reports have shown that some of the government's largest procurement operations need improvement. The Coast Guard has major acquisitions that pose significant challenges. The agency is involved in two of the most costly procurement programs in its history--the $17 billion Integrated Deepwater Project to modernize its entire fleet of cutters and aircraft, and the $500 million national response and distress system, called Rescue 21, to increase mariner safety. We have been reviewing the planning effort for the Deepwater Project for a number of years, and the agency's management during the planning phase was among the best of the federal agencies we have evaluated, providing a solid foundation for the project. While we believe the Coast Guard is in a good position to manage this acquisition effectively, the current phase of the project represents considerably tougher management challenges. The major challenges are: Controlling costs. Under the project's contracting approach, the responsibility for the project's success lies with a single systems integrator and its contractors for a period of 20 years or more. This approach starts the Coast Guard on a course potentially expensive to alter once funding has been committed and contracts have been signed. Moreover, this approach has never been used on a procurement of this size or complexity, and, as a result, there are no models in the federal government to guide the Coast Guard in developing its acquisition strategy. In response to the concerns we and others have raised about this approach, the Coast Guard developed cost-related processes and policies, including establishing prices for deliverables, negotiating change order terms, and developing incentives. Stable sustained funding. The project's unique contracting approach is based on having a steady, predictable funding stream of $500 million in 1998 dollars ($544.4 million in 2003 dollars) over the next 2 to 3 decades. Significant reductions in levels from planned amounts could result in reduced operations, increased costs, and/or schedule delays, according to the Coast Guard. Already the funding stream is not materializing as the Coast Guard planned. The 2002 fiscal year appropriation for the project was about $18 million below the planned level. The fiscal year 2003 transportation appropriations have not yet been signed into law; however, the Senate appropriations committee has proposed $480 million for the Deepwater Project, and the House appropriations committee proposed $500 million. Contractor oversight. Because the contracting approach is unique and untried, the challenges in managing and overseeing the project will become more difficult. To address these challenges, the Coast Guard's plans require the systems integrator to implement many management processes and procedures according to best practices. While these practices are not yet fully in place, in May 2002, the Coast Guard released its Phase 2 Program Management Plan, which establishes processes to successfully manage, administer, monitor, evaluate, and report contract performance. Unproven technology. Our reviews of other acquisitions have shown that reliance on unproven technology is a frequent contributor to escalated costs, schedule and delays, and compromised performance standards. While the Coast Guard has successfully identified technologies that are sufficiently mature, commercially available, and proven in similar applications for use in the first 7 years of the project, it has no structured process to assess and monitor the potential risk of technologies proposed for use in later years. Specifically, the Coast Guard has lacked uniform and systematic criteria, which is currently available, to judge the level of a technology's readiness, maturity, and risk. However, in response to our 2001 recommendation, the Coast Guard is incorporating a technology readiness assessment in the project's risk management process. Technology readiness level assessments are to be performed for technologies identified in the design and proposal preparation and procurement stages of the project. For these and other reasons, our most recent series of Performance and Accountability Reports continues to list the Deepwater Project as a project meriting close management attention. We will continue to assess the department's actions in these areas. The Coast Guard's move to DHS may complicate these challenges further. For example, central to the acquisition strategy for the Deepwater Project is a clear definition of goals, needs, and performance capabilities, so that a contractor can design a system and a series of acquisitions that can be carried out over 2 to 3 decades, while meeting the Coast Guard's needs throughout this time. These system goals and needs were all developed prior to September 11th. Whether the Coast Guard's evolving homeland security mission will affect these requirements remains to be seen. Properly aligning this program within the overall capital needs of DHS is critical to ensuring the success of the Deepwater Project. Also, the Homeland Security Act of 2002 requires the Secretary of DHS to submit a report to the Congress on the feasibility of accelerating the rate of procurement of the Deepwater Project. If the project is accelerated, even greater care would need to be exercised in managing a project that already carries numerous risks. In conclusion, these challenges are daunting but not insurmountable. The Coast Guard continues to do an admirable job of adapting to its new homeland security role through the hard work and dedication of its people, and it has the management capability to address the implementation issues discussed here as well. However, reorganizations frequently encounter startup problems and unanticipated consequences, and even in the best of circumstances, implementation is a lengthy process that requires a keen focus, the application of sound management principles, and continuous reexamination of challenges and issues associated with achieving desired outcomes. As the Coast Guard addresses these and other challenges in the future, we will continue to monitor its efforts as part of our ongoing work on homeland security issues, and we will be prepared to report to you on this work as you deem appropriate. Madame Chair, this concludes my testimony today. I would be pleased to respond to any questions that you or members of the Subcommittee may have at this time. For information about this testimony, please contact JayEtta Z. Hecker, Director, Physical Infrastructure, at (202) 512-2834, or [email protected]. Individuals making key contributions to this testimony include Christopher Jones, Sharon Silas, Stan Stenersen, and Randall Williamson. Major Management Challenges and Program Risks: Department of Transportation. GAO-03-108. Washington, D.C.: January 30, 2003. Major Management Challenges and Program Risks: Department of Homeland Security. GAO-03-102. Washington, D.C.: January 30, 2003. Homeland Security: Management Challenges Facing Federal Leadership. GAO-03-260. Washington, D.C.: December 20, 2002. Container Security: Current Efforts to Detect Nuclear Materials, New Initiatives, and Challenges. GAO-03-297T. New York, NY: November 18, 2002. Highlights of a GAO Forum: Mergers and Transformation: Lessons Learned for a Department of Homeland Security and Other Federal Agencies. GAO-03-293SP. Washington, D.C.: November 14, 2002. Coast Guard: Strategy Needed for Setting and Monitoring Levels of Effort for All Missions. GAO-03-155. Washington, D.C.: November 12, 2002. National Preparedness: Technology and Information Sharing Challenges. GAO-02-1048R. Washington, D.C.: August 30, 2002. Homeland Security: Effective Intergovernmental Coordination Is Key to Success. GAO-02-1011T. Washington, D.C.: August 20, 2002. Port Security: Nation Faces Formidable Challenges in Making New Initiatives Successful. GAO-02-993T. Washington, D.C.: August 5, 2002. Homeland Security: Critical Design and Implementation Issues. GAO- 02-957T. Washington, D.C.: July 17, 2002. Managing for Results: Using Strategic Human Capital Management to Drive Transformational Change. GAO-02-940T. Washington, D.C.: July 15, 2002. Homeland Security: Title III of the Homeland Security Act of 2002. GAO- 02-927T. Washington, D.C.: July 9, 2002. Homeland Security: Intergovernmental Coordination and Partnerships Will Be Critical to Success. GAO-02-899T. Washington, D.C.: July 1, 2002.
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The Coast Guard is one of 22 agencies being placed in the new Department of Homeland Security. With its key roles in the nation's ports, waterways, and coastlines, the Coast Guard is an important part of enhanced homeland security efforts. But it also has non-security missions, such as search and rescue, fisheries and environmental protection, and boating safety. GAO has conducted a number of reviews of the Coast Guard's missions and was asked to testify about the Coast Guard's implementation challenges in moving to this newly created Department. The Coast Guard faces major challenges in effectively implementing its operations within the Department of Homeland Security. GAO has identified critical success factors for reorganizing and restructuring agencies, and its recent work in reviewing the Coast Guard has focused on challenges dealing with six of these factors--strategic planning, communications and partnership-building, performance management, human capital strategy, information management and technology, and acquisition management. The Coast Guard faces challenges in all of these areas. The difficulty of meeting these challenges is compounded because the Coast Guard is not just moving to a new parent agency: it is also substantially reinventing itself because of its new security role. Basically, the agency faces a fundamental tension in balancing its many missions. It must still do the work it has been doing for years in such areas as fisheries management and search and rescue, but now its resources are deployed as well in homeland security and even in the military buildup in the Middle East. The Coast Guard's expanded role in homeland security, along with its relocation in a new agency, have changed many of its working parameters, and its adjustment to this role remains a work in process. Much work remains. Some of the work is strategic in nature, such as the need to define new missions and redistribute resources to meet the wide range of missions. Others include accommodating a sudden surge of new positions or trying to ensure that its most ambitious acquisition project--the Deepwater Project--remains viable.
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U.S. relations with the FAS began when American forces liberated the islands near the end of World War II. In 1947, the United Nations assigned the United States administering authority over the Trust Territory of the Pacific Islands, which included what are now the Republic of Palau, the FSM, and the RMI. Interior's Office of Insular Affairs (OIA) has primary responsibility for monitoring and coordinating all U.S. assistance to the FAS, and the Department of State is responsible for government-to-government relations. All three compacts give the United States responsibility for the defense of the FAS and provide the United States with exclusive military use rights in these countries. According to the Department of Defense, the compacts have enabled it to maintain critical access in the Asia-Pacific region. In 2014, Palau had the smallest population of the three nations, but its per capita gross domestic product (GDP) was about four times greater than the FSM's or the RMI's (see table 1). Economic growth has varied among the three nations. After adjustment for inflation, per capita GDP in the FSM was unchanged from 2004 to 2014 but grew by 11 percent in the RMI and 8 percent in Palau. The U.S. and Palau governments concluded their Compact of Free Association in 1986, and the compact entered into force on October 1, 1994. Key provisions of the Palau compact address the sovereignty of Palau, types and amounts of U.S. assistance, security and defense authorities, and periodic reviews of compact terms. (See app. I for a table summarizing the key provisions of the Palau compact.) In fiscal years 1995 through 2009, the United States provided about $574 million in compact assistance to Palau, including $70 million to establish Palau's compact trust fund and $149 million for road construction. In addition, U.S. agencies--the Department of Education, the Department of Health and Human Services (HHS), and Interior, among others--provided assistance to Palau through discretionary federal programs as authorized by U.S. legislation and with appropriations from Congress. On September 3, 2010, the governments of the United States and Palau reached an agreement to extend U.S. assistance to Palau, totaling approximately $216 million in fiscal years 2011 through 2024. The planned assistance included extending direct economic assistance to Palau, providing infrastructure project grants and contributions to an infrastructure maintenance fund, establishing a fiscal consolidation fund, and making changes to the compact trust fund. The 1986 Compact of Free Association between the United States, the FSM, and the RMI provided a framework for the United States to work toward achieving its three main goals: (1) to secure self-government for the FSM and the RMI, (2) to assist the FSM and the RMI in their efforts to advance economic development and self-sufficiency, and (3) to ensure certain national security rights for all of the parties. The second goal of the compact--advancing economic development and self-sufficiency for both countries--was to be accomplished primarily through U.S. direct financial payments (to be disbursed and monitored by Interior) to the FSM and the RMI. Under the 1986 compact, U.S. assistance to the FSM and the RMI to support economic development was estimated, on the basis of Interior data, at about $2.1 billion in fiscal years 1987 through 2003. In addition, other U.S. agencies provided assistance to the FSM and RMI in the form of grants, services, technical assistance, and loans. In 2003, the United States approved separate amended compacts with the FSM and the RMI. The amended compacts provide for direct financial assistance to the FSM and the RMI in fiscal years 2004 through 2023, decreasing in most years, with the amount of the decrements to be deposited in trust funds for the two nations established under the amended compacts. The amended compacts' enabling legislation authorized and appropriated funds for the compact trust funds. The trust funds are to contribute to the economic advancement and long-term budgetary self-reliance of each government by providing an annual source of revenue after fiscal year 2023. After the grants end in fiscal year 2023, trust fund proceeds are to be used for the same purposes as grant assistance, or as mutually agreed, with priorities in education and health care. (See app. II for further information about planned U.S. trust fund contributions and grants to the FSM and RMI through fiscal year 2023.) The amended compacts identify the additional 20 years of assistance-- primarily in the form of annual sector grants and contributions to the compact trust fund for each country--as intended to assist the FSM and RMI governments in their efforts to promote the economic advancement and budgetary self-reliance of their people. The amended compacts and their subsidiary agreements, along with the countries' development plans, target the grant assistance to six sectors--education, health, public infrastructure, the environment, public sector capacity building, and private sector development--prioritizing two sectors, education and health. Interior projects that it will provide the FSM $2.1 billion under the compact, while economic assistance and trust fund contributions to the RMI will total $1 billion in fiscal years 2019 through 2023. The amended compacts also provided for a joint economic management committee for the FSM and a joint management and financial accountability committee for the RMI to promote the effective use of compact funding. In practice, the committees allocate grants and attach terms and conditions to grant awards through resolutions, which the committees discuss and vote on at their meetings. OIA has responsibility for administration and oversight of the FSM and RMI compact grants. The public law implementing the amended compacts required the President to submit annual reports to Congress regarding the FSM and RMI, a reporting requirement that has been delegated to the Secretary of the Interior. Every 5 years, these annual reports are to include additional information, including findings and recommendations, pertaining to reviews that are required by law to be conducted at 5-year intervals. The compacts provide for FAS citizens to enter and reside indefinitely in the United States, including its territories, without regard to the Immigration and Nationality Act's visa and labor certification requirements. Since the compacts went into effect, thousands of migrants from the FAS have established residence in U.S. areas, particularly in Guam, Hawaii, and the CNMI. In the 2003 amended compacts' enabling legislation, Congress authorized and appropriated $30 million annually for 20 years for grants to Guam, Hawaii, the CNMI, and American Samoa, which it deemed affected jurisdictions, and authorized additional appropriations. The $30 million annual appropriation is to aid in defraying costs incurred by these jurisdictions as a result of increased demand for health, educational, social, or public safety services, or for infrastructure related to such services, due to the residence of compact migrants in their jurisdiction. Congress directed Interior to divide the $30 million compact impact grants among the affected jurisdictions in proportion to the most recent enumeration of those compact migrants residing in each jurisdiction. The U.S. Bureau of the Census (Census) conducted these enumerations in 2003, 2008, and 2013. If enacted, S. 2610 would approve, provide funding for, and make modifications to the September 2010 agreement between the governments of the United States and Palau regarding their compact. S. 2610 would not greatly alter the total U.S. assistance to Palau for fiscal years 2011 through 2024 specified in the 2010 agreement. However, S. 2610 would make changes to the provision of assistance outlined in the agreement in line with the reduction in U.S. assistance in fiscal years 2011 through 2016 from that planned in the 2010 agreement. The annual trust fund contributions and withdrawal conditions that S. 2610 details would improve the fund's prospects for sustaining scheduled payments through fiscal year 2044. Under S. 2610, U.S. assistance to Palau would total about $216 million-- approximately equal to the amount specified in the 2010 agreement--for fiscal years 2011 to 2024. However, after 2016, larger amounts of assistance would be provided under S. 2610 than the annual amounts scheduled under the 2010 agreement. Under the 2010 agreement, which has not been implemented, annual U.S. assistance to Palau would have declined over 14 years from roughly $28 million in 2011 to $2 million in 2024. The 2010 agreement includes the following: Direct economic assistance ($107.5 million). The 2010 agreement would provide direct economic assistance--budgetary support for Palau government operations and specific needs such as administration of justice and public safety, health, and education--of $13 million in 2011, declining to $2 million by 2023. The 2010 agreement also calls for the U.S. and Palau governments to establish a five-member Advisory Group to provide annual recommendations and timelines for economic, financial, and management reforms. The Advisory Group must report on Palau's progress in implementing these or other reforms, prior to annual U.S.-Palau economic consultations. These consultations are to review Palau's progress in achieving reforms such as improving fiscal management, reducing the public sector workforce and salaries, reducing government subsidization of utilities, and implementing tax reform. If the U.S. government determines that Palau has not made significant progress in implementing meaningful reforms, direct assistance payments may be delayed until the U.S. government determines that Palau has made sufficient progress. Infrastructure projects ($40 million). Under the 2010 agreement, the U.S. government would provide U.S. infrastructure project grants to Palau for mutually agreed infrastructure projects--$8 million in 2011 through 2013, $6 million in 2014, and $5 million in both 2015 and 2016. The 2010 agreement requires Palau to provide a detailed project budget and certified scope of work for any projects receiving these funds. Infrastructure maintenance fund ($28 million). The 2010 agreement stipulates that the United States make contributions to a fund to be used for maintenance of U.S.-financed major capital improvement projects, including the Compact Road and Airai International Airport. From 2011 through 2024, the U.S. government would contribute $2 million annually, and the Palau government would contribute $600,000 annually to the fund. Fiscal consolidation fund ($10 million). The 2010 agreement states that the United States would provide grants of $5 million each in 2011 and 2012, respectively, to help the Palau government reduce its debts. Unless agreed to in writing by the U.S. government, these grants cannot be used to pay any entity owned or controlled by a member of the government or his or her family, or any entity from which a member of the government derives income. U.S. creditors must receive priority, and the government of Palau must report quarterly on the use of the grants until they are expended. Trust fund ($30.25 million). The 2010 agreement provides for the United States to contribute $30.25 million to the fund from 2013 through 2023. The government of Palau would reduce its previously scheduled withdrawals from the fund by $89 million. From 2024 through 2044, Palau can withdraw up to $15 million annually, as originally scheduled. Moneys from the trust fund account cannot be spent on state block grants, operations of the office of the President of Palau, the Olibiil Era Kelulau (Palau national congress), or the Palau judiciary. Palau must use $15 million of the combined total of the trust fund disbursements and direct economic assistance exclusively for education, health, and the administration of justice and public safety. If enacted, S. 2610 would increase the total annual assistance to Palau in fiscal years 2017 through 2024 over that which was scheduled in the 2010 agreement. This increase would be in line with the lower than scheduled amount of annual U.S. assistance that has been provided to Palau since 2011. Specifically, Congress has not passed legislation to approve the agreement, and Interior has provided Palau with a total of $78.88 million in direct economic assistance from annual appropriations-- $13.147 million in each fiscal year from 2011 through 2016. The amount provided was approximately $67 million less than the amount outlined for those years in the 2010 agreement, and it included no contributions to the Palau trust fund. S. 2610 outlines changes in the schedule for contributing approximately $137 million with larger total contributions in fiscal years 2017 through 2024, which would amount to approximately the same total assistance specified in the 2010 agreement, $216 million. S. 2610 would make the following changes to the contribution schedule: Rescheduling U.S. contributions to Palau's trust fund, with a $20 million contribution in fiscal year 2017, $2 million annually through fiscal year 2022, and $250,000 in fiscal year 2023. Rescheduling U.S. contributions to Palau's infrastructure maintenance fund and fiscal consolidation fund, infrastructure project grants, and direct economic assistance. Figure 1 contrasts the scheduled annual assistance to Palau under the 2010 agreement with the contribution schedule under S. 2610. (See app. III for additional details on the schedule of U.S. assistance to Palau in the 2010 agreement and as modified in the provisions of S. 2610.) S. 2610 would also place conditions on the provision of assistance to Palau. Under the bill, if Palau withdraws more than $5 million from the trust fund in fiscal year 2016 or more than $8 million in fiscal year 2017, additional assistance would be withheld until Palau reimbursed the trust fund for the amounts that exceed the $5 million for fiscal year 2016 or the $8 million for fiscal year 2017. S. 2610 would not otherwise alter the withdrawal schedule outlined in the 2010 agreement. In the 2010 agreement, Palau agreed to a maximum withdrawal of $5 million annually in fiscal years 2011 through 2013, with the maximum subsequently increasing in increments through fiscal year 2023 to $13 million. Under the 2010 agreement, Palau agreed to withdraw up to $6.75 million in fiscal year 2016; under S. 2610, Palau would be able to withdraw up to $5 million in fiscal year 2016 without having assistance withheld. Furthermore, Palau did not commit to a withdrawal schedule beyond 2023 in the 2010 agreement. However, the compact details an annual distribution goal of $15 million for 2024 through 2044 from the trust fund. The contributions to, and conditions on withdrawals from, Palau's compact trust fund that S. 2610 outlines would improve the fund's prospects for sustaining payments beyond fiscal year 2044. At the end of fiscal year 2015, the trust fund had a balance of nearly $184 million. With or without the contributions and conditions that S. 2610 would provide, the trust fund would be sustained through fiscal year 2044 if it maintains the 7.6 percent compounded annual rate of return it earned from inception through fiscal year 2015. However, given this historical rate of return, the account balance at the end of fiscal year 2044 would be dramatically lower without the contributions and conditions outlined in S. 2610--about $32 million--than it would be with them--about $521 million. The balances with and without these contributions equal $18 million and $292 million, respectively, in 2015 inflation-adjusted dollars. Figure 2 compares the fund balance at the historical rate of return with and without the changes outlined in S. 2610. In addition, with the changes in S. 2610, Palau's trust fund would be able to sustain scheduled payments through 2044 given varying rates of return in fiscal years 2015 through 2044. With its historical 7.6 percent annual compounded return, Palau's trust fund would sustain its annual withdrawal schedule and continue to grow beyond 2044, with a balance of $521 million at the end of fiscal year 2044. (The 2044 balance would be $292 million in 2015 inflation-adjusted dollars.) With at least a 6.3 percent annual compounded rate of return, Palau's trust fund would sustain its annual withdrawal schedule, with a balance of $245 million or more at the end of fiscal year 2044. (The 2044 balance would be $137 million in 2015 inflation-adjusted dollars.) With a 4.4 percent annual compounded return, Palau's trust fund would sustain its annual withdrawal schedule through 2044, with a balance of $0 at the end of fiscal year 2044. Figure 3 shows the projected trust fund balances with these varying assumed rates of return. As we have previously reported, in implementing their amended compacts with the United States, the FSM and RMI have faced a number of critical challenges that could affect their ability to achieve the compacts' long-term development goals. Both countries have historically had limited prospects for achieving economic growth. Moreover, compact implementation by the FSM, RMI, and U.S. governments has displayed weaknesses that have affected their ability to allocate resources appropriately as well as provide accountability for, and oversight of, the use of compact grants, which are scheduled to end in 2023. We previously reported that the FSM's and RMI's economies were largely dependent on government spending of foreign assistance, including U.S. assistance under the amended compacts. Because of the scheduled annual decrements of compact grant funding, annual grant assistance to the FSM and RMI will diminish over the funding period. In addition, neither country had made significant progress in implementing reforms needed to improve tax income or increase private sector investment opportunities. Moreover, tourism and fishing--private sector industries that both countries have identified as having growth potential--faced significant constraints, such as geographic isolation and lack of tourism infrastructure. In 2011, Interior's annual report to Congress regarding the FSM and RMI noted that the FSM faced numerous challenges to private sector economic growth and suggested that a consequence of declining U.S. grant assistance could be a decline in living standards or migration to the United States. At that time, Interior found that economic prospects for the RMI remained uncertain, although the RMI had experienced growth in fisheries and tourism. Interior expected the continuation of migration from the RMI to the United States. We reported in 2007 that uncertainty existed regarding the sustainability of the FSM's and RMI's compact trust funds as sources of revenue after the amended compacts end. We noted that the countries' compact trust funds' balances in 2023 could vary widely owing to market volatility and choice of investment strategy and that, as a result, the compact trust funds might be unable to generate disbursements in some years, affecting the governments' ability to provide services after U.S. contributions to the trust funds end. More recent analyses of the FSM and RMI trust funds have highlighted the challenge of ensuring trust fund disbursements and proposed technical revisions to trust fund procedures. In 2015, the Asian Development Bank (ADB) projected that the probability of FSM and RMI trust funds' maintaining their value through 2050 was 22 and 49 percent, respectively. The ADB projects significant fluctuations in FSM and RMI annual drawdowns and proposes revised trust fund withdrawal rules. Moreover, 2015 economic reviews of the FSM and RMI compacts funded by Interior have projected that both trust funds will be underfunded and distribution shortfalls will be frequent and have recommended several changes to the distribution mechanism. In its September 2012 comments on the U.S. government's first 5-year review of the amended compact, the RMI government made specific recommendations to improve compact performance, including technical revisions to trust fund procedures. During the amended compacts' first 10 years, the FSM and RMI joint management and accountability committees directed the majority of compact grant assistance to the education and health sectors, which the compact agreements prioritized. As we previously reported, weaknesses in FSM, RMI, and U.S. implementation of the compacts have limited the governments' ability to ensure the effective use of grant funds. Lack of reliable performance data. Ongoing problems with the reliability of data on grant performance in the education and health sectors have prevented both countries from demonstrating and assessing progress toward compact goals for these sectors and from using the data to set priorities and allocate resources to improve performance. Challenges to ensuring accountability for compact grant funding. The FSM's and RMI's single audits for fiscal years 2006 through 2011 indicated challenges to ensuring accountability of compact and noncompact U.S. funds in the FSM and RMI. For example, these governments' single audits showed repeat findings and persistent problems in noncompliance with U.S. program requirements, such as accounting for equipment. For this hearing, we have updated our prior analysis of audit reports and have found that accountability remains a concern. For example, while the RMI met the single audit reporting deadline for fiscal years 2006 through 2010, it submitted the required reports for fiscal years 2011 through 2014 after the deadline. Moreover, the 2014 reports for both countries identified several material weaknesses, such as an inability to account properly for equipment. Limited oversight of compact grants. OIA's oversight of grants under the amended compacts has been limited by staffing shortages. As we have previously reported, OIA officials noted that budget constraints, as well as decisions to use available funding for other hiring priorities, were among factors that prevented OIA from hiring staff that it had projected as necessary to ensure effective oversight for the amended compacts. These staffing shortages have affected OIA's ability to ensure that compact funds are used efficiently and effectively. According to FSM and RMI officials, staffing constraints, as well as a lack of authority to enforce compact requirements, hampered oversight by the FSM and RMI offices responsible for compact implementation. The population of FAS migrants in U.S. areas has continued to grow. We have previously reported that, while the majority of compact migrants live in three affected jurisdictions--Hawaii, Guam, and the CNMI--migrants are also present in several other U.S. states. The three affected jurisdictions have reported more than $2 billion in costs associated with providing education, health, and social services to compact migrants and have called for additional funding and changes in law to address compact migrant cost impacts. Since the signing of the Compacts of Free Association, thousands of FAS citizens have migrated to U.S. areas. According to Census enumerations of migrants in three affected jurisdictions--Guam, Hawaii, and the CNMI--the total number of compact migrants in those jurisdictions increased from about 21,000, estimated in the 2003 enumeration, to about 35,000, estimated in the 2013 enumeration (see fig. 4). In 2011, Census estimated that roughly 56,000 compact migrants--nearly a quarter of all FAS citizens--were living in U.S. areas in 2005 to 2009. About 58 percent of compact migrants lived in Hawaii, Guam, and the CNMI at that time. Nine mainland U.S. states--California, Washington, Oregon, Utah, Oklahoma, Florida, Arkansas, Missouri, and Arizona-- each had an estimated compact migrant population of more than 1,000. (See app. IV for further information about the estimated compact migrant populations.) Approximately 68 percent of compact migrants were from the FSM, 23 percent were from the RMI, and 9 percent were from Palau. In fiscal years 2004 through 2016, affected jurisdictions received approximately $409 million in compact impact grants to aid in defraying their costs due to the residence of compact migrants. In fiscal years 2004 through 2016, Interior distributed a portion of the $30 million annual appropriation that was authorized and appropriated in the amended compacts' enabling legislation to each affected jurisdiction according to the size of its compact migrant population. Since fiscal year 2012, as authorized by the amended compacts' enabling legislation, Interior has also provided compact impact grants to affected jurisdictions from annual appropriations, which it has also divided according to the size of their migrant populations. Table 2 shows the compact impact grants that Guam, Hawaii, and the CNMI received in fiscal years 2004 through 2016. The affected jurisdictions have continued to report to Interior that their cost impacts from compact migrants greatly exceed the amount of the compact impact grants. In 2003 through 2014, Guam reported $825 million in costs, Hawaii reported $1.2 billion, and the CNMI reported $89 million. (Fig. 5 shows the affected jurisdictions' reported annual costs of services to compact migrants.) These affected jurisdictions reported costs for the services identified in the amended compacts' enabling legislation: educational, health, public safety, and social services. Education costs accounted for the largest share of reported expenses in all three jurisdictions, and health care costs accounted for the second largest share. Officials in Guam and Hawaii also cited compact migrants' limited eligibility for a number of federal programs, particularly Medicaid, as a key contributor to the cost of compact migration borne by the affected jurisdictions. We have previously found that the three affected jurisdictions' cost estimates contained a number of limitations with regard to accuracy, adequate documentation, and comprehensiveness. These limitations affect the reported costs' credibility and prevent a precise calculation of total compact cost impact on the affected jurisdictions. For example, some jurisdictions did not accurately define compact migrants according to the criteria in the amended compacts' enabling legislation, account for federal funding that supplemented local expenditures, or include revenue received from compact migrants. Many local government agencies did not include capital costs in their impact reporting, which may have led to an understatement of costs. We recommended that the Secretary of the Interior disseminate guidelines to the affected jurisdictions that adequately address concepts essential to producing reliable impact estimates and that the Secretary call for their use in developing compact impact reports. In a February 2015 report to Congress on the Governors' compact impact reports, Interior noted that it had concerns about the uniformity of compact impact reports, including the use of different data gathering and formats by Guam and Hawaii. Interior reiterated those concerns in its January 2016 report to Congress. While Interior developed a draft of compact impact reporting guidelines in 2014, it has not disseminated them to affected jurisdictions. In March 2016, Interior stated that OIA, in consultation with the leaders from the affected jurisdictions, would develop guidelines for measuring compact impact and that the guidelines would be completed in December 2016. Since we reported on compact migration impacts in 2001, the three affected jurisdictions have continued to express concerns that they do not receive adequate compensation for the growing cost of providing government services to compact migrants. For example, in his 2015 State of the Island address, the Governor of Guam noted that compact impact reimbursement had been a topic of disagreement for decades and criticized "the federal government's inability to live up to its promise" to help provide services to the compact migrant population. Similarly, in Hawaii's August 2015 cost impact report to Interior, the Governor of Hawaii noted that Hawaii had consistently advocated for an increase in compact impact assistance to the affected jurisdictions and that providing for direct federal assistance in programs such as Medicaid, Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), and other means-tested public assistance not currently available to compact migrants would significantly reduce Hawaii's impact costs. The Governor further suggested that the governments of the FAS be encouraged to utilize the financial support they receive directly from the United States to contract services in the United States for their citizens who choose to reside in the United States. In our 2011 report, we recommended that the Secretary of the Interior work with the U.S.-FSM and U.S.-RMI joint management committees to consider uses of sector grants that would address the concerns of FSM and Marshallese migrants and the affected jurisdictions. While Interior took initial steps to implement this recommendation and discuss compact impact at the joint management committee meetings, the discussions have not been continued. In March 2016, Interior OIA stated that the concerns of FSM and RMI migrants and affected jurisdictions will be discussed at future meetings of the joint management committees. In a January 2016 letter accompanying its Report to the Congress: 2015 Compact Impact Analysis, OIA stated that increased oversight and accountability are needed in the use of compact sector grants by the FAS--particularly for infrastructure grants for health and education--and that improving the quality of life for FAS citizens may help address the migration from the FAS to the United States. Chairwoman Murkowski, Ranking Member Cantwell, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. If you or your staff have any questions about this testimony, please contact David Gootnick, Director, International Affairs and Trade at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Emil Friberg (Assistant Director), Ashley Alley, Ming Chen, David Dayton, Brian Hackney, Julie Hirshen, Jeff Isaacs, Reid Lowe, Grace Lui, Mary Moutsos, Michael McKemey, Michael Simon, Jena Sinkfield, and Ozzy Trevino. Key provisions of the compact and its subsidiary agreements address the sovereignty of Palau, types and amounts of U.S. assistance, security and defense authorities, and periodic reviews of compact terms. Table 3 summarizes key provisions of the Palau compact and related subsidiary agreements. Figure 6 shows the annually decreasing U.S. grant funding to the Federated States of Micronesia (FSM) and Republic of the Marshall Islands (RMI) and increasing U.S. contributions to the FSM's and the RMI's compact trust funds in fiscal years 2004 through 2023. Senate Bill 2610 (S. 2610) would modify the schedule of U.S. assistance to Palau specified in the 2010 agreement between the U.S. and Palau governments, which has not been implemented. Table 4 shows the assistance schedule for fiscal years 2011 through 2024 outlined in the 2010 agreement. Table 5 shows U.S. assistance provided to Palau through discretionary appropriations in fiscal years 2011 through 2016 and the assistance schedule proposed in S. 2610. Compact migrants reside throughout U.S. states and territories. In 2011, we reported that 57.6 percent of all compact migrants lived in affected jurisdictions: 32.5 percent in Guam, 21.4 percent in Hawaii, and 3.7 percent in the Commonwealth of the Northern Mariana Islands (CNMI). According to American Community Survey data, nine mainland states had estimated compact migrant populations of more than 1,000 in 2005 through 2009 (see fig. 7). According to these estimates, the Federated States of Micronesia produced the highest number of migrants but migrants from the Republic of the Marshall Islands predominated in Arizona, Arkansas, California, and Washington.
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U.S. compacts with the FSM and the RMI entered into force in 1986 and were amended in 2003. A compact with Palau entered into force in 1994. Legislation pending before the Senate would approve, provide funding for, and make modifications to a 2010 agreement between the U.S. and Palau governments regarding their compact. Under the compacts, the United States provides each country with, among other things, economic assistance--including grants and contributions to a trust fund; access to certain federal services and programs; and permission for citizens of the three countries to migrate to the United States and its territories without regard to visa and labor certification requirements. Guam, Hawaii, the Commonwealth of the Northern Mariana Islands, and American Samoa, which are designated in law as jurisdictions affected by compact migration, receive grants to aid in defraying the cost of services to migrants. This testimony examines (1) the potential impact of the proposed legislation approving the 2010 Palau agreement, (2) challenges affecting implementation of the FSM and RMI compacts, and (3) migration from the FSM, RMI, and Palau and its impacts on U.S. areas. For this statement, GAO summarized previous reports issued in 2007 through 2013 and incorporated updated information from Palau, the Department of the Interior, and affected jurisdictions. GAO is not making any new recommendations in this testimony. GAO has made recommendations in its prior reports, some of which have not yet been addressed. If enacted, Senate Bill 2610 (S. 2610) would change the schedule for U.S. assistance to the Republic of Palau and improve prospects for Palau's compact trust fund. S. 2610 would approve a 2010 agreement between the U.S. and Palau governments and provide annual assistance to Palau through 2024. Congress has not approved legislation to implement the 2010 agreement, which scheduled $216 million in U.S. assistance for fiscal years 2011 through 2024. Since 2011, the United States has provided $79 million in economic assistance to Palau through annual appropriations. However, this amount was less than anticipated under the agreement and has not included trust fund contributions. S. 2610 would modify the agreement schedule to provide the remaining $137 million in fiscal years 2017 through 2024, including a $20 million trust fund contribution in 2017 and smaller contributions in later years (see fig.). U.S. Assistance to Palau Provided in Fiscal Years 2011-2016 and Proposed by Senate Bill 2610 for Fiscal Years 2017-2024 The Federated States of Micronesia (FSM) and Republic of the Marshall Islands (RMI) face challenges to achieving the compact goals of economic growth and self-sufficiency. GAO previously found that neither country has made significant progress on reforms and compact implementation has been characterized by unreliable performance data and by accountability and oversight challenges. GAO has previously reported on the growth of migrant populations from Palau, the FSM, and RMI in U.S. areas as well as the reported impacts of these compact migrants. In Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands--areas Congress has deemed affected jurisdictions--compact migrants increased from about 21,000 in 2003 to about 35,000 in 2013. In fiscal years 2004 through 2016, the Department of the Interior provided approximately $409 million to affected jurisdictions to aid in defraying costs, such as for education and health services, attributable to compact migrants. In contrast, affected jurisdictions estimated costs of $2.1 billion for these services in 2003 through 2014. However, GAO has noted that these estimates have limitations related to accuracy, documentation, and comprehensiveness.
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The Davis-Bacon Act requires workers on federal construction projects valued in excess of $2,000 to be paid, at a minimum, wages and fringe benefits that the Secretary of Labor determines to be prevailing for corresponding classes of workers in the locality where the contract is to be performed. The act covers every contract to which the United States or the District of Columbia is a party for construction, alteration, or repair of public buildings or public works. Labor's Wage and Hour Division (WHD), within Labor's Employment Standards Administration (ESA), has responsibility for administering the Davis-Bacon Act. Approximately 50 staff in the Washington, D.C., headquarters and in six regional offices are involved in the wage determination process. Two other Labor offices are sometimes involved in the administration of Davis-Bacon: Labor's Administrative Review Board hears appeals of prevailing wage determinations, and the Office of the Solicitor provides legal advice and assistance to Labor personnel relative to the act and represents WHD in Davis-Bacon wage determination cases before the Administrative Review Board. also improved Labor's ability to administer the wage determination process. Despite these changes, however, we reported in 1994 that data verification problems still existed. In setting prevailing wages, Labor's task is to determine and issue prevailing wage rates in a wide range of job classifications in each of four types of construction (building, residential, heavy, and highway) in more than 3,000 counties or groups of counties. It also needs to update these wage determinations frequently enough that they continue to represent the prevailing wages. Labor's process for determining the wage rates is based primarily on a survey of the wages and fringe benefits paid to workers in similar job classifications on comparable construction projects in the particular area. This information is submitted voluntarily by employers and third parties. Labor encourages the submission of wage information from all employers and third parties, including employee unions and industry associations that are not directly involved with the surveyed projects. Although an individual wage survey typically covers only one kind of construction, most surveys gather information on projects in more than one county. In fiscal year 1995, Labor completed 104 survey efforts resulting in wage determinations for over 400 counties. The wage determination process consists of four basic stages: planning and scheduling surveys, conducting the surveys, clarifying and analyzing respondents' wage data, and issuing the wage determinations. In addition, any employer or interested party who wishes to contest or appeal Labor's final wage determination can do so. counties for which the wage determination should be conducted and determines what construction projects will be surveyed. The work of conducting the surveys and clarifying and analyzing the data is done by about 30 staff distributed among six regional offices. The survey is distributed to the participant population, which includes the general contractor for each construction project identified as comparable and within the survey's geographic area. In surveying the general contractors, Labor requests information on subcontractors to solicit their participation. Labor also surveys interested third parties, such as local unions and construction industry associations that are located or active in the survey area. Once the data submissions are returned, the analysts review and analyze the returned survey forms. They follow up with the employer or third parties to clarify any information that seems inaccurate or confusing. The analysts then use this information to create computer-generated recommended prevailing wages for key construction job classifications. The recommended prevailing wages are reviewed and approved by Labor's National Office in Washington, D.C. Labor publishes the final wage determinations in printed reports and on its electronic bulletin board. The opportunity to appeal a final wage determination is available to any interested party at any time after the determination is issued. For example, appeals could come from contractors, contractor associations, construction workers, labor unions, or federal, state, or local agencies. Appeals may take the form of informal inquiries resolved at the regional office level or formal requests for reconsideration that are reviewed at the regional office or the National Office and may be appealed to the Administrative Review Board for adjudication. Labor's wage determination process contains weaknesses that could permit the use of fraudulent or inaccurate data for setting prevailing wage rates. These weaknesses include limitations in the degree to which Labor verifies the accuracy of the survey data it receives, limited computer capability to review wage data before calculating prevailing wage rates, and an appeals process that may not be well publicized to make it accessible to all interested parties. Wage determinations based on erroneous data could result in wages and fringe benefits paid to workers that are higher or lower than the actual prevailing rates. Labor's regional staff rely primarily on telephone responses from employers or third parties to verify the information received on Labor's WD-10 wage reporting forms. Regional office staff told us that most of the verification--clarifications concerning accuracy, appropriateness, or inclusion--was done by telephone. Labor's procedures also do not require and Labor staff rarely request supporting documentation--for example, payroll records--to supplement the information on the forms submitted by employers. Labor officials and staff told us that if an employer insists that the wages reported are accurate, the wage analyst generally accepts that statement. It is because of resource constraints, according to Labor headquarters officials, that verification is limited to telephone contacts without on-site inspections or reviews of employer payroll records to verify wage survey data. In recent years, Labor has reduced the number of staff allocated to Davis-Bacon wage-setting activities. For example, the number of staff in Labor's regional offices assigned to the Davis-Bacon wage determination process--who have primary responsibility for the wage survey process--decreased from a total of 36 staff in fiscal year 1992 to 27 staff in fiscal year 1995. Labor officials in one region also told us that staff had only received two work-related training courses in the last 6 years. Labor's regional staff told us that the staff decline has challenged their ability to collect and review wage survey data for accuracy and consistency. Labor's administration of the Davis-Bacon wage determination process is also hampered by limited computer capabilities. Labor officials reported a lack of both computer software and hardware that could assist wage analysts in their reviews. Instead, they said that analysts must depend on past experience and eyeballing the wage data for accuracy and consistency. For example, Labor offices do not have computer software that could detect grossly inaccurate data reported in Labor's surveys. Regional staff reported only one computer edit feature in the current system that could eliminate duplicate entry of data received in the wage surveys. As a result, several review functions that could be performed by computers are conducted by visual reviews by one or more wage analysts or supervisory wage analysts in Labor's regional offices. capabilities, Labor staff told us that they are unable to store historical data on prior wage determinations that would allow wage analysts to compare current with prior recommendations for wage determinations in a given locality. These limitations could be significant given the large number of survey forms received and the frequency of errors on the WD-10 reporting forms. In fiscal year 1995, Labor received wage data on about 75,000 WD-10 wage reporting forms; these were from over 37,000 employers and third parties, some of whom provided information on multiple construction projects. Labor staff reported that submissions with some form of data error were quite common. The frequency of errors could be caused in part by employer confusion in completing the wage reporting forms. Depending on the employer's size and level of automation, completing the WD-10 reporting forms could be somewhat difficult and time consuming. For example, employers must conduct so-called peak week calculations where they must not only compute the hourly wages paid to each worker who was employed on the particular project in a certain job classification but also do so for the time period when the most workers were employed in each particular job classification. We were told that this can be especially difficult for many smaller, nonunion employers. Although Labor staff reported that wage surveys with data errors are fairly common, agency officials believe that it is very unlikely that erroneous wage data went undetected and were used in the prevailing wage determination. They said that a key responsibility of Labor's wage analysts is to closely scrutinize the WD-10 wage reporting forms and contact employers as necessary for clarification. Labor officials contended that, over time, this interaction with employers and third parties permitted Labor staff to develop considerable knowledge of and expertise in the construction industry in their geographic areas and to easily detect wage survey data that are inaccurate, incomplete, or inconsistent. Labor's appeals process could provide an important safeguard against reliance on inaccurate data in that it allows any interested party to question the validity of the determinations. But our review suggests that this mechanism is not understood well enough to serve its purpose. most inquiries on its wage determinations are informal and are generally resolved quickly over the telephone at the regional offices. If an informal inquiry is not resolved to the satisfaction of the interested party, he or she may submit a formal request for reconsideration to either the regional or National Office. A formal request for reconsideration of a wage determination must be in writing and accompanied by a full statement of the interested party's views and any supporting wage data or other pertinent information. A successful request for reconsideration typically results in Labor modifying an existing determination or conducting a new wage survey. An interested party may appeal an unsuccessful request--that is, one in which he or she is dissatisfied with the decision of the WHD Administrator--to Labor's Administrative Review Board for adjudication. Labor officials said it is extremely rare for anyone to appeal formal requests for reconsideration of a determination to the Board, reporting that there had been only one such case in the last 5 years. The infrequency of formal appeals to the Board can be interpreted in more than one way. Labor officials interpreted this record to mean that there is little question about the accuracy and fairness of the prevailing wage determinations issued. Alternatively, this could reflect interested parties' lack of awareness of their rights and the difficulty they face in collecting the evidence necessary to sustain a case. Representatives of construction unions and industry trade associations told us that employers were generally unaware of their rights to appeal Labor's final wage determinations. Officials with a state Labor Department also told us that, even if an interested party wanted to appeal a wage determination to the National Office and the Administrative Review Board, the effort it takes to independently verify wage data submissions could discourage such an action. They reported that it took a state investigation team a full month to gather information to support the need for Labor to reconsider some wage determinations--and that involved investigating and verifying the information for only three construction projects. A private employer or organization wishing to appeal a determination might experience similar difficulties. Wage determinations based on erroneous data could result in workers being paid higher or lower wages and fringe benefits than those prevailing on federal construction projects. Higher wages and fringe benefits would lead to increased government construction costs. On the other hand, lower wages and fringe benefits would result in construction workers being paid less than is required by law. Although they considered it unlikely, Labor officials acknowledged that, in general, there could be an incentive for third parties, particularly union contractors, to report higher wages than those being paid on a particular construction project. By reporting higher wages, they could influence the prevailing wages in a local area toward the typically higher union rate. The use of inaccurate data could also lead to lower wages for construction workers on federal projects than would otherwise be prevailing. Labor officials acknowledged that an employer in a largely nonunion area who had been paying lower than average wages would have an incentive to "chisel" or report wages and fringe benefits levels somewhat lower than what he or she was actually paying, in an attempt to lower the Davis-Bacon rate. However, officials also said that it is much more likely for some employers to report data selectively in an effort to lower the prevailing wage rate. For example, a contractor may only submit data on those projects where the wages paid were relatively low, ignoring projects where a somewhat higher wage was paid. In addition, the wages required under the Davis-Bacon Act have implications for construction projects other than those specifically covered by the act. Industry association members and officials told us that in several parts of the country, employers, especially nonunion contractors, paid wages on their private projects below the prevailing wage levels specified by the Davis-Bacon Act in their areas. These officials told us that this differential sometimes proved problematic for contractors in retaining their skilled labor force. An official of an employer association told us, for example, that an employer who successfully bid on a Davis-Bacon contract but who typically paid wages below the prevailing rate would be required to pay the workers employed on the new project at the higher Davis-Bacon wage rates. Depending on the local labor market conditions, when the project was completed, these workers typically received their pre-Davis-Bacon, lower wages and fringe benefits on any future work. In such cases, some employees became disgruntled, believing that they were being cheated, and may have suffered lower morale that sometimes led to increased staff turnover. Depending on local labor market conditions, if the employer did not bid on the Davis-Bacon project, he or she could still be affected if the employer's skilled workers quit to search for work on the new, higher wage federally funded project. Labor has acknowledged the weaknesses of its current wage determination process and it has proposed both short- and long-term initiatives to improve the accuracy of the data used to make prevailing wage determinations. One recent change improves the verification process for data submitted by third parties. In August 1995, Labor began requiring its wage analysts to conduct telephone verifications with the employer on all third-party data that appear to be inaccurate or confusing. In addition, the new policy requires analysts to verify with the employers at least a 10-percent sample of third-party data that appear to be accurate. Labor has also proposed a change that would specifically inform survey respondents of the possible serious consequences of providing false data, since it is a crime under federal law to knowingly submit false data to the government or use the U.S. mail for fraudulent purposes. In February 1996, Labor solicited comments in the Federal Register on its proposal to place a statement on the WD-10 survey reporting form that respondents could be prosecuted if they willfully falsify data in the Davis-Bacon wage surveys. The comment period for this proposal ended in May 1996, and the proposed regulation has now been sent to the Office of Management and Budget. Labor has also proposed a long-term strategy to review the entire Davis-Bacon wage determination process. In late 1995, Labor established an ongoing task group to identify various strategies for improving the process it uses to determine prevailing wages. These continuing discussions have led to the identification of various weaknesses in the wage determination process and steps Labor might take to address them. In its fiscal year 1997 budget request, Labor asked for about $4 million to develop, evaluate, and implement alternative reliable methodologies or procedures that will yield accurate and timely wage determinations at reasonable cost. Approaches that it is considering include alternatives such as use of other existing databases to extrapolate wage data instead of collecting its own survey data. Labor anticipates making a general decision on the overall direction of its strategy for improving its wage determination process by late 1996. inaccurate data. Therefore, we recommended that, while it continues its more long-term evaluation and improvement of the overall wage determination process, it move ahead immediately to improve its verification of wage data submitted by employers. We also recommended that it make the appeals process a more effective internal control to guard against the use of fraudulent or inaccurate data. Specifically, we recommended that Labor improve the accessibility of the appeals process by informing employers, unions, and other interested parties about the process--about their right to request information and about procedures for initiating an appeal. In its response to our draft report, Labor agreed to implement these recommendations. Our review confirmed that vulnerabilities exist in Labor's current wage determination process that could result in wage determinations based on fraudulent or otherwise inaccurate data. Although we did not determine the extent to which Labor is using inaccurate data in its wage calculations nor the consequences, in terms of wages paid, of such use, we believe that these vulnerabilities are serious and warrant correction. We believe that the process changes we recommended address those vulnerabilities and, if implemented in a timely manner, could increase confidence that the wage rates are based on accurate data. Specifically, Labor needs to move ahead immediately to improve its verification of wage data submitted by employers. We recognize, however, that the wage determinations could be flawed for other reasons. For example, other problems with the survey design and implementation, such as the identification of projects to survey or the response rates obtained, could affect the validity of the determinations. In addition, untimely updating of the wage rates decreases confidence in their appropriateness. Nevertheless, using only accurate data in the wage determination process is, in our view, a minimum requirement for ultimately issuing appropriate wage determinations. Mr. Chairmen, that concludes my prepared statement. At this time, I will be happy to answer any questions you or other members of the Subcommittees may have. For information on this testimony, please call Charles A. Jeszeck, Assistant Director, at (202) 512-7036; or Linda W. Stokes, Evaluator-in-Charge, at (202) 512-7040. 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 vulnerabilities in the Department of Labor's prevailing wage determination process under the Davis-Bacon Act. GAO noted that: (1) Labor sets prevailing wage rates for numerous job classifications in about 3,000 geographic areas; (2) Labor's wage determination process depends on employers' and third parties' voluntary participation in a survey that reports wage and fringe benefits paid for similar jobs on comparable construction projects in a given area; (3) due to limited resources, Labor concentrates on those geographical areas most in need of wage rate revisions; (4) Labor wage determinations can be appealed by any interested party; (5) process weaknesses include limited data verification, limited computer capabilities to detect erroneous data, and the lack of awareness of the appeals process; (6) erroneous data could result in setting the wage rate too low so that construction workers are underpaid or setting the wage rate too high so that the government incurs excessive construction costs; (7) Labor initiatives to improve its rate-setting process include having employers verify certain third-party data, informing survey respondents of the serious consequences of willfully falsifying wage data, and proposing a long-term strategy to review the entire wage determination process; and (8) Labor should immediately improve its verification of employer wage data and make the appeals process more effective.
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Four major sources of student aid are currently available: the Federal Family Education Loan Program (FFELP), the Pell Grant Program, the Federal Direct Loan Program, and Campus-Based Programs. Before the recent 5-year phase-in of the direct loan program, FFELP and the Pell Grant programs were the largest sources of federally financed educational assistance. FFELP provides loans through private lenders; these loans are guaranteed against default by about 36 guaranty agencies nationwide--state and nonprofit private agents of the federal government whose services include, among others, payment of claims on defaulted loans. The loans are ultimately insured by the federal government. The Pell program provides for grants to economically disadvantaged students. Over the years, both FFELP and the Pell Grant Program have been subject to waste, fraud, and abuse. Because of the limited risks to schools, lenders, and guaranty agencies, and the billions of dollars in available aid, the structure of FFELP created the potential for large losses, sometimes through abuse. In fiscal year 1995, for example, the federal government paid out over $2.5 billion to make good the guarantee on defaulted student loans. In our past work we found that students who had previously defaulted on student loans were nonetheless subsequently able to obtain additional loans. The Pell program has likewise experienced abuse, such as students' receiving grants while attending two or more schools concurrently. Since the inception of the program in 1973, students have been limited to receiving Pell grants from only one school at a time. The Department's student financial aid programs are one of 25 areas we have categorized as high risk because of vulnerability to waste, fraud, and abuse. Although progress has been made, the Department's controls for ensuring data accuracy and management oversight remain inadequate. The Department has long recognized its significant problems with title IV data reliability. In fact, it reported this as a material weakness under the Federal Managers' Financial Integrity Act. Plans are now underway to address this issue through a major initiative started last December to reconcile NSLDS data with data in the program-specific databases. Similarly, because of the poor quality and unreliability of financial data remaining in the Department's systems, Education staff cannot obtain the complete, accurate data necessary for reporting on its financial position. In fact, the Department's Office of Inspector General was unable to express an opinion on the fiscal year 1994 FFELP principal financial statements, taken as a whole, because of the unreliability of student loan data on which the Department based its expected costs to be incurred on outstanding guaranteed loans. Education received a disclaimer of audit opinion on the 1995 financial statements for the same reason. The Department's acting chief financial officer, therefore, had to present unaudited 1996 financial statements in Education's March 1997 annual accountability report (covering fiscal year 1996). According to this report, the audited statements--with auditor's report--were to be available "around July 31, 1997." NSLDS was authorized under the 1986 HEA amendments as a means of improving compliance with repayment and loan-limitation provisions, and to help ensure accurate information on student loan indebtedness and institutional lending practices. The 1992 HEA amendments required that Education integrate NSLDS with the databases of the program-specific title IV systems by January 1, 1994. In January 1993 the Department awarded a 5-year, $39-million contract to develop and maintain NSLDS. Despite the mandate of the 1992 HEA amendments--and the conclusions of studies carried out both within Education and by the Advisory Committee on Student Financial Assistance--the Department's actions have fallen short of full integration. Education officials chose to establish NSLDS as a data repository, to receive information from the other title IV systems. Yet operating in such an environment presents complications due to the lack of uniformity in how the systems handle and store information. The lack of data standards has complicated data matching between systems. To assist in achieving integration of the Department's title IV systems, the 1992 amendments included specific requirements for the establishment of common identifiers and the standardization of data reporting formats, including definitions of terms to permit direct comparison of data. This has still not been accomplished. Hence, the NSLDS database cannot be updated without expensive conversion workaround programs. The result is a collection of independent systems, many of which keep data that duplicate information stored in NSLDS. This lack of integration promotes an environment of reduced management efficiency, compromised system integrity, and escalating costs as new stand-alone systems are developed. While NSLDS was envisioned as the central repository for student financial aid data, it is not readily compatible with most of the other title IV systems. These various systems are operated by several different contractors and have different types of hardware, operating systems, application languages, and database management systems. Along with Education's internal systems, thousands of schools and numerous guaranty agencies also employ disparate systems through which they send data to NSLDS. Therefore, to accept data from these other systems, NSLDS must have the necessary workarounds in place. Education and its data providers currently use over 300 computer formatting and editing programs--many of them workarounds--to bridge the gaps in this complex computing environment. These programs, however, may themselves introduce errors and that would not be necessary in a fully integrated environment. Such programs contribute to the rapidly escalating costs for the 5-year NSLDS contract--from an original $39 million estimate to about $83 million today. Department officials have acknowledged that integration is important and has not been fully achieved. They told us, however, that they had little time to consider viable alternatives in designing and implementing NSLDS because of statutory requirements and the large number of diverse organizations from which data had to be gathered. The nonstandard use of student identifiers by various title IV systems complicates tracking of students across programs, making the task cumbersome and time-consuming. Likewise, identifying institutions can be problematic because multiple identifiers are used; for instance, the same school may have different identifying numbers for each of the title IV programs in which it participates. The 1992 amendments required common institutional identifiers by July 1, 1993; as of now, the Department's plans call for their development and implementation for the 1999-2000 academic year. Beyond simply having common identifiers, it is important that data standards be established; this is the accepted technique used to govern the conventions for identifying, naming, and formatting data. The absence of such standards usually results at best in confusion, at worst in possible misinformation leading to the improper awarding of aid. Having data standards in place means that everyone within an organization understands the exact meaning of a specific term. While each title IV system uses the format specified by NSLDS to report data, the Department permits each program to use its own data dictionary--defining terms in different ways. One example of how this disparity can affect program operations can be seen in the differences in how student enrollment status is stored in NSLDS, compared with the system that supports the Pell Grant Program. Properly determining enrollment status is important because students generally begin repaying loans following a 6-month grace period after leaving school. Because NSLDS and the Pell system report enrollment status in different formats--alpha versus numeric--and use different definitions, exact comparisons cannot be made, and queries may well produce inconsistent responses. This can lead to misinterpretations of a student's true enrollment status. Problems such as these resulting from data inconsistencies between systems can take school officials weeks or months to resolve--if they are even detected. Over the last decade, computer-based information systems have grown dramatically; with this growth has come vastly increased complexity. As a means of handling such size and complexity, reliance on systems architectures has correspondingly increased. As discussed briefly earlier, an architecture is simply a framework or blueprint to guide and constrain the development and evolution of a collection of related systems. Used in this way, it can help significantly to avoid inconsistent system design and development decisions, and along with them the cost increases and performance shortfalls that usually result. Leading public and private organizations are today using systems architectures to guide mission-critical systems acquisition, development, and maintenance. The Congress has also recognized the importance of such architectures and their place in improving federal information systems. The Clinger-Cohen Act of 1996 requires department-level chief information officers to develop, maintain, and facilitate the implementation of integrated systems architectures. And experts in academia have likewise championed this approach. A systems architecture could significantly help Education in overcoming its continuing problems integrating NSLDS and the other title IV systems. It should also reduce expenses by obviating the need for more stand-alone systems and their requirement for workarounds, since one function of an architecture is to ensure that systems will be interoperable. Despite the importance of a systems architecture, Education officials have not devoted the time or effort necessary to develop such a blueprint. According to these officials, two factors accounting for this are the Department's focus on responding to legislative mandates and its lack--until recently--of a chief information officer. However, the Department reports that work on an architecture has begun and that it expects completion by June 30, 1998. We have conducted a preliminary review of the technical portion of the draft architecture, and we believe that Education is underestimating what will be required to fully develop and implement a systems architecture departmentwide. Further, we are concerned that the Department has drafted the technical component before the "logical" component. The logical part should be developed first because it is derived from a strategic information systems planning process that clearly defines the organization's mission, the business functions required to carry out that mission, and the information needed to perform those functions. The Department has a compelling need for a systems architecture that would enable the eventual integration of all title IV systems. In spite of this, however, it continues to acquire multiple stand-alone systems. Today the Department manages 9 major systems, supported by 16 separate contracts, to administer student financial aid programs. They range from legacy mainframe systems, several developed over 15 years ago, to a new client-server system. For the most part, these systems operate independently, and cannot communicate or share data with one another. They are also expensive. As I mentioned earlier, this is a costly approach to systems acquisition. Our chart, reproduced at the end of this statement, shows that Education's information technology costs have almost tripled since fiscal year 1994. The reported cost of these systems in fiscal year 1994 was $106 million; for fiscal year 1998 it is expected to be about $317 million. Many of the systems, including NSLDS, were developed independently over time by multiple contractors responding to new functions, programs, or mandates--and not as part of a long-range, carefully considered systems-design strategy. This has evolved into a patchwork of stovepipe systems that rely heavily on contractor expertise to develop and maintain systems responsible for administering critical student financial aid information. A case in point: the Department recently awarded separate contracts to three vendors for new, stand-alone systems to service direct loans. Including the original servicer, the total cost for the four systems could be as high as $1.6 billion through fiscal year 2003. This will result in four different servicing systems for the same loan program, inviting problems that stem from a likely lack of systems interoperability. For over 2 years, the Advisory Committee on Student Financial Assistance has been a consistent voice favoring movement away from this "stovepipe" approach and toward integration. It has attributed deficiencies in the delivery system for student financial aid to the lack of a fully functional, title IV-wide recipient database that could integrate all program operations. Two years ago, a project was initiated that held the promise of reengineering current processes and developing a system that would integrate all players in the student financial aid community. Called Project EASI, for Easy Access for Students and Institutions, it has endured loose definition, a tentative start, and uncertain commitment from top management. As such, whether it can achieve real process redesign and systems integration is in doubt. In summary, the Department of Education continues its slow pace toward compliance with the 1992 HEA amendments. While we understand the difficulty of the challenges it faces, we nonetheless believe that the longer the Department waits to develop a sound architecture and integrate its systems, the more difficult and expensive that job will eventually be. Accordingly, our report recommends that the Secretary of Education direct the Department's chief information officer to develop and enforce a Departmentwide systems architecture by June 30, 1998; that all information technology investments made after that date conform to this architecture; and that funding for all projects be predicated on such conformance, unless thorough, documented analysis supports an exception. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have at this time. Pell Grant Recipient Financial Management System (PGRFMS) National Student Loan Data System (NSLDS) FFELP System (FFELPS) Central Processing System (CPS) (includes multiple data entry contracts) Student Financial Aid Information: Systems Architecture Needed To Improve Programs' Efficiency (GAO/AIMD-97-122, July 29, 1997). Department of Education: Multiple, Nonintegrated Systems Hamper Management of Student Financial Aid Programs (GAO/T-HEHS/AIMD-97-132, May 15, 1997). High-Risk Series: Student Financial Aid (GAO/HR-97-11, Feb. 1997). Reporting of Student Loan Enrollment Status (GAO/HEHS-97-44R, Feb. 6, 1997). Department of Education: Status of Actions To Improve the Management of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). Student Financial Aid: Data Not Fully Utilized To Identify Inappropriately Awarded Loans and Grants (GAO/T-HEHS-95-199, July 12, 1995). Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89, July 11, 1995). Federal Family Education Loan Information System: Weak Computer Controls Increase Risk of Unauthorized Access to Sensitive Data (GAO/AIMD-95-117, June 12, 1995). Financial Audit: Federal Family Education Loan Program's Financial Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131, June 30, 1994). Financial Management: Education's Student Loan Program Controls Over Lenders Need Improvement (GAO/AIMD-93-33, Sept. 9, 1993). Financial Audit: Guaranteed Student Loan Program's Internal Controls and Structure Need Improvement (GAO/AFMD-93-20, March 16, 1993). Department of Education: Management Commitment Needed To Improve Information Resources Management (GAO/IMTEC-92-17, April 20, 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 its review of the Department of Education's progress in integrating its National Student Loan Data System (NSLDS) with other student financial aid systems, as required by law. GAO noted that: (1) the Department of Education has made only limited progress in integrating NSLDS with the other student financial aid systems that support title IV programs; (2) this is largely because the Department has not developed an overall systems architecture, a framework needed to allow these disparate systems to operate in concert with each other; (3) as a result, while information can be shared among systems, the process is cumbersome, expensive, and unreliable; (4) further, the lack of a systems architecture allows the proliferation of individual stand-alone systems; (5) this is expensive, not only with respect to system procurement, operation, and maintenance, but also in terms of efficiency; (6) such an approach has served immediate program needs on a limited basis, but undermines sharing of student financial aid information across programs; and (7) this, in turn, can result in different databases containing different and perhaps conflicting information on the status of student loan or grant.
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Under the Resource Conservation and Recovery Act, the Clean Air Act, and the Clean Water Act, the federal government has established requirements setting limits on emissions and discharges from municipal and private industrial facilities that might pollute the land, air, or water. EPA shares responsibility for administering and enforcing these requirements with the states that have been authorized to administer the permit programs. EPA's implementing regulations cover activities such as setting levels and standards for air emissions, establishing effluent limitation guidelines for water discharges, evaluating the environmental impacts of air emissions, monitoring compliance with discharge limits for water permits, ensuring adequate public participation, and issuing permits or ensuring that state processes meet federal requirements for the issuance of permits. While EPA has retained oversight responsibility for these activities, it has authorized state, tribal, and local authorities to perform most activities related to issuing permits to industrial facilities. These authorities-- referred to as permitting authorities--receive federal funding from EPA to carry out these activities and must adopt standards that are equivalent to or more stringent than the federal standards. Title VI of the Civil Rights Act and EPA's Title VI implementing regulations prohibit permitting authorities from taking actions that are intentionally discriminatory or that have a discriminatory effect based on race, color, or national origin. EPA's Title VI regulations allow citizens to file administrative complaints with EPA that allege discrimination by programs or activities receiving EPA funding [40 C.F.R.SSSS7.120(1998)]. Title VI complaints must be filed in response to a specific action, such as the issuance of a permit. Because they must be linked to the actions of the recipients of federal funds, complaints alleging discrimination in the permitting process are filed against the permitting authority, rather than the facility receiving the permit. Complaints may be based on one permitting action or may relate to several actions or facilities that together have allegedly had an adverse disparate impact. Neither the filing of a Title VI complaint nor the acceptance of one for investigation by EPA stays the permit at issue. As of February 7, 2002, EPA's complaint system showed 44 pending complaints alleging that state agencies had taken actions resulting in adverse environmental impacts that disproportionately affected protected groups. Of these complaints, 30 involved complaints that were accepted by EPA and were related to permits allowing proposed facilities to operate at a specified level of emissions. Other complaints involved issues such as cleanup enforcement and compliance. The 15 facilities covered in our study included waste treatment plants, recycling operations, landfills, chemical plants, and packaging facilities. These facilities were in nine locations, and some were in rural areas, while others were in urban areas. (See app. II for additional information on the location and description of the facilities). All of the facilities that we studied reported that they had provided jobs as a result of the creation or expansion of their facility. As shown in table 1, the number of full-time jobs ranged from 4 to 103 per facility, with 9 of the facilities having 25 jobs or less. Most of the facilities involved waste-related operations, which generally employ small numbers of employees. For four of the facilities, information was available from documents prepared before the facilities began operating on the number of jobs the facilities had estimated they would provide. In each of these cases, the number of jobs estimated was greater than the number of jobs provided. Specifically, Genesee Power Station estimated it would provide 30 jobs and provided 25; ExxonMobil estimated it would provide 50 jobs and provided 40; Natural Resources Recovery estimated it would provide between 15 and 40 jobs and provided 6; and Safety-Kleen, Inc., estimated it would provide 50 jobs in Westmoreland and provided 22. Officials from a few facilities told us that their facilities, in addition to providing jobs directly, generated additional jobs outside of the facility. For example, a document from ExxonMobil indicated that for every job provided at the plant, 4.6 jobs resulted elsewhere in the East Baton Rouge Parish economy. Also, Chemical Waste Management officials told us that their landfill increased business in the area and that this enhanced business could result in more jobs. We did not verify the facilities' estimates of jobs generated outside of the facility. In some cases, the number of jobs at these facilities decreased over time. For example, jobs at the chemical waste facility in Kettleman City, California, decreased from 200 in 1990 to 103 in 2002; and jobs at a similar facility in Buttonwillow, California, decreased from 110 in 1987 to 23 in 2002. In addition, jobs at a fertilizer plant in New York decreased from 80 in 1993 to 39 in 2002. Officials from the two facilities in California told us that the changes resulted from a decreased demand for the facilities due to a reduction in the amount of waste generated by a more environmentally conscious public. We obtained information on the salary ranges and types of jobs provided for 14 of the 15 facilities. According to officials at these facilities, the salaries for the jobs provided varied from about $15,000 to $80,000 per year, depending on factors such as the type of work and the location of the facility. However, the information that the facilities provided was not detailed enough to allow us to determine the numbers for each job type, the salaries for individual jobs, or the number of jobs filled by people from the surrounding communities. The information indicates a wide range of salaries; however, community organizations in some locations told us that, in their view, the majority of the jobs filled by community residents were low paying. The facilities provided the following information: The ExxonMobil Corporation told us that their facility in Louisiana had both hourly and salaried jobs. According to ExxonMobil, its hourly jobs included mechanics, electricians, and laboratory technicians; and its average wage was about $23 an hour, which is equivalent to $47,840 per year. Salaried jobs included engineers, a chemist, accountants, and administrative assistants, and the average salary was just under $70,000 annually. The Texas Industries Package Plant, located in Texas, told us that its jobs included plant manager, sales representative, dispatcher, packaging coordinator, maintenance mechanic, plant operator, crew operators, crew members, and administrative positions. The salaries ranged from about $10 to $15 per hour, which is equivalent to $20,800 and $31,200 per year, respectively. The three hazardous waste treatment facilities in California reported that the jobs at their facilities--facility manager, manager, heavy equipment operators, plant operators, truck receiving operators, customer service representatives, and waste acceptance specialists-- had salaries ranging from $28,000 to $82,000 annually. The nine nonhazardous waste-related facilities located in Connecticut, Louisiana, Michigan, and New York reported having jobs that included facility site managers, site supervisors, scale and machine operators, technical assistants, mechanics, and laborers. Salaries for these jobs ranged from $7.50 to $33.50 per hour, which is equivalent to $15,600 and $69,680 per year, respectively. About half of the facilities provided some information on whether their jobs were filled by people from the communities. Specifically, according to information provided by the Hunts Point, South Bronx, New York facilities, a large number of employees in the waste-related facilities resided in the Bronx. The Hunts Point Water Pollution Control Plant had 67 employees from the Bronx, with 1 living in the immediate Hunts Point neighborhood. Safety-Kleen, Inc., told us that the majority of the employees in its two facilities lived in the county where the facilities were located. Over the years of the Genesee Power Station's operation, about half of the 68 employees resided in Flint or Genesee County, Michigan; however, the facility did not indicate how many employees, if any, lived in Genesee Township--the home of the power station--or the Flint community that is close to the plant. Similarly, information provided by the Texas Industries Package Plant in Austin, Texas, indicated that its 10 employees all resided in a nearby community, town, or city but did not identify the number from the community immediately surrounding the plant. And in a 1998 document submitted to EPA, Natural Resources Recovery, Inc., indicated that four of its five employees lived in the town where the plant was located. However, community representatives told us that few, if any, town residents worked at the landfill at the time of our visit. As shown in table 2, officials from 10 of the 15 facilities said they had contributed to the communities in which they were located. Specifically, they performed volunteer work that included offering firefighting assistance and organizing cleanups in the area. They also made infrastructure improvements, such as installing a new water drainage system. In addition, some of the facilities made or were planning to make financial contributions in the communities where they were located. These financial contributions would assist schools and universities as well as community groups and other organizations. For example, the Genesee Power Station awarded eight $1,000 scholarships to high school students. In three communities, the facilities established foundations or funds to manage and disburse the financial contributions. One foundation was set up following legal action taken by community groups. In another case, the foundation was not linked to legal action. The fund resulted from collaboration among the state environmental agency, the facility, and the community that ultimately resulted in the community dropping its complaint with EPA. The facilities and community groups in these three locations provided the following information: The Kettleman City Foundation, a California nonprofit public benefit corporation, was set up after legal action was taken by the community against Chemical Waste Management. The foundation was organized to improve the quality of life of the residents of Kettleman City and nearby areas of Kings County, California, by developing capacity, leveraging additional resources, and protecting the environment and residents' health and welfare. The board of this foundation consisted of the legal representative for the Center on Race, Poverty, and the Environment; three community residents; and the manager of the Chemical Waste Management facility. Chemical Waste Management provided $115,000 to the foundation. In addition, Chemical Waste Management agreed to make further contributions annually, based on tons of municipal waste disposed at its landfill. Since 1998, Chemical Waste Management has contributed almost $300,000 to the foundation. Some of these funds are to be used to help build the Kettleman City Community Center, which plans to provide a variety of social services. The Buttonwillow Community Foundation was established in June 1994. The directors of the foundation included representatives from local government offices, the Chamber of Commerce, and a senior citizens' group. This foundation's primary function was to provide grants to facilitate projects promoting the health, education, recreation, safety and welfare of the Buttonwillow residents. Safety-Kleen, Inc., provided an initial $50,000 donation to the foundation. Its annual contribution to the foundation is linked to the tons of waste received at the facility, and in calendar years 2000 and 2001, these contributions exceeded $100,000. The North Meadow Municipal Landfill worked with the community to address the community's concerns. Consequently, a fund called the Economic Development Account was established for economic development for minority business enterprises, social welfare projects, relief of the poor and underprivileged, environmental education, community revitalization, amelioration of public health concerns, and for other charitable purposes within Hartford. A board consisting of community group and city representatives would determine how to distribute funds from the account. At the time of our review, the facility had agreed to provide $9.7 million for the account over 10 years. In exchange for these contributions, the community group agreed to accept the landfill's expansion and withdraw the complaint to EPA. Despite these efforts, community residents often felt these contributions were inadequate. Property values in a community are affected by many factors, including the condition of the land and houses; the proximity of the property to natural or manmade structures--such as the facilities covered by this study--that might be viewed as desirable or undesirable; and economic conditions in the surrounding or adjacent communities. Information on property values was not available for most of the communities where the facilities were located. For example, in some rural and unincorporated areas, information on property values was kept for a limited number of properties or was based on property sales, which were infrequent and had not occurred since the facilities had begun operating. Some information was available for two locations--Genesee Township, Michigan, and South Bronx, New York. Even in these two locations, the information available was not specific enough to isolate the effect of the facility on property values because of the other factors that can affect property values, such as the location of other manufacturing or waste- related facilities in the area or economic activity in adjacent areas. The Genesee Township tax assessor provided information showing that property values in the area had not changed. In the South Bronx, property assessment data indicated that property values had increased in the Hunts Point neighborhood--the neighborhood where multiple waste management facilities were located. For this case, local officials stated that the increase occurred because of factors such as expanding economic development and the rising cost of housing in Manhattan. In locations where property values were not available, community groups voiced concerns that the facilities would cause property values to decline. For example, residents of Alsen, Louisiana, believed that the location of nearby industrial facilities, including the facilities studied for this report, affected property values and reduced homeowners' ability to sell their homes for a reasonable price. Similar concerns were included in the complaints regarding the hazardous waste landfills in California. The Alum Crest Acres Association, Inc., a community group in Columbus, Ohio, and the Garden Valley Neighborhood Association located near the Texas Industries Austin Package Plant also expressed concern about the effect of the industrial facilities on their property values. Six of the 15 facilities we studied said they used incentives or subsidies that were available in a particular area. Officials from these facilities also said that they chose their location because of low land costs, favorable zoning, or other factors. The incentives varied, depending on the type of facility and its location, but included tax exemptions, a local bond initiative, reductions in regulatory fees, and reduced utility rates. In Louisiana, the state granted ExxonMobil an industrial tax exemption from state, parish, and local taxes on property such as buildings, machinery, and equipment that were used as part of the manufacturing process. This exemption, which is available to any manufacturing company that builds or expands a facility within the state, is initially available for 5 years but may be renewed for an additional 5 years. According to the Louisiana Department of Economic Development, ExxonMobil's polyolefin plant had received tax exemptions worth approximately $193 million between 1990 and June 2000. Also, in 2001, approximately $139 million was filed for the ad valorem tax exemption related to the Polypropylene project. The Buttonwillow and Westmoreland, California, hazardous waste facilities received a low-interest bond issued by the California Pollution Control Financing Authority in the amount of $19.5 million, and the facility in Kettleman City experienced a 40-percent reduction in regulatory fees as a result of provisions granted by the state in January 1998. In the latter case, facility representatives said the provisions were intended to help keep the facility from laying off employees. In the Hunts Point community in the South Bronx, the New York Organic Fertilizer Company was eligible for discount rates from the utility company--Consolidated Edison--because of its location. The utility company offered this incentive to any facility that located in a certain community and hired a percentage of employees from that community. Also, Tri Boro Fibers, a recycling company located in Hunts Point, received a local tax exemption that was available to all recycling facilities for trucking fees and certain purchases. Certain EPA units provided technical comments on a draft of this report. EPA's Office of Civil Rights commented that the report needed (1) more detailed information on the number and types of jobs and on those jobs provided to the communities nearest the facilities and (2) a comparison of property values in the communities closest to the facilities to similar communities. As stated in the report, the facilities covered in this study were not required to provide information, however most of them voluntarily provided some job-related information. Facilities were not required to provide a specified number of jobs to receive permits to locate in a given area. A property value comparison would not have been possible considering the data limitation and accessibility issues that we identified. EPA generally agreed with the information about the agency and provided clarifications which we incorporated into this report where 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 the date of the report. At that time, we will send copies to the appropriate congressional committees and the Administrator of the Environmental Protection Agency. We will also make copies available to others on request. If you have any questions about this report, please contact Nancy Simmons, Assistant Director, or me at (202) 512-8678. Key contributors to this assignment are listed in appendix III. The objectives of this engagement were to (1) determine the number and types of jobs provided, (2) identify contributions made by the facilities to their communities, (3) determine the facilities' effect, if any, on property values in their communities, and (4) determine the amount and type of government subsidies or incentive packages the facilities received. We did not examine the environmental impact of the facilities or the associated impact, if any, on the health of the communities in which they were located. We selected facilities for this engagement from the Environmental Protection Agency's (EPA) complaint system. These complaints involved facilities that received environmental permits and were located in communities that felt the facilities' operations were having a disproportionate impact on them. As of February 7, 2002, the system contained 44 complaints, of which EPA had accepted 36 for further review. As agreed with the requesters, we considered only facilities covered by complaints involving issues related to the permitting process (30 of the 36 accepted complaints). We initially selected three of the complaints, which involved three locations and eight of the facilities covered in our study. We found that 1 of these complaints involved 26 waste-related facilities. As agreed with our requestors' staffs, we included 6 of the 26 facilities in the scope of this engagement. Subsequently, using geographic location, type of facility, and population density (urban versus rural), we selected seven additional complaints involving diverse facilities and locations. We found that two of these complaints involved facilities that were no longer in business; consequently, we excluded them from our analysis. The remaining five complaints involved six additional locations and seven facilities. Table 3 outlines the 9 locations and 15 facilities included in our study. To determine the number of jobs provided, the contributions the facilities made to the communities, and the impact on property values, we used a structured data collection instrument to interview officials from each facility and from state or local economic development and planning organizations. We asked for information such as the number of jobs provided over time, the number of jobs filled by people in the communities nearest the facilities, the types of jobs offered, and the salaries for each job. However, we did not examine whether the jobs represented a net increase in jobs within the community. Where available, we obtained property assessment information from local tax assessment offices. We also interviewed representatives from community and environmental action groups, some of which were involved in filing complaints with EPA. We analyzed documents pertaining to jobs at the facilities, property values before and after the facilities began operating or expanding, contributions to the community, and program planning; reviewed public hearings related to the issuance of environmental permits; and reviewed economic and demographic data. In general, we did not independently verify the information provided. To determine the subsidies or tax incentives that the facilities used, we interviewed officials from the facilities and from state or local economic development and planning organizations. We also reviewed documents obtained from these officials. We conducted our work between May 2001 and May 2002 in accordance with generally accepted government auditing standards. We obtained comments on a draft of this report from EPA officials. We also asked the representatives of some facilities with whom we consulted to review portions of the draft of this report for accuracy and clarity. Their comments are incorporated into this report as appropriate. Alsen is located along the Mississippi River near Baton Rouge, Louisiana, in an industrial corridor. Located along this corridor are facilities such as petrochemical plants that produce one-fifth of all U.S. petrochemicals, a lead smelter, a commercial hazardous waste incinerator, and landfills. Alsen is located in a rural area where the population is predominantly low income and African-American. Two of the facilities included in this report are located in Alsen--ExxonMobil and Natural Resources Recovery, Inc. The ExxonMobil facility produces both polyethylene and polypropylene (plastic) for textile, film, and automotive markets and is located in a cluster of petrochemical companies. The Louisiana Environmental Action Network and the North Baton Rouge Environmental Association filed a complaint with EPA against the Louisiana Department of Environmental Quality for issuing a permit for ExxonMobil's expansion of an existing plant. According to officials at the facility, a $150-million expansion was initiated in 1998 and, with a capacity of 600 million pounds, will increase production to meet the growing demand for polypropylene. Natural Resources Recovery, Inc., is a construction and demolition debris landfill. The facility also recycles wood and construction material. As with ExxonMobil, Louisiana Environmental Action Network and North Baton Rouge Environmental Association filed a complaint with EPA against the Louisiana Department of Environmental Quality concerning Natural Resources Recovery, Inc. The residential population within the Hunts Point community consisted of about 12,000 people in 2000, many of whom were renters. Community residents are largely Hispanic and African-American, and many residents are low income. The community is home to many industrial facilities, including numerous waste treatment facilities. Six of the waste treatment facilities are included in this report--Waste Management (Truxton), Waste Management (Barretto), Tri Boro Fibers, Hunts Point Water Pollution Control Plant, New York Organic Fertilizer Company, and Tristate Transfer Associates Inc. Respectively, these facilities handle carting and demolition, transfer clean fill material, recycle nonhazardous waste, treat sewage, conduct thermal drying of biosolid waste, and collect garbage. Most of these facilities have operated since the 1980s and 1990s. These and other facilities are the subject of a complaint filed with EPA by U. S. Congressman Serrano and various Hunts Point community groups against the New York State Department of Environmental Conservation and New York City Department of Sanitation concerning the issuance of permits to operate existing and proposed facilities. These three communities are located in sparsely populated portions of Kern County, Imperial County, and Kings County, respectively. Residents of all three communities are predominantly Hispanic and low income. In addition, each of the communities is home to one of the three hazardous waste treatment facilities included in our study. Safety-Kleen, Inc.--the world's largest recycler of automotive and industrial fluid wastes--operates the facilities located in Buttonwillow and Westmoreland. These facilities collect, process, recycle, and dispose of a range of hazardous wastes. The Buttonwillow facility, which accepts a wide range of EPA regulated hazardous and nonhazardous waste, has been operating since 1982. The area immediately surrounding the facility is irrigated agricultural and undeveloped land. Irrigated agriculture, oil production, and waste disposal are the predominant land uses for several miles around the facility, and the closest residence is about 3 miles away. The Westmoreland facility began operating in 1980 and also accepts a wide range of EPA regulated hazardous and nonhazardous waste. Like the Buttonwillow facility, the Westmoreland facility processes and disposes of both hazardous and nonhazardous waste. Chemical Waste Management operates the third facility, which is located about 4 miles from Kettleman City in Kings County, California. This facility provides hazardous waste treatment, storage, and disposal services to a variety of customers--including universities, government agencies, and private industry--throughout California and the western United States. In addition, the facility has a separate landfill that handles municipal solid waste generated from two counties. The Parents for Better Living of Buttonwillow, People for Clean Air and Water of Kettleman City, and Concerned Citizens of Westmoreland filed a complaint with EPA against the California Department of Toxic Substances Control and Imperial County Air Pollution Control District, regarding these three hazardous waste landfills. Genesee Township is a suburban area located in Genesee County and is adjacent to the city of Flint, which is the fourth-largest city in Michigan. Residents near the facility are largely low income and minority. The Genesee Power Station is a wood-burning power plant located in an industrial park within the township. Using waste wood, the plant produces electricity for a power company that services about 35,000 homes in Flint and Genesee Township. The area surrounding the plant includes a cement- making plant, an asphalt plant, a fuel storage facility, and a residential community. The Saint Francis Prayer Center filed a complaint with EPA against the Michigan Department of Environmental Quality regarding the issuance of a permit for the Genesee Power Station. Hartford is an urban area in central Connecticut. The North Meadow Municipal Landfill--one of the facilities covered in our study--has existed for over 75 years and is located in north Hartford in a community of about 35,000 people. The city of Hartford owns the landfill, which is run by the Connecticut Resource Recovery Authority. The facility is located in an area that abuts an industrial zone containing auto dealerships, the city's public works garage, a junkyard, vacant buildings, and other industrial businesses. The neighborhood near the facility is largely minority and suffers from poorly maintained and abandoned buildings. The Organized North Easterner and Clay Hill and North End, Inc., filed a complaint with EPA against the Connecticut Department of Environmental Protection regarding this landfill. However, after subsequent discussions among representatives of the community, the state environmental agency, and the facility, an agreement was reached and the complaint was withdrawn. While Austin is considered the home of the Texas Industries Austin Package Plant, which was included in our study, the plant is located outside of the city. The plant produces packaged products that include various types of concrete, mortar, sand, cement and asphalt mixes. It primarily sells its products to construction companies in the southwestern United States. The Garden Valley Neighborhood Association--which represents a largely minority, residential community close to the plant--filed a complaint with EPA against the Texas Natural Resources Conservation Commission regarding the concrete plant. The Georgia Pacific facility has operated in an urban area on the south side of Columbus, Ohio, in Franklin County since 1971. The facility annually produces 110 million pounds of resin as well as 235 million pounds of formaldehyde, which is used in making plywood, particleboard, ceiling tiles, laminates, and other products. On behalf of a community near this facility that is approximately 80 percent minority, Alum Crest Acres Association, Inc., and South Side Community Action Association filed a complaint with EPA concerning the permit issued for this facility by the Ohio Environmental Protection Agency and the City of Columbus. Staff members who made key contributions to this report were Gwenetta Blackwell-Greer, Emily Chalmers, M. Grace Haskins, Tina Kinney, Tina Morgan, and Paul Thompson. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. 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Industrial facilities that operate under permits regulating some emissions and discharges have been the subject of complaints from community groups and environmental activists who charge that the facilities expose the surrounding communities to greater environmental risk than the general population. In response, the facilities point out that they contribute to the economic growth of the surrounding communities by employing residents and supporting other community needs, such as schools and infrastructure. In a survey of selected facilities, GAO found that the number of jobs in some decreased over time. According to facility officials, these jobs included unskilled, trade, technical, administrative, and professional positions with salaries ranging from $15,000 to $80,000 per year. Most of the facilities identified other contributions that they had made or planned to make in the local communities. These included volunteer work such as organizing cleanups; infrastructure improvements such as installing a new water drainage system; and financial assistance to schools, universities, community groups, and other organizations. Property values in a community are affected by many factors, including the condition of the land and houses, the proximity of the property to natural or man-made structures--such as the facilities covered by this study--that might be viewed as desirable or undesirable, and economic conditions in the surrounding or adjacent communities. Information on property values was unavailable for most of the communities and facilities studied. In these locations, community groups voiced concerns that the facilities would cause property values to decline. Officials at 6 of the 15 facilities GAO studied said they had used available incentives or subsidies. The incentives varied, depending on the type of facility and its location, but included tax exemptions, a local bond initiative, reductions in regulatory fees, and reduced utility rates.
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Airline travel is one of the safest modes of public transportation in the United States. The current level of airline safety has been achieved, in part, because the airline industry and government regulatory agencies have implemented rigorous pilot training and evaluation programs. The major airlines have training programs for pilots that focus on, among other things, maintaining flying skills, qualifying to fly new types of aircraft, and acquiring skills in dealing with emergencies. FAA's original regulations for the airlines' general training programs--referred to in this report as part 121--spell out the number of hours of training required in particular areas, such as the time spent practicing emergency procedures. Effective for 1996, FAA instituted a requirement for CRM training under part 121 that states the following: "After March 19, 1998, no certificate holder may use a person as a flight crewmember, and after March 19, 1999, no certificate holder may use a person as a flight attendant or aircraft dispatcher unless that person has completed approved crew resource management or dispatcher resource management initial training, as applicable, with that certificate holder or with another certificate holder." FAA believes that this training should improve flight crews' performance. As an alternative to training under these regulations, airlines may apply to participate in AQP. Eight of the 10 major airlines have applied to, and been approved for participation in, AQP. Unlike traditional part 121 training, AQP specifies the criteria for the required level of performance in certain types of maneuvers, rather than hours of training, and it integrates CRM training with technical flying skills. The airlines are expected to fully implement AQP over a period of time, up to 8 years. Full implementation means that the airlines have trained their pilots for each type of aircraft they fly. Training, however, occurs only after the airline has gone through three other stages: (1) getting approval to participate in the program, (2) developing a training curriculum, and (3) training instructors. Continuing crew training, the last stage, is to occur annually. Responsibility for AQP and traditional part 121 training rests with different FAA branches. The AQP Branch within the Office of Flight Standards Services oversees AQP, and the Branch expects to transfer many of its oversight responsibilities to inspectors in the field as each airline fully implements its AQP. The administration of traditional part 121 training is divided between the Air Carrier Training Branch, which sets training requirements, and the flight standards inspectors in the field, who are responsible for overseeing the training. FAA's inspectors periodically review and approve airlines' curricula and training materials and observe training. CRM is a "human factors" approach for improving aviation safety by preventing or managing pilots' errors. Human factors refers to a multidisciplinary effort to develop information about human capabilities and limitations and to apply this information to equipment, systems, facilities, procedures, jobs, environments, training, staffing, and personnel management for safe and effective human performance. Under this approach, pilots are trained to recognize potential mistakes in judgment or actions and to compensate for them to prevent accidents and incidents. For example, in training for initial departure, CRM training has the captain practice briefing the crew about the actions to be taken if the takeoff must be aborted because of an emergency. CRM also teaches the crew to question orders when they believe they have information that indicates these orders are inappropriate. Similarly, CRM training teaches the crew to anticipate problems and make decisions that take these anticipated problems into account. About 30 percent of the 169 accidents and 18 percent of the 3,901 incidents that occurred from 1983 through 1995 were caused at least in part by pilots' performance, according to our analysis of the National Transportation Safety Board's (NTSB) and FAA's data. Furthermore, the accident data indicate that nearly one-third of the accidents occurred because the pilots either did not follow, or did not correctly follow, CRM principles. The most frequently occurring accidents and incidents included collisions on the ground with objects and other airplanes, flights through turbulent weather that resulted in injuries, and deviations from flight paths that had the potential to cause an in-flight collision. On the ground, pilot performance was associated most frequently with airplanes colliding with vehicles, buildings, other equipment, or animals. This was the case for both accidents (32 percent) and incidents (34 percent). Figure 1 shows the types of accidents and incidents on the ground reported from 1983 through 1995. Loss of control on ground NTSB cited 62 events associated with pilots' performance in 169 accidents. FAA cited 446 events associated with pilots' performance in 3,901 incident reports. In the air, pilot performance was most frequently associated with injuries to passengers and flight attendants during turbulent weather--41 percent of accidents and 12 percent of incidents. Figure 2 shows the types of accidents and incidents in the air that were reported. In addition to the accidents and incidents discussed above, FAA maintains data separately for those occasions on which pilots failed to comply with the air traffic controller's instructions--such as not staying on the directed flight path and/or entering a runway without clearance. Of the 1,471 unauthorized maneuvers from 1987 through 1995, 80 percent occurred in the air, and most of these (73 percent) occurred when pilots did not maintain their assigned altitude levels. The unauthorized pilot maneuvers on the ground were most often (69 percent) associated with pilots' moving airplanes onto runways without authorization from the air traffic control tower. These types of incidents have the potential to cause accidents. For example, the December 1990 crash at the Detroit Metropolitan Airport occurred when an airplane taxied onto a runway being used for takeoff by another airplane and collided with that airplane. Twelve people died. The first plane had not gotten permission from the control tower to enter this runway, as it should have. Figure 3 shows the most frequently reported unauthorized pilot maneuvers in the air and on the ground. In our analysis of accidents, we found deficiencies in the airline pilots' use of CRM in nearly one-third of all accidents involving pilots' performance. Moreover, we found CRM deficiencies in half of the serious accidents in which there was at least one fatality. About 46 percent of these CRM deficiencies involved a lack of coordination among members of the cockpit crew, as well as the captain's failure to assign tasks to other crew members and to effectively supervise the crew. Generally, these CRM deficiencies illustrated the importance of effective communication. For example, in the Charlotte, North Carolina, crash in July 1994, communication among crew members did not occur, according to NTSB's accident investigation report. NTSB believes that the captain, who was not flying the aircraft at the time and could not see the ground because of poor visibility, became disoriented and commanded the first officer, "down, push it down," even though they were encountering windshear, which is a sudden change in wind direction. The first officer did not question the order, as he should have, according to NTSB, because the windshear was creating an unstable situation; the plane could not recover from the sudden downward shift in direction caused by following the captain's order. The plane crashed nose down into the ground, and 37 people died. Similarly, in a June 1984 accident in Detroit, Michigan, a lack of communication between the crew and air traffic controllers during a landing in a severe thunderstorm contributed to the accident, according to the NTSB report. The crew did not request clarification about the weather conditions or change its course of action to take these conditions into account. The winds associated with the storm forced the plane down precipitously, causing an emergency landing without the landing gear's being fully extended. The plane skidded off the runway, causing serious damage to the aircraft and an emergency evacuation of the passengers. NTSB reported that the lack of CRM practices was a probable cause of the accident. The National Aeronautics and Space Administration reported similar results in its analysis of pilot reports submitted to its voluntary reporting system. Nearly half of the reports cited deficiencies in the pilots' use of CRM principles; about 53 percent of the CRM deficiencies concerned coordination among members, assignment of tasks, and crew supervision. For AQP training, FAA has specified the process airlines need to follow to develop and implement a curriculum that integrates CRM concepts with technical flying skills, but FAA's guidance for CRM training under part 121 does not have the same degree of specificity. As a result, inspectors overseeing training under part 121 do not have standards they can use to evaluate airlines' CRM training curriculum and the delivery of that training. Generally, inspectors could not use the guidance provided under AQP to evaluate part 121 training for the CRM curriculum because the curricula developed under the two programs differ significantly. As a result, airlines continue to need specific guidance for CRM under part 121--both those airlines that have opted not to enter AQP as well those that will continue to train at least some of their crews under part 121 until they have fully implemented AQP, which could take up to 8 years. Once an airline elects to participate in AQP, it must follow SFAR 58 (the AQP regulation) for developing a formal curriculum--including assessing the skills pilots need to safely operate the aircraft they fly, developing curriculum objectives for teaching those skills, having measurable criteria for evaluating whether the pilots have achieved those objectives, and developing materials to teach those objectives. FAA must approve this curriculum. Furthermore, AQP requires all airlines to train their pilots in simulators so that they gain experience with a number of emergency situations. Finally, airlines must submit data to FAA demonstrating that their crews have mastered the skills they need to fly for those airlines. In developing its AQP curriculum, an airline is required to integrate CRM training into every aspect of its crews' training. As a result, the pilots trained under AQP are assessed on CRM principles as well as on technical flying skills. For example, when a pilot changes the aircraft's altitude--a technical flying skill--CRM principles dictate that this pilot inform the other pilot by verbally announcing the new altitude while continually pointing to the altitude indicator until the other pilot also points to the altitude indicator and repeats the new altitude. This procedure is used to ensure that neither pilot will fail to maintain the appropriate altitude. In contrast, FAA's requirements for CRM training under part 121 do not require airlines to develop a curriculum for CRM training with measurable criteria or to integrate that curriculum with other aspects of part 121 training. For the CRM curriculum under part 121, FAA provides suggested training topics but does not clearly lay out how the airlines are to introduce these topics into their training programs, according to airline officials and FAA inspectors. For example, FAA recommends that airlines train crews in "workload management and situational awareness." For this training, FAA suggests such topics as "preparation/planning/vigilance" and "workload distribution/distraction avoidance." However, for those airlines that choose to integrate these topics with technical flying skills, FAA does not explain how the airlines are to do so. The lack of specificity in FAA's guidance for the development of a CRM curriculum under part 121 contrasts with the detailed guidance FAA provides for the development of a curriculum on technical flying skills. For example, FAA's guidance on how pilots are to respond to windshear under part 121 directs them in a number of technical flying skills, such as how to handle the rudder, but it is silent on how to employ CRM principles in this situation. In contrast, under AQP, FAA's guidance instructs the airlines to specify not only the technical skills but also the CRM principles that must be applied in a windshear situation. Because FAA's guidance on CRM training under part 121 is less specific, airlines vary in how they deliver their CRM training. While all the airlines provide classroom training in CRM principles under part 121 training, they may not integrate this training with technical flying skills. For example, airlines may (1) train pilots in technical flying skills in flight simulators without integrating CRM principles or (2) integrate CRM principles with technical flying skills in flight simulators. Generally, we found that CRM training had been integrated with technical flight training to a higher degree at those airlines that were in later phases of AQP implementation. In developing AQP, FAA incorporated procedures for evaluating CRM training and developed a process for ensuring that FAA inspectors would have the criteria they need to conduct the evaluations for pilots' training on different types of aircraft. Specifically, AQP provides a systematic way of identifying the tasks and subtasks involved in a particular phase of flight. Therefore, an inspector observing the training program can determine whether CRM principles are being invoked in a given flight situation. For example, when a crew is preparing for landing, AQP specifies that the first officer, if unsure of the planned course of action in the event of a missed approach, is to ask the captain to clarify the plan so that both have a full understanding of the actions they will take. Similarly, if a flight has to be diverted from one airport to another, the captain is to direct the first officer to (1) get out the maps for the alternate airport, (2) notify the flight attendants, and (3) make the announcement to the passengers. This delegation of tasks allows the captain time to handle radio contact with the airline's dispatchers and air traffic controllers, obtain weather updates at the alternate airport, and fly the plane. In the early stages of AQP implementation, the AQP Branch is evaluating airlines' training. FAA will transfer this responsibility to inspectors in the field as airlines fully implement AQP. Field inspectors will be trained in evaluating the CRM training as an integral part of their evaluation of AQP training. The inspectors at those airlines that had progressed beyond the initial phases of AQP noted that they had received AQP training at the airlines for which they were responsible. Moreover, all of the inspectors we spoke with maintained that while certain facets of AQP were fixed, some parts were still evolving. As a result of the program's flexibility and evolution, the inspectors pointed out that it was not possible to structure a training program for them that could cover every aspect of AQP at every airline. Despite this fluidity, these inspectors said that the AQP Branch Office made sure that the program's standards were maintained across airlines. While the evaluation of the delivery of CRM training is incorporated into the oversight process for AQP training, it is not under traditional part 121 training. Moreover, FAA has not provided its inspectors with any specific guidance or training for evaluating airlines' CRM training under part 121. Although FAA inspectors may obtain some CRM training from a 3-hour computerized interactive course, this lack of guidance for evaluating CRM training under part 121 is troublesome to the inspectors we spoke with because of what they view as an inherent conflict between performance expectations for individuals under part 121 and crew performance expectations articulated in CRM principles. Under part 121, pilots are to master technical flying skills and perform these skills without reliance on any other crew member. In contrast, CRM principles and training teach pilots how to use to maximum effect the abilities and experience of other crew members, as well as their own technical flying skills. Without formal FAA instructions, inspectors have developed their own approaches to this evaluation. For example, one inspector said that he based his approval on his belief that the airline for which he was responsible "had a good safety record" and "would probably establish a good program." Another inspector said that in approving any training program, he sought guidance first from any applicable federal aviation regulation; the Inspector's Handbook, applicable advisory circulars; and, finally, any other FAA publication, such as the Introduction to CRM Training. However, this inspector added that these sources did not provide the criteria he needed to evaluate CRM training. As a result, he looked for behaviors such as crew members' "working together" to resolve problems, "catching errors," or "dealing with the consequences resulting from uncaught errors." These ad hoc approaches to evaluating the delivery of CRM training are not satisfactory to FAA officials at headquarters or to officials for at least one airline. FAA officials told us that the agency needed additional CRM training for its inspectors conducting reviews under part 121. In addition, officials at one airline told us that the lack of specific guidance and training for FAA inspectors responsible for evaluating CRM training under part 121 has hampered FAA's ability to review CRM programs. Furthermore, the problems FAA inspectors face in evaluating CRM training under part 121 will continue indefinitely in the absence of clearer guidance from FAA for those airlines that have decided not to enter AQP and for those airlines in the program that have not fully implemented it. Because AQP is implemented by the type of aircraft the crew flies, even the airlines that have been accepted for AQP will continue to provide some CRM training under part 121. For the eight airlines implementing AQP, we estimate that only about one-third of their crews have begun to receive AQP training. Therefore, most crews are still receiving traditional training under part 121, and some will continue do so for up to 8 years. As of September 1997, the airlines' estimated dates for completing the transition to AQP training ranged between 2000 and 2005. (See table 1.) For the flying public, safety is the paramount issue, and FAA and the airlines have worked to provide rigorous training programs for pilots. Crew resource management, which focuses on making the best use of all available experience and skills in the cockpit, is increasingly seen as an important component of safe flights. FAA recognized the importance of crew resource management by requiring all airlines to include training in these principles and by incorporating crew resource management into its Advanced Qualification Program. Pilots' performance is not the only factor in airline accidents, but it is an important one. We identified pilots' performance as the cause of about one-third of all the accidents and nearly one-fifth of the incidents for the 10 major airlines from 1983 through 1995. Training for safer performance by pilots that teaches crew resource management can occur under either the Advanced Qualification Program or part 121. However, while FAA's guidance for the implementation of the Advanced Qualification Program specifies a process for curriculum development that integrates this training with training in technical flying skills, FAA's guidance for curriculum development under part 121 is ambiguous and does not provide standards that inspectors can use to evaluate and approve airlines' training in crew resource management. As a result, FAA cannot be assured that airlines are developing a curriculum for teaching crew resource management that will effectively teach pilots how to best use all the skills and experience available to them in the cockpit. Furthermore, without specificity in the development of training for crew resource management under part 121 and without any guidance on how to evaluate this training under part 121, FAA inspectors are relying on their own experience in observing pilots or even on the belief that the airline "would probably establish a good program." These problems are especially troublesome because pilots who have not completed FAA-approved crew resource management training by March 1998 may not fly for airlines. To help ensure that airlines appropriately train pilots in CRM principles under part 121 and that FAA inspectors are able to uniformly evaluate this CRM training, we recommend that the Secretary of Transportation direct the Administrator of FAA to develop a process that airlines must follow for creating a CRM curriculum, with measurable criteria, under part 121 as it has for the Advanced Qualification Program. We provided a draft of this report to FAA for review and comment. We met with the Deputy Associate Administrator for Regulation and Certification, the Deputy Director of Flight Standards Services, the Managers for the Air Carrier Training Branch and the Advanced Qualification Program, and other officials. FAA commended our review of CRM training at the nation's airlines. FAA accepted the report's recommendation in part. FAA agreed that it should ensure that pilots are appropriately trained and noted that CRM training can provide desirable consequences in aviation safety. It further agreed that uniform evaluation of CRM training using measurable criteria is a commendable objective. However, FAA stated that science has not yet developed valid, reliable criteria for measuring CRM performance. FAA also agreed that more can be done to develop a process that airlines and inspectors can follow to create a CRM curriculum. FAA indicated that better guidance would be provided in a number of ways, such as updating Advisory Circular 120-51, Crew Resource Management Training, and supplemental guidance for inspectors included in the inspectors' handbook and holding regional meetings with CRM specialists from Flight Standards Services and other organizations. We concur with FAA that CRM training for pilots could improve aviation safety. However, we believe that before the contribution of CRM training to aviation safety can be measured, it is necessary to determine the extent to which the delivery of CRM training for pilots has occurred. We further concur with FAA that more should be done to develop processes for airlines and inspectors to follow in creating a CRM curriculum. We believe that until FAA establishes a process for CRM curriculum development that includes an assessment of the extent to which pilots have mastered that curriculum, it will not be possible to measure CRM's performance in contributing to aviation safety. To determine the extent to which inadequate performance by pilots was a problem for the 10 major U.S. airlines, we examined the types and frequency of safety-threatening events--incidents and accidents--from 1983 through 1995. To determine the adequacy of FAA' s guidance for and oversight of pilots' training, we reviewed FAA's role in the airlines' implementation of CRM. We focused primarily on CRM training because FAA has described the failure to apply CRM principles as a more important contributing factor in accidents than technical flying skills. We also compared FAA's rules and regulations and other guidance for CRM training with that provided for other training programs, as well as interviewed FAA and airline officials. A detailed discussion of our methodology is presented in appendix I. Related GAO products are listed at the end of this report. Our work was performed from October 1996 through October 1997 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 30 days after the date of this letter. At that time, we will provide copies of the report to the Secretary of Transportation, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. Please contact me at (202) 512-3650 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix II. To identify the types and frequencies of accidents and incidents--safety-threatening events--related to pilot performance, we reviewed accident and incident data, including pilot deviations, contained in the National Transportation Board's (NTSB) and the Federal Aviation Administration's (FAA) electronic databases. We obtained these data from FAA's National Aviation Safety Data Analysis Center. We limited our review to the reported events in accident and incident data sources involving the 10 major U.S. passenger airlines from 1983 through 1995. We did not independently verify these data. To facilitate the comparison of accidents with incidents in our analysis of the types and frequencies of safety-threatening events, we made two adjustments to the data. First, because of differences in the way information is recorded in these databases, we matched the similar categories contained in both databases and used these categories in our analysis. For example, both NTSB's and FAA's databases contain the category "on ground collision with object," which means an airplane struck an object, such as a vehicle or structure, while moving on the ground. Second, because the occurrences of events in accidents closely conform to those in incidents, we used the events that occurred in each of the 169 accidents as our unit of analysis. In our analysis of crew resource management (CRM) deficiencies, we used the accident as the unit of analysis because NTSB's findings of CRM deficiencies were by accident and not by the individual events that occurred within accidents. To characterize the prevalence of pilot performance as a factor in safety-threatening events over time and between airlines, we examined FAA's incident and pilot deviation databases. We used these two databases because they are the only such sources with adequate numbers of observations to make such comparisons. To determine the extent to which the inadequate use of CRM by pilots contributed to accidents and incidents, we performed a content analysis of the textual information found in the factual reports, briefs, and final reports of the 169 accidents investigated by NTSB from 1983 through 1995. We then classified CRM deficiencies according to the classification framework presented at a National Aeronautics and Space Administration (NASA)/Ames workshop in 1980. This framework groups CRM issues into five broad clusters: (1) Resource management--the application of specialized cognitive skills to effectively and efficiently utilize available resources, such as the ability to plan, organize, and communicate. (2) Organization processes--crew members' actions and behaviors in the context of their assigned duties and expected responsibilities. (3) Personal factors--the knowledge, skills, abilities, and limitations that individual crew members bring with them to the cockpit. (4) Material resources internal to the aircraft--the cockpit crew's appropriate, effective, and efficient use of instructional items, such as checklists, and navigational charts and equipment, such as on-board weather radar, navigational controls, and engine fire extinguisher. (5) Resources external to the aircraft--those people (air traffic controllers), entities (airports), and circumstances (emerging poor weather) that may affect pilots' plans, decisions, and actions. Table I.1 shows the classification framework used to categorize CRM issues. To verify the results of our content analysis, we requested a similar analysis by NASA's Aviation Safety Reporting System (ASRS) staff of voluntarily submitted pilot reports contained in the ASRS database. According to the aviation experts we consulted, ASRS incident reports provide the best source of information on deficiencies in CRM. Furthermore, because ASRS staff are most familiar with the data and have expertise in analyzing this free-form data, we concluded that it was more appropriate for them to perform this analysis. To evaluate the adequacy of FAA's oversight of airline pilot training, we obtained FAA's training policies, requirements, guidance, and handbooks relevant to CRM training. We discussed training programs, including CRM, and training procedures with appropriate FAA officials, including officials in the Office of System Safety, the Office of Regulation and Certification's Flight Standards Services, the Advanced Qualification Program Branch, the Office of Accident Investigation, and the Human Factors Division. In addition, we discussed airline training evaluation and approval processes and obtained training documents from FAA inspectors responsible for monitoring airline training. Finally, we contacted safety directors and trainers at the major airlines and obtained documents on their policies, procedures, research, and training curricula. We requested comments from recognized experts in the field of human factors in academia and the aviation industry, pilots, and government officials from FAA, NTSB, and NASA. We incorporated their comments where appropriate and made adjustments to our methodology as warranted. Aviation Safety: New Airlines Illustrate Long-Standing Problems in FAA's Inspection Program (GAO/RCED-97-2, Oct. 17, 1996). Human Factors: Status of Efforts to Integrate Research on Human Factors Into FAA's Activities (GAO/RCED-96-151, June 27, 1996). Military Aircraft Safety: Significant Improvements Since 1975 (GAO/NSIAD-96-69BR, Feb. 1, 1996). Aviation Safety: Data Problems Threaten FAA Strides on Safety Analysis System (GAO/AIMD-95-27, Feb. 8, 1995). Aviation Safety: Unresolved Issues Involving U.S.-Registered Aircraft (GAO/RCED-93-135, June 18, 1993). Aviation Safety: Changes Needed in FAA's Service Difficulty Reporting Program (GAO/RCED-91-24, Mar. 21, 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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Pursuant to a congressional request, GAO examined the role of airline pilots' performance in accidents and the Federal Aviation Administration's (FAA) efforts to address any inadequate performance, focusing on the: (1) types and frequency of accidents in which an airline pilot's performance was cited as a contributing factor, including those in which failure to use crew resource management (CRM) principles was identified; and (2) adequacy of FAA's guidance for and oversight of the airlines' implementation of pilots' training for CRM. GAO noted that: (1) of the 169 accidents that involved the major airlines and that were investigated and reported on in detail by the National Transportation Safety Board (NTSB) from 1983 through 1995, about 30 percent were caused in part by the pilots' performance; (2) in at least one-third of these accidents, GAO determined that the pilots did not correctly use CRM principles; (3) for example, according to NTSB, just before the 1994 crash in Charlotte, North Carolina, which killed 37 people, the aircraft had encountered a sudden change in wind direction and the captain gave an incorrect order to the first officer, who did not question the order, as CRM principles would require; (4) during the same period, of the nearly 4,000 incidents, GAO found that about one-fifth were caused in part by the pilots' performance; (5) FAA's guidance for and oversight of training in CRM does not ensure the adequacy of this training under part 121 of the federal aviation regulations, while they do under the new Advanced Qualification Program (AQP); (6) FAA's guidance for the implementation of AQP specifies a process for curriculum development that the airlines must follow in order to integrate CRM training with technical flying skills; (7) FAA inspectors overseeing this training assess the curriculum to see if FAA's process has been followed, enabling them to determine whether the pilots' training under this curriculum is adequate; (8) although FAA requires airlines to teach CRM in their traditional part 121 training, the guidance it provides on how to develop the curriculum for this training is ambiguous and does not provide standards that inspectors can use to evaluate airlines' CRM training; (9) because AQP training generally differs from traditional part 121 training in how it develops a curriculum for training CRM, the guidance for this training in AQP may not be applicable to CRM training under part 121; (10) FAA needs to develop guidance for teaching CRM under traditional part 121 training; (11) and although 8 of the 10 major airlines plan to train all their pilots under AQP, the need for guidance on CRM training under part 121 remains--both for those airlines that have opted not to enter AQP as well as for those that participate in the program but will nonetheless continue to have some of their pilots trained under part 121 for up to 8 years as they make the transition to AQP.
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Inhaling excessive amounts of coal mine dust can cause CWP and other debilitating lung diseases, including chronic obstructive pulmonary disease, which encompasses chronic bronchitis and emphysema. According to NIOSH, it usually takes about 10 to 15 years of exposure to coal mine dust to develop CWP, although cases involving fewer years of exposure have been observed. Once contracted, CWP cannot be cured, making it critical to prevent the development of this disease by limiting miners' exposure to coal mine dust. MSHA is responsible for protecting miners by enforcing the provisions of the Federal Mine Safety and Health Act of 1977 (Mine Act), as amended. Under this law, MSHA has a number of responsibilities, including setting new safety and health standards and revising existing standards, approving training programs for mine workers, and developing regulations regarding training requirements for rescue teams, among other things. MSHA also conducts periodic inspections of coal mines and, along with coal mine operators, periodically collects samples of coal mine dust to determine compliance with the exposure limit. MSHA set the current exposure limit for coal mine dust at 2.0 mg/m. This limit applies to the overall level of dust in the mine environment; specifically, it provides that each mine operator "shall continuously maintain the average concentration of respirable dust in the mine atmosphere during each shift to which each miner in the active workings of each mine is exposed" at or below that level. To measure the level of dust in the mine environment, MSHA requires that mine operators collect samples of dust in specific areas of the mine and for designated occupations. Designated occupations are those that have the greatest concentration of coal mine dust, as determined through MSHA sampling. then took effect. Pub. L. No. 91-173, SS 202(b), 83 Stat. 742, 760-61 (1970). The 1977 Mine Act did not change the 2.0 mg/m. 45 Fed. Reg. 23,990, 24,001 (Apr. 8, 1980) (codified at 30 C.F.R. SS 70.100). incurring any disability from... occupation-related disease during or at the end of such period." NIOSH shares some responsibility with MSHA for improving mine safety and protecting miners' health. For example, NIOSH conducts research on the causes of work-related diseases and injuries; researches, develops, and tests new technologies and equipment designed to improve mine safety; and recommends occupational safety and health standards, such as the exposure limit for coal mine dust. NIOSH also administers the Coal Workers' X-ray Surveillance Program--a medical monitoring and surveillance program designed to detect and prevent lung disease. This program requires mine operators to provide up to three initial chest x-rays for coal miners within specified time frames after their employment begins. Miners then can opt to have periodic chest x-rays approximately every 5 years thereafter. NIOSH uses this program for disease surveillance, which includes tracking trends, setting prevention and intervention priorities, and assessing prevention and intervention efforts. In addition, to estimate the prevalence of lung disease among underground coal miners and to study the relationship between miners' lung disease and their level of exposure to coal mine dust, NIOSH developed the National Study of Coal Workers' Pneumoconiosis. In this study, NIOSH collected and analyzed epidemiological data--including findings from chest x-rays, results of lung function tests, and occupational and smoking histories--from a sample of coal miners across all major coalfields in the United States between 1969 and 1988. The data also allowed researchers to link to results of coal mine dust sampling over approximately the same period to estimate dust exposures for individual miners. According to NIOSH, epidemiological studies examining the relationship between coal mine dust and disease must contain a sufficiently large body of data over a time period that is adequate to derive reliable findings. There are two primary types of underground coal mining in the United States: continuous mining and longwall mining. In continuous mining, a machine called a continuous miner cuts out rooms of coal from the coal bed leaving a series of pillars of coal to help support the mine roof. In addition to the pillars of coal, bolts are driven into the roof of the mine to help support the mine. The extracted coal from the continuous miner is loaded into shuttle cars for transport out of the mine. In longwall mining, a machine called a shearer moves back and forth across a wall of coal. After the coal is cut, a machine crushes it into small pieces and a conveyer belt removes it from the mine. While the shearer cuts the coal and the coal is extracted, the roof is held up temporarily with self- advancing hydraulic supports. While both types of mining produce dust, certain pieces of machinery produce more coal mine dust than others. For example, in continuous mining, the continuous miner, roof bolting machines, and shuttle cars generate the most dust. Major sources of dust in longwall mining include the shearer and crusher. Appropriately, MSHA did not use NIOSH's surveillance data as the basis for its proposed new coal mine dust limit, although the data served to inform MSHA's decision to take action. In the preamble to its proposed rule, MSHA cited an increase in the prevalence of CWP among underground coal miners based on NIOSH surveillance data, which may have led many to believe that these data were part of the basis for MSHA's proposed change in the exposure limit. The surveillance data showed that the prevalence of CWP, which declined substantially between 1970 and the late 1990s, increased for several years in the early 2000s before declining again between 2005 and 2009. According to MSHA and NIOSH officials, information about the increasing prevalence of CWP based on the surveillance data was mentioned in the preamble to the proposed rule to show that black lung disease still exists among active underground coal miners, thus helping to compel MSHA to take action to reduce miners' exposure to dust, in accordance with its duties under the Mine Act. However, as we reported in August 2012, the data MSHA used to support its proposal were from two reports, which relied on six epidemiological studies, not the surveillance data. In addition, in a 1996 notice in the Federal Register, well before the increase in the prevalence of CWP shown by the surveillance data, MSHA stated its intent to respond to a 1995 NIOSH recommendation to lower the exposure limit for coal mine dust by developing a proposed rule. dust because of some important limitations of the data. For example, because the data do not include individual miners' past exposures to coal mine dust, they cannot be used to estimate disease risk for individual miners. Based on principles of epidemiology and statistical modeling, measures of past exposures to coal mine dust are critical to assessing the relationship between miners' cumulative coal mine dust exposure and their risk of developing CWP. Also, because there is no active selection of miners by researchers and participation in the surveillance program is voluntary, miners who choose to participate may differ in unknown ways from those who choose not to participate, which could result in an overestimation or underestimation of the prevalence of disease. This methodological limitation is known as participation bias, and there are many ways it could affect the prevalence of disease indicated by the surveillance data. For example, the prevalence of CWP could be underestimated because some miners may decline further x-ray screenings once CWP is detected. Alternatively, the prevalence of CWP could be overestimated because miners may be more likely to participate after years of dust exposure, when they believe they are at risk of developing CWP. Experts identified various engineering controls that could further reduce the overall level of coal mine dust, but they said reductions would likely be incremental. Since 1968, the mining industry has achieved significant reductions in the level of dust in underground coal mines. Average dust levels declined from about 7 mg/m in 1968 to below 2 mg/mreplace contaminated air with fresh air, which also helps reduce the level of coal mine dust in the air. The experts also described ways that operators use water to prevent dust from being generated in mining operations. For example, operators spray water on the surface of the coal and on the machines' cutting surfaces as the coal is being cut to reduce the amount of dust generated. In some cases, operators also infuse water into the coal prior to cutting, but the experts reported limited success with that approach. Operators also use hygroscopic salts on mine floors to help maintain the moisture content of the mine floor, which in turn absorbs coal mine dust. The experts said that, with the increased productivity of mines in recent years, the water quantity and pressure for sprays may need to be increased. From 1978 to 2007, the amount of coal produced per work hour has more than tripled. The experts cautioned, however, that using too much water could have adverse impacts, such as causing conveyor belts to slip, which would affect production. The experts pointed to a number of factors that could limit mine operators' use of engineering controls aimed at reducing coal mine dust in the mine environment. The experts said that fundamental differences between continuous mining and longwall mining operations render some technological approaches useful for one type of mining, but not both. For example, while scrubbers were cited as an effective tool for reducing dust in continuous mining operations, the experts cautioned that they may not be as effective for mines that require a lot of ventilation, such as longwall mines, because the amount of air flowing through the mine can overwhelm the scrubber. An expert noted that one way to reduce dust levels is to operate only one continuous mining machine at a time in a section of a mine instead of more than one. However, he estimated that this could significantly decrease the productivity of the mine and increase the cost of producing the coal. Another expert noted that controlling dust in a cost-effective manner requires some flexibility. The experts did not quantify the cost of some of the technologies used in reducing dust levels because dust control is not the only purpose of some of the technologies, and future technologies have not been developed enough to fully determine their costs. However, they did identify primary cost drivers. For example, mines that contain high levels of gas must ventilate significant amounts of fresh air, which also helps lower coal mine dust levels. They also noted that while NIOSH has done some of the major research on dust control, overall, industry research on dust control technologies has declined. One expert made the point that research is directly proportional to the economic health of the coal industry. When the industry is contracting economically, manufacturers may not be willing to devote resources to research and development. While specific costs were difficult to assign, the primary drivers the experts identified for lowering dust levels were the cost of maintaining equipment; the cost of purchasing new or additional equipment, materials, and labor; and the cost of providing training. The experts identified options that could reduce individual miners' exposure to respirable coal mine dust, specifically, personal protective equipment and administrative controls. However, they noted that these options would not help mines reduce the overall level of coal mine dust in the mine environment, and therefore would not help mine operators comply with MSHA's exposure limit. Personal protective equipment includes items such as respirators and air stream helmets. Respirators filter the air that an individual miner breathes and air stream helmets actively filter and push air across a miner's face. While respirators and air stream helmets could reduce the amount of coal dust to which individual miners are exposed, the experts noted that miners have concerns that these devices limit communication between miners and thus could raise safety issues. The experts also said that personal dust monitors could be used to reduce individual miners' exposure to dust because they provide workers with real time data on dust levels in the area of the mine in which they are working. This information allows workers to adjust their position in the mine to reduce their exposure to coal mine dust. Although personal dust monitors have no effect on dust levels in the mine, the experts noted that they may provide data that could be used by mine operators to identify problem areas in the mines and to change work practices to reduce miners' exposure to coal mine dust. One of the experts told us personal dust monitors cost about $13,000 to $18,000 per unit, which could be a significant expense if all miners were outfitted with them. The experts also noted that administrative controls could limit miners' exposure to coal mine dust, although they do not control the overall level of dust in the mine. These controls include rotating workers more frequently from positions that are exposed to higher levels of dust, cutting the coal using a remote control device, and changing the sequence by which coal is cut. Experts said that rotating workers to other positions could help reduce their exposure to dust, but this could also require changes to the current collective bargaining agreement at unionized mines because the jobs that involve highest exposure to dust may also pay more. This approach may also increase costs for mine operators because, for example, the collective bargaining agreement might require them to continue to pay workers a higher rate of pay when they rotate to a lower paying position. The experts also said that some mines use remote control devices to keep miners farther away from the source of dust. Controlling the mining machine from a greater distance than is currently done may require high resolution imaging equipment. One expert said that this is especially true for mining operations where geologic conditions change frequently, requiring miners to make judgments about where to move the machinery. According to the experts, another way to limit exposure to individual miners in continuous mining is by modifying the sequence in which coal is mined. The experts explained that this approach reduces the number of miners who are downwind from the dust generated by the continuous mining machine. However, this type of change could result in decreased productivity in the mine. We provided a draft of this report to the Secretaries of Labor and Health and Human Services for review and comment. Both agencies generally concurred with the findings of the report, but provided no formal written comments. The agencies did, however, provide technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretaries of Labor and 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) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. The objectives of our review were to: (1) determine the extent to which the Mine Safety and Health Administration (MSHA) used recent coal workers' pneumoconiosis (CWP) trend data as a basis for its proposed exposure limit on coal mine dust, and (2) obtain experts' views on ways to lower the level of dust in coal mines, including their associated advantages, disadvantages, and cost. To address our first objective, we reviewed MSHA's Notice of Proposed Rulemaking, including the proposed exposure limit and related documents, updated the literature search from our prior report, and interviewed officials from MSHA and the National Institute for Occupational Safety and Health (NIOSH) to identify recent data on the prevalence of coal worker respiratory diseases. Two GAO research methodologists and one public health specialist reviewed information gathered about CWP trend data, to assess its strengths and limitations, and reviewed a recent study by NIOSH researchers on the usefulness of these data for estimating disease prevalence. We also reviewed our prior report and the analyses that supported it, and interviewed MSHA and NIOSH officials to determine what role, if any, recent CWP trend data had in developing the proposal to lower the exposure limit. We examined whether these data would have been appropriate for MSHA to use in developing its proposed exposure limit using principles of social science research and epidemiology. For our second objective, we worked with the National Academies to convene a group of experts to obtain their views on these issues. To prepare for our discussions with experts, we reviewed NIOSH and other studies on the ability of currently available and alternative technologies to control coal mine dust. We also reviewed the technological and economic feasibility assessments MSHA used to develop its proposed exposure limit. The group included experts from all of the major stakeholder groups: NIOSH researchers, academics, other technical experts, individuals from companies that manufacture mining equipment, and individuals who represent coal mine operators and workers. In identifying the experts, the National Academies compiled a preliminary list of 53 experts who represented 17 universities, 7 coal companies or coal associations, 5 equipment manufacturers, 1 mine workers' association, and 2 government agencies. The nominees were grouped by sector and field of expertise, and were vetted by 10 individuals working in the public, private, and academic sectors who have expertise in coal mining or a related field. Feedback from these individuals, along with biographical information about the experts, was used to prioritize the experts within each sector and field of expertise. Using this information, we invited 17 experts to participate in a 1-day panel discussion, although 1 person subsequently cancelled. The resulting 16 experts included 3 representatives of mine operators, 1 representative of underground coal miners, 3 representatives of equipment manufacturers, 6 academics, and 3 representatives of federal government agencies. To ensure that there were no unforseen biases or conflicts of interest, each panelist reported to the National Academies his or her investments, sources of earned income, organizational positions, relationships, and other circumstances that could affect, or could be viewed to affect, his or her view on the topic of methods for reducing the level of respirable dust in underground coal mines. We asked the experts to discuss the technological and other options available for lowering the level of dust in coal mines below the existing permissible exposure limit and the costs, advantages, and disadvantages of these technologies. We did not ask the experts about the proposed new limit. In addition to the 16 panelists, we allowed 5 observers to sit in on the panel discussion. The observers included representatives of mining equipment manufacturers, coal mine operators, and one government agency. We conducted this performance audit from July 2013 to April 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Revae Moran, (202) 512-7215 or [email protected]. In addition to the contact listed above, individuals making key contributions to this report were Mary Crenshaw (Assistant Director), Nabajyoti Barkakati, Russell Burnett, Sarah Cornetto, Andrea Dawson, Timothy Guinane, Kristy Kennedy, Kathy Leslie, Sheila McCoy, Sara Pelton, Tim Persons, Martin Scire, Sushil Sharma, Walter Vance, Kathleen van Gelder, and Shana Wallace.
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Underground coal miners face the threat of being overexposed to coal mine dust, which can cause CWP and other lung diseases, collectively referred to as black lung disease. In October 2010, MSHA--the federal agency responsible for setting and enforcing mine safety and health standards--proposed lowering the exposure limit for respirable coal mine dust to reduce miners' risk of contracting black lung. In August 2012, GAO reported that the evidence MSHA used supported its conclusion that lowering the exposure limit on coal mine dust would reduce miners' risk of disease. However, some have questioned whether and how recent NIOSH trend data on CWP were used in developing the proposed limit. In May 2013, GAO was asked to provide additional information on MSHA's proposal. GAO examined (1) the extent to which MSHA used recent CWP trend data as a basis for its proposed exposure limit, and (2) expert views on ways to lower the level of dust in coal mines, including their associated advantages, disadvantages, and cost. GAO reviewed MSHA's proposal and related documents; updated a previous GAO literature search; interviewed MSHA and NIOSH officials; and, with the help of the National Academies, convened a group of experts knowledgeable about underground coal mining and methods for reducing coal mine dust. GAO is not making any recommendations in this report, and MSHA and NIOSH both generally concurred with the findings. The Department of Labor's Mine Safety and Health Administration (MSHA) appropriately did not use recent trend data on coal workers' pneumoconiosis (CWP) as a basis for its proposal to lower the permissible exposure limit for respirable coal mine dust. These recent data from the Department of Health and Human Services' National Institute for Occupational Safety and Health (NIOSH) are inappropriate for this purpose because they do not include the types of detailed information about individual miners needed to estimate the likelihood that miners would develop CWP at different exposure levels, such as historical dust exposures. MSHA primarily based its proposed new limit on two reports and six epidemiologic studies, which each concluded that lowering the limit on exposure to coal mine dust would reduce miners' risk of developing disease. MSHA's proposed coal mine dust limit was supported by these reports and studies because, unlike recent CWP trend data, they included information needed to conduct a reliable epidemiological analysis of disease risks associated with different levels of exposure to coal mine dust. Experts identified various approaches that could incrementally reduce overall coal mine dust levels as well as individual miners' exposure to dust. They said that air and water are the primary engineering controls used to reduce overall coal mine dust levels in the mine environment, which are used in various mining equipment, such as sprays. The experts also said that no one technology or approach would result in substantially lower dust levels, but instead could have a cumulative impact if used together. They also noted that all the approaches may not be effective in all types of mines, and that there are a number of cost drivers that would have to be considered, such as machine maintenance and training. The experts also identified other approaches, such as personal protective equipment and administrative controls, which could reduce individual miners' exposure to dust. Personal protective equipment includes respirators and air stream helmets; administrative controls include rotating workers and using remote control devices. However, they noted that these approaches would not help mine operators comply with MSHA's exposure limit because they would not reduce the overall level of coal mine dust in the mine environment.
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NASA and its international partners--Japan, Canada, the European Space Agency, and Russia--are building the space station as a permanently orbiting laboratory to conduct materials and life sciences research, earth observation and commercial utilization, and related uses under nearly weightless conditions. Each partner is providing station hardware and crew members and is expected to share operating costs and use of the station. The NASA space station program manager is responsible for the cost, schedule, and technical performance of the total program. The Boeing Corporation, the prime contractor, is responsible for development, integration, and on-orbit performance of the station. By the end of 1997, the United States and its partners had produced well over 358,000 pounds of space flight hardware, of which the prime contractor was responsible for about 260,000 pounds. According to NASA, by the end of 1998, virtually all flight hardware for the first six flights will have been delivered to Russian or American launch sites. In June 1995, we reported that the U.S. funds required to design, launch, and operate the space station would be about $94 billion--over $48 billion to complete assembly and almost $46 billion to operate and conduct research. That total included $17.4 billion for station development activities, $13 billion for operations, and $50.5 billion for shuttle launch support during assembly and operations. Our report also noted that the program's funding reserves were limited and that the launch and assembly schedule would be difficult to achieve. Since June 1995, total space station cost estimates have increased from $93.9 billion to $95.6 billion (see table 1). In particular, the development cost estimate has increased by more than 20 percent, in-house personnel requirements have increased dramatically, and eight shuttle flights have been added to the development program. However, the shuttle support cost, as of April 1998, is less than that of June 1995 because NASA is projecting a significant reduction in the average cost per flight. The higher development costs--$21.9 billion versus $17.4 billion--are attributable to schedule delays, additional prime contractor effort not covered by funding reserves, additional crew return vehicle costs, and costs incurred as a result of delays in the Russian-made Service Module. In June 1995, NASA expected to complete assembly in June 2002. Partially due to delays in the Russian program, the last flight in the assembly sequence is now scheduled for December 2003, a delay of 18 months that has increased development costs by more than $2 billion. Also, NASA has undertaken activities such as developing the Interim Control Module to mitigate delays in the delivery of the Service Module. These activities are estimated by NASA to cost more than $200 million. It should be noted that our estimate includes the cost of the Russian Space Agency contract, which NASA does not include in its portrayal of station development funding needs. The increased in-house personnel costs during development--$2.2 billion versus $0.9 billion--are attributable to a longer development program, higher estimated personnel levels, and a more inclusive estimating methodology. Our June 1995 estimate was based on a development program scheduled to end in June 2002 while our current estimate includes an additional 18 months of effort. In addition, our prior estimate was based on an average of 1,285 civil service staff annually. NASA's budget now estimates that about 2,000 staff per year will be needed during development. The increased staffing levels are attributable largely to the inclusion of science and crew return vehicle personnel into the station budget, which in most cases were previously covered under the Science, Aeronautics and Technology budgets. Finally, our current estimate is based on an allocation of all research and program management costs to the station program, while the previous estimate did not include all components of that budget line. Regarding shuttle support, our 1995 estimate was based on 35 flights during development and 50 during operations. However, NASA now estimates 43 flights during development, including 2 additional flights to the Russian space station Mir, 1 flight to test the crew return vehicle, and flights required by changes to the assembly sequence. NASA continues to estimate that 50 flights will be needed during operations. However, NASA's estimate of average cost per flight is now lower, resulting in a shuttle launch support cost of $17.7 billion during assembly, essentially the same cost as estimated in 1995, despite the increased number of flights. During operations, the estimated cost for shuttle support is now significantly less--$25.6 billion versus $32.7 billion--based on the same number of flights. NASA's estimated reduction in the average cost per flight is based on its expectation that program efficiencies and other cost savings will be achieved and sustained throughout the operating life of the space station. If that expectation is not realized, the cost for shuttle support will increase. A number of potential program changes could significantly increase the current estimate. First, the development costs shown in table 1 would increase if the assembly complete milestone slips beyond December 2003. Second, it is likely that the program will ultimately require more shuttle flights than are included in our analysis. Finally, NASA is now considering modifying space shuttle Columbia to permit its use for some station missions. A recent independent assessment by NASA's Cost Assessment and Validation Task Force suggests that the program's schedule will likely experience further delays and require additional funding. We believe NASA and its partners face a formidable challenge in meeting the launch schedules necessary to complete assembly. Those schedules depend on the launch capacity in the United States and Russia and the program's ability to meet all manufacturing, testing, and software and hardware integration deadlines. Through December 2003, over 90 launches by NASA and its international partners will be needed for assembly, science utilization, resupply, and crew return vehicle purposes. During this period, NASA's shuttles are currently scheduled to be flown up to 9 times a year for both station and nonstation needs, and Russia will have to average 9 to 10 launches a year to accommodate its station commitment. While these rates have been achieved in the past, a January 1998 NASA study of personnel reductions at Kennedy Space Center concluded that, without additional processing efficiencies, the required shuttle flight rate may not be supportable. If NASA is unable to maintain the planned flight rate, the station assembly schedule could experience further slippage. Also, recent Russian annual flight rates to support the Mir space station have been significantly lower than the required rate to support space station assembly. The assembly schedule also assumes that further critical manufacturing delays will not occur. According to NASA's Aerospace Safety Advisory Panel's 1997 annual report, the program's schedule is at risk due to software, hardware, and testing issues. The report states, in part, that the ". . . software development schedule is almost impossibly tight. If something else does not cause a further delay in (station) deployment, software development may very well do so." Further, the report pointed out that the crew return vehicle development schedule is "extremely optimistic," noting that any delays in the availability of the vehicle could constrain station operations. In addition, the panel stated that, while integrated testing is a "very positive step for safety," there is no room in the current schedule for required changes that may be discovered during this testing. Delays in the development program would increase costs because, at a minimum, fixed costs such as salaries, contractor overhead, and sustaining engineering would continue for a longer period than planned. Assuming NASA would continue to spend at the rate assumed in its current estimate for fiscal year 2003, the program would incur additional costs of more than $100 million for every month of schedule slippage. The program could require more shuttle flights than are baselined in our estimate. For example, the baseline does not include additional flights that may be needed for crew return vehicle testing and launches and some resupply flights. While some of these possibilities are subject to program changes that have not been adopted, it appears that the costs associated with launching the crew return vehicle are not included. Depending on the ultimate life expectancy of that vehicle, two additional flights could be needed. On the basis of NASA's estimate of average cost per flight for the shuttle, this could add about $1 billion to the total estimate. According to NASA, sustaining engineering costs associated with the crew return vehicle will have to be absorbed by the program's operations budget. Also, NASA is reviewing alternatives for making Columbia capable of supporting the station. A modified Columbia could be used as a backup (in the event one of the other orbiters is out of service) or as a delivery vehicle for cargo. Between November 1997 and April 1998, an independent cost assessment and validation team examined the program's past and projected performance and made quantitative determinations regarding the potential for additional cost and schedule growth. Reflecting many of the same areas we identified, the team cited complex assembly requirements and potential schedule problems associated with remaining hardware and software development and concluded that the program could require an additional $130 million to $250 million in annual funding. The team also indicated that the program could experience 1 to 3 years of schedule growth beyond the currently anticipated completion date of December 2003. The estimate we derived in 1995 and our latest estimate include those costs related to the space station's development, assembly, and operations. They do not include potential costs that may be incurred to satisfy NASA's space debris tracking requirement. Due to its large size and long operational lifetime, the space station will face a risk of being struck by orbital debris. NASA plans to provide shielding against smaller objects and maneuver the station to avoid collisions with large objects. The National Space Policy requires NASA to ensure the safety of all space flight missions involving the space station and shuttle, including protection against the threat of collisions from orbiting space debris. However, NASA has no surveillance capability and must rely on the Department of Defense (DOD) to perform this function. As mentioned previously, NASA updated its overall requirement for space debris tracking as it relates to supporting the space station, to include the ability to track and catalog objects as small as 1 centimeter. NASA recognized that such a capability could require sensor facility upgrades and the addition of new sensors to DOD's surveillance network. However, DOD maintains that the upgrade is not feasible within current budget constraints. A NASA study suggested that developing a system to satisfy NASA's needs could cost about $1 billion. A DOD study suggested that the cost of a space-based system satisfying all DOD and NASA needs could exceed $5 billion and noted that the cost to maintain a system that provides 24-hour a day tracking of 1-centimeter-sized space debris could be "prohibitively expensive." More recently, the Senate Committee on Armed Services, in its report on the National Defense Authorization Act for Fiscal Year 1998, directed the Secretary of the Air Force to undertake a design study for a 1-centimeter debris tracking system. The study was to be coordinated with a number of national laboratories. The resulting report, which was transmitted to congressional committees on April 2, 1998, identified three possible designs that range in estimated cost from about $400 million to $2.5 billion. The sources of funding for the system are undetermined at this time. Also, while the more stringent requirement is related to the space station, all other space activities would benefit from the ability to track 1-centimeter-sized debris. Since debris tracking is a NASA-wide requirement, and the agency relies on DOD to provide the service, the two agencies will have to work together to determine how to provide the capability. We have previously expressed our concern with the adequacy of space station financial reserves. We continue to be concerned. The program has used, or identified specific uses for a significant portion of its available reserves, with almost 6 years left before the last assembly flight is scheduled to be launched. In January 1995, the space station program had more than $3 billion in financial reserves to cover development contingencies. In March 1998, the financial reserves available to the program were down to about $2.1 billion, and NASA had identified over $1 billion in potential funding requirements against those reserves. In the past, reserves have been used to fund additional requirements, overruns, and other authorized changes. Some of the potential funding needs include those related to NASA's decision to add a third node to the station's design and unforeseen costs associated with the development of an Interim Control Module. We recognize that NASA identifies adequacy of reserves as one of the highest current program risks. We also note that the current reserve status could be affected by additional schedule slips, contract disputes, manufacturing problems, or the need for additional testing. Inadequate reserves hinder program managers' ability to cope with unanticipated problems. If a problem could not be covered by available reserves, program managers could be faced with deferring or rephasing other activities, thus possibly delaying the space station's development schedule or increasing future costs. In the summer of 1997, after many months of estimating that the total cost growth at the completion of the contract would not exceed $278 million, Boeing more than doubled its estimate--to $600 million. Through September 1997, $398 million in cost growth had already accumulated. On September 30, 1997, Boeing formally asked NASA to consider rebaselining the program using a more "meaningful program baseline against which performance measurements (could) be taken." In October 1997, NASA granted approval to Boeing to begin tracking cost and schedule performance using a new performance measurement baseline. The revised baseline permitted Boeing to reset its budgeted cost of work scheduled and performed equal to the actual cost of work performed as of September 1997. According to Boeing, this change provides the program with the most accurate cost information and incorporates updated program schedules to reflect the most achievable recovery plans. For reporting purposes, the change had the effect of resetting cost and schedule variances to zero. We asked the program officials to provide us with an analysis depicting a crosswalk back to the original baseline. That analysis shows that, as of February 1998, the total variance was $448 million. Of that amount, about $50 million was incurred in the first 5 months of fiscal year 1998. While NASA approved the new baseline for reporting purposes, it continues to use Boeing's estimate of overrun at completion--$600 million--as the basis for calculating the contractor's incentive award fee. NASA's estimate of total cost growth at completion, which had been in general accord with Boeing's $600 million estimate, has been increased to $817 million, and is the basis for its fiscal year 1999 budget request. This higher estimate is based on its assessment of trends and its belief that Boeing's cost control strategy will not be fully successful. Since our last cost estimate was completed in June 1995, U.S. life-cycle funding requirements for building and operating the International Space Station have increased--from $93.9 billion to $95.6 billion. Many of the reasons for this increase were not foreseen by NASA in 1995. Reasons include schedule delays by Russia and prime contractor difficulties. In light of our analysis and that by an independent team, additional costs could materialize. Potential program changes, such as additional schedule slippage and more shuttle flights, could increase our latest cost estimate. Also, NASA's updated requirement for tracking space debris may require DOD to upgrade its surveillance network. NASA's potential share of this cost has not yet been determined. When the station is fully assembled, funding requirements for operational activities, such as shuttle launches, the crew return vehicle, principal investigator work, and in-house personnel support, will need to be fully defined. During the station's projected 10-year utilization period, U.S. funding requirements are estimated to total over $42 billion, or about an average of $4.2 billion per year. Therefore, station-related funding needs will continue be a major portion of NASA's future budgets. In commenting on a draft of this report, NASA raised three major concerns: (1) our use of average cost per flight to estimate shuttle launch support costs, (2) the inclusion of certain program costs in the station development estimate, and (3) the inclusion of references to the requirement for improved orbital debris tracking capability. NASA also provided a number of technical and clarifying comments, which have been incorporated where appropriate. NASA believes that marginal cost, rather than average cost per flight, is a more accurate estimate of shuttle launch support costs. NASA defines marginal cost per flight as those costs incurred or avoided as a result of adding or deleting one flight to or from the shuttle manifest in a given fiscal year. Marginal cost does not include any fixed costs that NASA says are required to maintain the capability to launch the shuttle a specific number of times during a given year. Average cost per flight as defined by NASA is the total cost to operate the space shuttle on a recurring and sustained basis for a given fiscal year divided by the number of flights planned for that year. Its calculation of average cost per flight captures most costs in the shuttle operations budget line, as well as prorations of civil service personnel, space communications network costs, and recurring costs for shuttle improvements. We believe our use of average cost per flight is appropriate because more than 70 percent of shuttle flights during fiscal years 1999 through 2003 will be devoted to the space station. NASA expressed concern with our inclusion of certain costs in the development estimate, particularly the Russian Space Agency contract cost. We chose to include all costs that we believe directly support station development and construction activities to more completely portray that portion of the life-cycle cost estimate. However, we revised the report to recognize the way NASA treats those costs. NASA also expressed concern that our discussion of the costs associated with orbital debris tracking could be misunderstood. We believe our discussion is clear. We agree that debris tracking costs should not be considered part of the space station's life-cycle cost estimate, and benefits would accrue to programs other than the space station. However, it is a potential cost that is related to space station support because the requirement to track and catalog 1-centimeter-sized debris was established to support the station. As stated in the report, since debris tracking is a NASA-wide responsibility and the agency relies on DOD to provide the service, the two agencies will have to work together to achieve the improved capability. We provide additional details on NASA's comments in appendix I. To estimate station costs, identify program uncertainties, examine program reserves, and assess the prime contractor's cost and schedule reporting system, we reviewed NASA's program planning and budgeting documents, internal cost reports, independent program assessments, and contracts relating to space station development. We interviewed NASA officials in the Space Station Program Office, the Space Shuttle Program Office, the Office of Human Space Flight, the Office of Life and Microgravity Sciences and Applications, the Office of the Comptroller, and the X-38 development program. We also met with officials from NASA's space station Cost Assessment and Validation Task Force to discuss the scope and results of their work, and the National Research Council to discuss ongoing work related to station disposal. To examine potential impacts of satisfying NASA's debris tracking requirement, we discussed a recent Air Force study with cognizant officials and reviewed previous debris tracking studies. We used NASA budget data to depict certain costs and to derive other costs. We used cost reports and independent assessments to test the reliability of NASA's estimates and to identify cost risks to the program. We did not, however, attempt to independently validate NASA's budget data. We performed our work from December 1997 to April 1998 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from its issue date. At that time, we will send copies to appropriate congressional committees, the NASA Administrator, and the Director of the Office of Management and Budget. We will also make copies available to others on request. Please contact me at (202) 512-4841 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix II. The following are GAO's comments on the National Aeronautics and Space Administration's (NASA) letter dated April 27, 1998. 1. According to NASA, shuttle support costs for the space station would be $3.1 billion during development and $5.5 billion during operations if marginal cost per flight is used to estimate those costs. However, we believe that it is more appropriate to use average cost per flight to estimate shuttle support. NASA defines marginal cost per flight as those costs incurred or avoided as a result of adding or deleting one flight to or from the shuttle manifest in a given fiscal year. Marginal cost does not include any fixed costs that NASA says are required to maintain the capability to launch the shuttle a specific number of times during a given year. According to NASA officials, eliminating or adding a single flight in a given year has no effect on these fixed costs. Marginal cost per flight includes costs of personnel and any consumable hardware and materials, such as propellant, that can be added or removed with only temporary adjustment in the flight rate. NASA defines average cost per flight as the total cost to operate the space shuttle on a recurring and sustained basis for a given fiscal year divided by the number of flights planned for that year. Its calculation of average cost per flight captures most costs in the shuttle operations budget line, as well as prorations of civil service personnel, space communications network costs, and recurring costs for shuttle improvements. The calculation does not include capital-type costs, such as those required to develop the system, and construct and modify government-owned facilities or nonrecurring costs associated with system improvements. During its assembly, station elements will be almost the exclusive payload on the shuttle, and there is no alternative means of transportation for the station. Also, during the operations period, the station will be a major user of the shuttle. Since the station will be the predominant user of the shuttle for many years, we believe the use of average cost per flight is more appropriate than the use of marginal cost per flight to estimate shuttle launch support costs. 2. The time frames for the cost estimates were clearly portrayed in the life-cycle cost table. We added a footnote in the Results in Brief section to cite those dates earlier in the report. 3. We changed the heading in the table from "development budget" to "development cost". We chose to aggregate all costs related directly to space station development and construction. 4. We revised the report to refer to earth observation and commercial utilization and related uses. 5. We revised the report to read ". . . development, integration, and on-orbit performance." 6. We recognize that we have included some costs in our development total that were not included in 1995, such as the Russian Space Agency contract and crew return vehicle development costs. In calculating the percentage increase, we excluded those costs from our total in order to make a proper comparison. Using NASA's own figures, the increase is more than 22 percent--$17.4 billion vs. $21.3 billion. 7. We recognize that the NASA Administrator initiated the idea of conducting an independent cost review. However, we note that the Congress specifically requested such an analysis in Conference Report 105-297. The report specified a number of preconditions to the release of some space station funding. One of those requirements was "a detailed analysis by a third party of (space station) cost and schedule projections . . ." For brevity, we have deleted references to this sequence of events. 8. We agree that debris tracking costs should not be considered part of the space station's life-cycle cost estimate. We believe we have made that clear by (1) excluding any reference to debris tracking from the life-cycle cost table and (2) stating that debris tracking is a NASA-wide responsibility. However, we believe it is important to identify this potential cost because NASA established the requirement to catalog and track objects as small as 1 centimeter, in part, to support the International Space Station, and funding to achieve that capability is not yet available. As stated in the report, since debris tracking is a NASA-wide responsibility and the agency relies on the Department of Defense to provide the service, the two agencies will have to work together to determine how to move ahead on this challenge. 9. We do not imply that the program has spent $2 billion of reserves. However, according to program documentation, the net unencumbered reserve posture, as of March 1998, was about $1.1 billion. This compared with a starting point of about $3.1 billion in January 1995. 10. We believe the sentence, as written, accurately reflects the status of cost variance under the prime contract. 11. We revised our terminology. 12. We changed the life-cycle cost table category to read "development cost from 1994 to assembly complete" and added language in the report narrative to recognize NASA's position. We note that in testimony on April 23, 1998, the NASA Administrator pointed out the relevance of the activities under the Russian contract to the development and construction of the space station. 13. The shuttle was incapable of supporting space station assembly without incorporating certain enhancements. We believe these nonrecurring costs are completely relevant to the discussion of space station life-cycle cost estimates. 14. We changed the footnote to read "U.S. missions to . . . Mir." 15. We changed the footnote to read "Russian Space Agency contract." 16. We did not change the order of reasons for contract growth. See comment 12 for discussion of Russian Space Agency contract. 17. Our estimate of civil service personnel costs includes an allocation of all elements of the research and program management budget--personnel and related costs, travel, and research operations support--to the station program. According to a NASA official, the agency's estimate only allocates personnel and related costs to the station program. Since the station program benefits from all elements of the research and program management budget, we believe that it is appropriate to allocate all of those costs to the program. 18. We modified the report to incorporate this suggestion. 19. A crew return vehicle is required for space station operations. The X-38 program is focused on demonstrating a concept for station crew return. Therefore, we believe those costs are directly related to station development. 20. We changed the report to reflect NASA's current plans for modifying space shuttle Columbia. 21. We modified the report to read ". . . Over 90 launches by NASA and its international partners." 22. We disagree. We believe a "delay" in the seven person operational capability is a constraint to the station program. 23. See comment 20. 24. We revised the report to reflect information in the final Cost Assessment and Validation Task Force report. 25. See comment 8. 26. See comment 9. 27. We believe report language accurately reflects the rebaselining of the prime contract performance measurement reporting system. 28. We modified the report to incorporate NASA's suggestion. 29. We modified the report to incorporate NASA's suggestion. 30. We identified the independent cost team as NASA's Cost Assessment and Validation Task Force earlier in the report. 31. See comment 8. Vijay Barnabas 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 issues associated with the National Aeronautics and Space Administration's (NASA) International Space Station program, focusing on: (1) estimates of the station's development, assembly, and operations costs and comparing this estimate with the estimate in GAO's June 1995 report; (2) program uncertainties that may affect those costs; (3) potential debris tracking costs; (4) the status of program reserves; and (5) recent actions to measure prime contractor performance based on rebaselined information. GAO noted that: (1) life-cycle cost is the sum total of direct, indirect, recurring, and nonrecurring cost of a system over its entire life through disposal; (2) overall, the estimated U.S. cost to develop, assemble, and operate the space station is about $96 billion, an increase of almost $2 billion over GAO's last estimate made in 1995; (3) development costs represent the largest increase--more than 20 percent; (4) the development increase is attributable to schedule slippages, prime contract growth, additional crew return vehicle costs, and the effects of delays in delivery of the Russian-made Service Module; (5) overall costs would have been significantly higher had there not been an offsetting reduction in shuttle support costs; (6) a number of potential program changes could significantly increase the updated cost estimate; (7) they include the potential or additional schedule slippage and the need for shuttle launches to test and deliver the crew return vehicle; (8) at the current estimated spending rate, the program would incur additional costs of more than $100 million for every month of schedule slippage; (9) in addition, NASA may have to incur costs related to protecting the station from space debris; (10) in August 1997, the agency updated its overall space debris tracking requirement; (11) the new requirement, as it relates to supporting the space station, includes the ability to track and catalog objects as small as 1 centimeter; (12) the adequacy of the space station program's funding reserves has been a concern of GAO's; (13) the program has used, or identified potential uses for, a significant portion of its available reserves, with almost 6 years left before the last assembly flight is scheduled to be launched; (14) in October 1997, NASA granted approval to Boeing Corporation to begin tracking cost and schedule performance using a new performance measurement baseline; (15) the purpose of the change was to incorporate updated program schedules to reflect the most achievable recovery plans; (16) for reporting purposes, the change had the effect of resetting cost and schedule variances to zero; (17) the original baseline shows that the February 1998 cost variance would have been about $50 million higher than the $398 million Boeing reported prior to the change; and (18) while NASA approved the new baseline for reporting purposes, it continues to use Boeing's estimate of overrun at completion--$600 million--as the basis for calculating the contractor's incentive award fee.
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Interest in oil shale as a domestic energy source has waxed and waned since the early 1900s. More recently, the Energy Policy Act of 2005 directed BLM to lease its lands for oil shale research and development. In June 2005, BLM initiated a leasing program for research, development, and demonstration (RD&D) of oil shale recovery technologies. By early 2007, it granted six small RD&D leases: five in the Piceance Basin of northwest Colorado and one in Uintah Basin of northeast Utah. The leases are for a 10-year period, and if the technologies are proven commercially viable, the lessees can significantly expand the size of the leases for commercial production into adjacent areas known as preference right lease areas. The Energy Policy Act of 2005 also directed BLM to develop a programmatic environmental impact statement (PEIS) for a commercial oil shale leasing program. During the drafting of the PEIS, however, BLM realized that, without proven commercial technologies, it could not adequately assess the environmental impacts of oil shale development and dropped from consideration the decision to offer additional specific parcels for lease. Instead, the PEIS analyzed making lands available for potential leasing and allowing industry to express interest in lands to be leased. Environmental groups then filed lawsuits, challenging various aspects of the PEIS and the RD&D program. Since then, BLM has initiated another round of oil shale RD&D leasing. Stakeholders in the future development of oil shale are numerous and include the federal government, state government agencies, the oil shale industry, academic institutions, environmental groups, and private citizens. Among federal agencies, BLM manages the land and the oil shale beneath it and develops regulations for its development. USGS describes the nature and extent of oil shale deposits and collects and disseminates information on the nation's water resources. DOE, through its various offices, national laboratories, and arrangements with universities, advances energy technologies, including oil shale technology. The Environmental Protection Agency (EPA) sets standards for pollutants that could be released by oil shale development and reviews environmental impact statements, such as the PEIS. Interior's Bureau of Reclamation (BOR) manages federally built water projects that store and distribute water in 17 western states and provides this water to users. BOR monitors the amount of water in storage and the amount of water flowing in the major streams and rivers, including the Colorado River, which flows through oil shale country and feeds these projects. BOR provides its monitoring data to federal and state agencies that are parties to three major federal, state, and international agreements that together with other federal laws, court decisions, and agreements, govern how water within the Colorado River and its tributaries is to be shared with Mexico and among the states in which the river or its tributaries are located. The states of Colorado and Utah have regulatory responsibilities over various activities that occur during oil shale development, including activities that impact water. Through authority delegated by EPA under the Clean Water Act, Colorado and Utah regulate discharges into surface waters. Colorado and Utah also have authority over the use of most water resources within their respective state boundaries. They have established extensive legal and administrative systems for the orderly use of water resources, granting water rights to individuals and groups. Water rights in these states are not automatically attached to the land upon which the water is located. Instead, companies or individuals must apply to the state for a water right and specify the amount of water to be used, its intended use, and the specific point from where the water will be diverted for use, such as a specific point on a river or stream. Utah approves the application for a water right through an administrative process, and Colorado approves the application for a water right through a court proceeding. The date of the application establishes its priority--earlier applicants have preferential entitlement to water over later applicants if water availability decreases during a drought. These earlier applicants are said to have senior water rights. When an applicant puts a water right to beneficial use, it is referred to as an absolute water right. Until the water is used, however, the applicant is said to have a conditional water right. Even if the applicant has not yet put the water to use, such as when the applicant is waiting on the construction of a reservoir, the date of the application still establishes priority. Water rights in both Colorado and Utah can be bought and sold, and strong demand for water in these western states facilitates their sale. A significant challenge to the development of oil shale lies in the current technology to economically extract oil from oil shale. To extract the oil, the rock needs to be heated to very high temperatures--ranging from about 650 to 1,000 degrees Fahrenheit--in a process known as retorting. Retorting can be accomplished primarily by two methods. One method involves mining the oil shale, bringing it to the surface, and heating it in a vessel known as a retort. Mining oil shale and retorting it has been demonstrated in the United States and is currently done to a limited extent in Estonia, China, and Brazil. However, a commercial mining operation with surface retorts has never been developed in the United States because the oil it produces competes directly with conventional crude oil, which historically has been less expensive to produce. The other method, known as an in-situ process, involves drilling holes into the oil shale, inserting heaters to heat the rock, and then collecting the oil as it is freed from the rock. Some in-situ technologies have been demonstrated on very small scales, but other technologies have yet to be proven, and none has been shown to be economically or environmentally viable. Nevertheless, according to some energy experts, the key to developing our country's oil shale is the development of an in-situ process because most of the richest oil shale is buried beneath hundreds to thousands of feet of rock, making mining difficult or impossible. Additional economic challenges include transporting the oil produced from oil shale to refineries because pipelines and major highways are not prolific in the remote areas where the oil shale is located, and the large-scale infrastructure that would be needed to supply power to heat oil shale is lacking. In addition, average crude oil prices have been lower than the threshold necessary to make oil shale development profitable over time. Large-scale oil shale development also brings socioeconomic impacts. There are obvious positive impacts such as the creation of jobs, increase in wealth, and tax and royalty payments to governments, but there are also negative impacts to local communities. Oil shale development can bring a sizeable influx of workers, who along with their families, put additional stress on local infrastructure such as roads, housing, municipal water systems, and schools. Development from expansion of extractive industries, such as oil shale or oil and gas, has typically followed a "boom and bust" cycle in the West, making planning for growth difficult. Furthermore, traditional rural uses could be replaced by the industrial development of the landscape, and tourism that relies on natural resources, such as hunting, fishing, and wildlife viewing, could be negatively impacted. Developing oil shale resources also faces significant environmental challenges. For example, construction and mining activities can temporarily degrade air quality in local areas. There can also be long- term regional increases in air pollutants from oil shale processing, upgrading, pipelines, and the generation of additional electricity. Pollutants, such as dust, nitrogen oxides, and sulfur dioxide, can contribute to the formation of regional haze that can affect adjacent wilderness areas, national parks, and national monuments, which can have very strict air quality standards. Because oil shale operations clear large surface areas of topsoil and vegetation, some wildlife habitat will be lost. Important species likely to be negatively impacted from loss of wildlife habitat include mule deer, elk, sage grouse, and raptors. Noise from oil shale operations, access roads, transmission lines, and pipelines can further disturb wildlife and fragment their habitat. Environmental impacts could be compounded by the impacts of coal mining, construction, and extensive oil and gas development in the area. Air quality and wildlife habitat appear to be particularly susceptible to the cumulative effect of these impacts, and according to some environmental experts, air quality impacts may be the limiting factor for the development of a large oil shale industry in the future. Lastly, the withdrawal of large quantities of surface water for oil shale operations could negatively impact aquatic life downstream of the oil shale development. My testimony today will discuss impacts to water resources in more detail. In our October report, we found that oil shale development could have significant impacts on the quantity and quality of surface and groundwater resources, but the magnitude of these impacts is unknown. For example, we found that it is not possible to quantify impacts on water resources with reasonable certainty because it is not yet possible to predict how large an oil shale industry may develop. The size of the industry would have a direct relationship to water impacts. We noted that, according to BLM, the level and degree of the potential impacts of oil shale development cannot be quantified because this would require making many speculative assumptions regarding the potential of the oil shale, unproven technologies, project size, and production levels. Hydrologists and engineers, while not able to quantify the impacts from oil shale development, have been able to determine the qualitative nature of its impacts because other types of mining, construction, and oil and gas development cause disturbances similar to impacts that would be expected from oil shale development. According to these experts, in the absence of effective mitigation measures, impacts from oil shale development to water resources could result from disturbing the ground surface during the construction of roads and production facilities, withdrawing water from streams and aquifers for oil shale operations, underground mining and extraction, and discharging waste waters from oil shale operations. For example, we reported that oil shale operations need water for a number of activities, including mining, constructing facilities, drilling wells, generating electricity for operations, and reclamation of disturbed sites. Water for most of these activities is likely to come from nearby streams and rivers because it is more easily accessible and less costly to obtain than groundwater. Withdrawing water from streams and rivers would decrease flows downstream and could temporarily degrade downstream water quality by depositing sediment within the stream channels as flows decrease. The resulting decrease in water would also make the stream or river more susceptible to temperature changes--increases in the summer and decreases in the winter. These elevated temperatures could have adverse impacts on aquatic life, which need specific temperatures for proper reproduction and development and could also decrease dissolved oxygen, which is needed by aquatic animals. We also reported that both underground mining and in-situ operations would permanently impact aquifers. For example, underground mining would permanently alter the properties of the zones that are mined, thereby affecting groundwater flow through these zones. The process of removing oil shale from underground mines would create large tunnels from which water would need to be removed during mining operations. The removal of this water through pumping would decrease water levels in shallow aquifers and decrease flows to streams and springs that are connected. When mining operations cease, the tunnels would most likely be filled with waste rock, which would have a higher degree of porosity and permeability than the original oil shale that was removed. Groundwater flow through this material would increase permanently, and the direction and pattern of flows could change permanently. Similarly, in- situ extraction would also permanently alter aquifers because it would heat the rock to temperatures that transform the solid organic compounds within the rock into liquid hydrocarbons and gas that would fracture the rock upon escape. The long-term effects of groundwater flows through these retorted zones are unknown. Some in-situ operations envision using a barrier to isolate thick zones of oil shale with intervening aquifers from any adjacent aquifers and pumping out all the groundwater from this isolated area before retorting. The discharge of waste waters from operations would also temporarily increase water flows in receiving streams. These discharges could also decrease the quality of downstream water if the discharged water is of lower quality, has a higher temperature, or contains less oxygen. Lower- quality water containing toxic substances could increase fish and invertebrate mortality. Also, increased flow into receiving streams could cause downstream erosion. However, if companies recycle waste water and water produced during operations, these discharges and their impacts could be substantially reduced. Commercial oil shale development requires water for numerous activities throughout its life cycle; however, we found that estimates vary widely for the amount of water needed to produce oil shale. These variations stem primarily from the uncertainty associated with reclamation technologies for in-situ oil shale development and because of the various ways to generate power for oil shale operations, which use different amounts of water. In our October report, we stated that water is needed for five distinct groups of activities that occur during the life cycle of oil shale development: (1) extraction and retorting, (2) upgrading of shale oil, (3) reclamation, (4) power generation, and (5) population growth associated with oil shale development. However, we found that few studies that we examined included estimates for the amount of water used by each of these activities. Consequently, we calculated estimates of the minimum, maximum, and average amounts of water that could be needed for each of the five groups of activities that comprise the life cycle of oil shale development. Based on our calculations, we estimated that about 1 to 12 barrels of water could be needed for each barrel of oil produced from in- situ operations, with an average of about 5 barrels (see table 1); and about 2 to 4 barrels of water could be needed for each barrel of oil produced from mining operations with a surface retort operation, with an average of about 3 barrels (see table 2). In October 2010, we reported that water is likely to be available for the initial development of an oil shale industry, but the eventual size of the industry may be limited by the availability of water and demands for water to meet other needs. Oil shale companies operating in Colorado and Utah will need to have water rights to develop oil shale, and representatives from all of the companies with whom we spoke were confident that they held at least enough water rights for their initial projects and will likely be able to purchase more rights in the future. According to a study by the Western Resource Advocates, a nonprofit environmental law and policy organization, of water rights ownership in the Colorado and White River Basins of Colorado companies have significant water rights in the area. For example, the study found that Shell owns three conditional water rights for a combined diversion of about 600 cubic feet per second from the White River and one of its tributaries and has conditional rights for the combined storage of about 145,000 acre-feet in two proposed nearby reservoirs. In addition to exercising existing water rights and agreements, there are other options for companies to obtain more water rights in the future, according to state officials in Colorado and Utah. In Colorado, companies can apply for additional water rights in the Piceance Basin on the Yampa and White Rivers. For example, Shell recently applied--but subsequently withdrew the application--for conditional rights to divert up to 375 cubic feet per second from the Yampa River for storage in a proposed reservoir that would hold up to 45,000 acre-feet for future oil shale development. In Utah, however, officials with the State Engineer's office said that additional water rights are not available, but that if companies want additional rights, they could purchase them from other owners. Most of the water needed for oil shale development is likely to come first from surface flows, as groundwater is more costly to extract and generally of poorer quality in the Piceance and Uintah Basins. However, companies may use groundwater in the future should they experience difficulties in obtaining rights to surface water. Furthermore, water is likely to come initially from surface sources immediately adjacent to development, such as the White River and its tributaries that flow through the heart of oil shale country in Colorado and Utah, because the cost of pumping water over long distances and rugged terrain would be high, according to water experts. Developing a sizable oil shale industry may take many years--perhaps 15 or 20 years by some industry and government estimates--and such an industry may have to contend with increased demands for water to meet other needs. For example, substantial population growth and its correlative demand for water are expected in the oil shale regions of Colorado and Utah. State officials expect that the population within the region surrounding the Yampa, White, and Green Rivers in Colorado will triple between 2005 and 2050. These officials expect that this added population and corresponding economic growth by 2030 will increase municipal and industrial demands for water, exclusive of oil shale development, by about 22,000 acre-feet per year, or a 76 percent increase from 2000. Similarly in Utah, state officials expect the population of the Uintah Basin to more than double its 1998 size by 2050 and that correlative municipal and industrial water demands will increase by 7,000 acre-feet per year, or an increase of about 30 percent since the mid- 1990s. Municipal officials in two communities adjacent to proposed oil shale development in Colorado said that they were confident of meeting their future municipal and industrial demands from their existing senior water rights and as such will probably not be affected by the water needs of a future oil shale industry. However, large withdrawals could impact agricultural interests and other downstream water users in both states, as oil shale companies may purchase existing irrigation and agricultural rights for their oil shale operations. State water officials in Colorado told us that some holders of senior agricultural rights have already sold their rights to oil shale companies. A future oil shale industry may also need to contend with a general decreased physical supply of water regionwide due to climate change; Colorado's and Utah's obligations under interstate compacts that could further reduce the amount of water available for development; and limitations on withdrawals from the Colorado River system to meet the requirements to protect certain fish species under the Endangered Species Act. Oil shale companies own rights to a large amount of water in the oil shale regions of Colorado and Utah, but we concluded that there are physical and legal limits on how much water they can ultimately withdraw from the region's waterways, which will limit the eventual size of the overall industry. Physical limits are set by the amount of water that is present in the river, and the legal limit is the sum of the water that can be legally withdrawn from the river as specified in the water rights held by downstream users. Our analysis of the development of an oil shale industry at Meeker, Colorado, based on the water available in the White River, suggests that there is much more water than is needed to support the water needs for all the sizes of an industry that would rely on mining and surface retorting that we considered. However, if an industry that uses in-situ extraction develops, water could be a limiting factor just by the amount of water physically available in the White River. Since 2006, the federal government has sponsored over $22 million of research on oil shale development and of this amount about $5 million was spent on research related to the nexus between oil shale development and water. Even with this research, we reported that there is a lack of comprehensive data on the condition of surface water and groundwater and their interaction, which limits efforts to monitor and mitigate the future impacts of oil shale development. Currently DOE funds most of the research related to oil shale and water resources, including research on water rights, water needs, and the impacts of oil shale development on water quality. Interior also performs limited research on characterizing surface and groundwater resources in oil shale areas and is planning some limited monitoring of water resources. However, there is general agreement among those we contacted-- including state personnel who regulate water resources, federal agency officials responsible for studying water, water researchers, and water experts-- that this ongoing research is insufficient to monitor and then subsequently mitigate the potential impacts of oil shale development on water resources. Specifically, they identified the need for additional research in the following areas: Comprehensive baseline conditions for surface water and groundwater quality and quantity. Experts we spoke with said that more data are needed on the chemistry of surface water and groundwater, properties of aquifers, age of groundwater, flow rates and patterns of groundwater, and groundwater levels in wells. Groundwater movement and its interaction with surface water. Experts we spoke with said that additional research is needed to develop a better understanding of the interactions between groundwater and surface water and of groundwater movement for modeling possible transport of contaminants. In this context, more subsurface imaging and visualization are needed to build geologic and hydrologic models and to study how quickly groundwater migrates. Such tools will aid in monitoring and providing data that does not currently exist. In addition, we found that DOE and Interior officials seldom formally share the information on their water-related research with each other. USGS officials who conduct water-related research at Interior and DOE officials at the National Energy Technology Laboratory (NETL), which sponsors the majority of the water and oil shale research at DOE, stated they have not talked with each other about such research in almost 3 years. USGS staff noted that although DOE is currently sponsoring most of the water- related research, USGS researchers were unaware of most of these projects. In addition, staff at DOE's Los Alamos National Laboratory who are conducting some water-related research for DOE noted that various researchers are not always aware of studies conducted by others and stated that there needs to be a better mechanism for sharing this research. Based on our review, we found there does not appear to be any formal mechanism for sharing water-related research activities and results among Interior, DOE, and state regulatory agencies in Colorado and Utah. The last general meeting to discuss oil shale research among these agencies was in October 2007, but there have been opportunities to informally share research at the annual Oil Shale Symposium, such as the one that was conducted at the Colorado School of Mines in October 2010. Of the various officials with the federal and state agencies, representatives from research organizations, and water experts we contacted, many noted that federal and state agencies could benefit from collaboration with each other on water-related research involving oil shale. Representatives from NETL stated that collaboration should occur at least every 6 months. As a result of our findings, we made three recommendations in our October 2010 report to the Secretary of the Interior. Specifically, we stated that to prepare for possible impacts from the future development of oil shale, the Secretary should direct the appropriate managers in the Bureau of Land Management and the U.S. Geological Survey to establish comprehensive baseline conditions for groundwater and surface water quality, including their chemistry, and quantity in the Piceance and Uintah Basins to aid in the future monitoring of impacts from oil shale development in the Green River Formation; model regional groundwater movement and the interaction between groundwater and surface water, in light of aquifer properties and the age of groundwater, so as to help in understanding the transport of possible contaminants derived from the development of oil shale; and coordinate with the Department of Energy and state agencies with regulatory authority over water resources in implementing these recommendations, and to provide a mechanism for water-related research collaboration and sharing of results. Interior generally concurred with our recommendations. In response to our first recommendation, Interior commented that there are ongoing USGS efforts to analyze existing water quality data in the Piceance Basin and to monitor surface water quality and quantity in both basins but that it also plans to conduct more comprehensive assessments in the future. With regard to our second recommendation, Interior stated that BLM and USGS are working on identifying shared needs for modeling. Interior underscored the importance of modeling prior to the approval of large- scale oil shale development and cited the importance of the industry's testing of various technologies on federal RD&D leases to determine if production can occur in commercial quantities and to develop an accurate determination of potential water uses for each technology. In support of our third recommendation to coordinate with DOE and state agencies with regulatory authority over water resources, Interior stated that BLM and USGS are working to improve such coordination and noted current ongoing efforts with state and local authorities. In conclusion, Mr. Chairman, attempts to commercially develop oil shale in the United States have spanned nearly a century. During this time, the industry has focused primarily on overcoming technological challenges and trying to develop a commercially viable operation. However, there are a number of uncertainties associated with the impacts that a commercially viable oil shale industry could have on water availability and quality that should be an important focus for federal agencies and policymakers going forward. Chairman Lamborn, Ranking Member Holt, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Anu K. Mittal, Director, Natural Resources and Environment team, (202) 512-3841 or [email protected]. In addition to the individual named above, key contributors to this testimony were Dan Haas (Assistant Director), Quindi Franco, Alison O'Neill, Barbara Timmerman, and Lisa Vojta. 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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Oil shale deposits in Colorado, Utah, and Wyoming are estimated to contain up to 3 trillion barrels of oil--or an amount equal to the world's proven oil reserves. About 72 percent of this oil shale is located beneath federal lands managed by the Department of the Interior's Bureau of Land Management, making the federal government a key player in its potential development. Extracting this oil is expected to require substantial amounts of water and could impact groundwater and surface water. GAO's testimony is based on its October 2010 report on the impacts of oil shale development (GAO-11-35). This testimony summarizes (1) what is known about the potential impacts of oil shale development on surface water and groundwater, (2) what is known about the amount of water that may be needed for commercial oil shale development, (3) the extent to which water will likely be available for such development and its source, and (4) federal research efforts to address impacts to water resources from commercial oil shale development. For its October 2010 report, GAO reviewed studies and interviewed water experts, officials from federal and state agencies, and oil shale industry representatives. Oil shale development could have significant impacts on the quality and quantity of water resources, but the magnitude is unknown because technologies are not yet commercially proven, the size of a future industry is uncertain, and knowledge of current water conditions is limited. In the absence of effective mitigation measures, water resources could be impacted by disturbing the ground surface during the construction of roads and production facilities, withdrawing water from streams and aquifers for oil shale operations, underground mining and extraction, and discharging waste waters produced from or used in such operations. Commercial oil shale development requires water for numerous activities throughout its life cycle, but estimates vary widely for the amount of water needed to commercially produce oil shale primarily because of the unproven nature of some technologies and because the various ways of generating power for operations use differing quantities of water. GAO's review of available studies indicated that the expected total water needs for the entire life cycle of oil shale production range from about 1 barrel (or 42 gallons) to 12 barrels of water per barrel of oil produced from in-situ (underground heating) operations, with an average of about 5 barrels, and from about 2 to 4 barrels of water per barrel of oil produced from mining operations with surface heating, with an average of about 3 barrels. GAO reported that water is likely to be available for the initial development of an oil shale industry but that the size of an industry in Colorado or Utah may eventually be limited by water availability. Water limitations may arise from increases in water demand from municipal and industrial users, the potential of reduced water supplies from a warming climate, the need to fulfill obligations under interstate water compacts, and decreases on withdrawals from the Colorado River system to meet the requirements to protect threatened and endangered fish species. The federal government sponsors research on the impacts of oil shale on water resources through the Departments of Energy (DOE) and Interior. Even with this research, nearly all of the officials and experts that GAO contacted said that there are insufficient data to understand baseline conditions of water resources in the oil shale regions of Colorado and Utah and that additional research is needed to understand the movement of groundwater and its interaction with surface water. Federal agency officials also told GAO that they seldom coordinate water-related oil shale research among themselves or with state agencies that regulate water. In its October report, GAO made three recommendations to the Secretary of the Interior to prepare for the possible impacts of oil shale development, including the establishment of comprehensive baseline conditions for water resources in the oil shale regions of Colorado and Utah, modeling regional groundwater movement, and coordinating on water-related research with DOE and state agencies involved in water regulation. The Department of the Interior generally concurred with the recommendations. GAO is making no new recommendations at this time.
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The Army is DOD's single manager for the military services' conventional ammunition and is responsible for ensuring that an adequate industrial base is maintained to meet the services' ammunition requirements. The conventional ammunition requirements include about 250 end items and 500 components that are grouped into 14 different families. These requirements are derived by adding the projected training, testing, and pipeline requirements to the war reserve requirement that is needed for combat. Since Operation Desert Storm, ammunition requirements have decreased substantially, and the reduced threat and changing conflict scenarios caused war reserve requirements to decline by more than 70 percent between 1992 and 1994. In the past 20 years, DOD's ammunition planning strategy has changed dramatically. Before July 1976, the services stocked enough items to support combat consumption from the day military operations begin to when the production rate for an item equals combat consumption. Beginning in July 1976, the services were to stock enough items to meet the first 6 months of combat consumption and the industrial base was assumed to be able to take over supply at that time. If industry could respond before the sixth month, then reserve item requirements were to be reduced accordingly. However, if industry could not respond by the sixth month, industrial preparedness actions necessary to make such a response possible were to be identified for funding. The 1978 Program Objective Memorandum (POM) guidance allowed sizing of the industrial base to meet total mobilization requirements. The 1979 POM guidance reduced the allowable size of new facilities to essentially that required to support an 180-day requirement. The 1980 POM guidance further reduced allowable sizing to a 90-day requirement. This guidance was interpreted to limit sizing of new facilities in support of new munitions to that which would support production for the Five-Year Defense Plan. This guidance began the movement away from surge planning. After the collapse of the former Soviet Union and the end of the Cold War, requirements dropped again. As the prospects for a long drawn out global war declined, DOD continued to reduce its ammunition requirements. Surge involved emphasis on expediting the completion of items already in process rather than sustaining production because its only purpose was to preclude serious depletion of war reserve stocks in a short, intense war. The emphasis had shifted away from huge stockpiles and an industrial base with a large surge capacity to a "come as you are" philosophy. Stockpile requirements declined as DOD planned primarily for major regional conflicts rather than a global war. Surge capacity lost its importance because the conflicts were assumed to be so short in duration that a surging base would not be able to make a significant difference. The key measurement of the health of the industrial base became the length of time required to replenish the stockpile after two major regional conflicts. DOD's war reserve requirements are now based on the need to fight two nearly simultaneous major regional conflicts. Key assumptions in this new plan are (1) each conflict will be intense and short in duration (60 to 120 days); (2) the military will rely on existing stocks for the entire duration of the conflicts; (3) there will not be a significant surge in ammunition production during the conflicts; and (4) following the conflicts, ammunition items will be replenished to a designated level within a specified time frame, to prepare for the next conflict. Using the two-conflict scenario, the military services compute war reserve requirements based on target kill data from computer simulation models and from logistics distribution figures. After the Cold War, the Army Materiel Command studied the services' ammunition industrial base needs in light of the diminished threat that had led to force reductions and reduced ammunition requirements. In April 1991, the study results were published, and the Command concluded that the base needed to be consolidated and reduced in size. The Army used this study to develop its ammunition facility strategy for the 21st century (AMMO-FAST-21), a strategy that supports reduced peacetime ammunition requirements while maintaining the highest level of readiness possible for future contingency operations. In August 1993, an independent study team from the American Defense Preparedness Association--two retired military officers and four corporate managers with more than 30 years experience dealing with ammunition--endorsed the Army's AMMO-FAST-21 strategy. The strategy prioritizes ammunition item families and identifies the facilities that provide the most production flexibility. It attempts to minimize expenditures by reshaping the industrial base to its minimum essential size. Redundancy within the base is limited, and excess government facilities are disposed of or leased to commercial firms. AMMO-FAST-21 also attempts to preserve the balance between government and commercial facilities and to maintain the critical equipment, processes, and skilled personnel at both types of facilities. The strategy is being implemented through government-owned, group technology centers and specified mission facilities and through commercial facilities. AMMO-FAST-21 established a restricted specified base of privately owned facilities that DOD can contract with directly for critical items and components. The ammunition industrial base has experienced a dramatic drop in its production capacities. The relative percentages of ammunition procurement dollars going to government and commercial producers, however, have remained relatively constant since 1987. In addition, recent closures of production facilities have closely reflected those projected by the Army when it submitted its 1991 Production Base Planning Study and 1993 update to Congress. DOD's primary means of maintaining the industrial base is through the direct procurement of hardware--ammunition end items and components--but it also procures services for the layaway of production facilities, the maintenance of inactive facilities, and the demilitarization of ammunition. This report uses the term procurement funding to refer to the procurement of ammunition end items and components only. The ammunition industrial base has experienced dramatic changes over the last 17 years. Less than 50 percent of the production facilities that existed in 1978 still exist today, and production capacity is declining for all 14 families of ammunition. However, the mix of procurement funding between government-owned and contractor-owned production facilities has remained relatively stable since 1987, with contractor-owned facilities receiving about 65 percent of the funding. Decreased funding has led to reductions and consolidations in both the government and private sectors of the industrial base. As shown in table 1, the numbers of government-owned, government-operated (GOGO); government-owned, contractor-operated (GOCO); and contractor-owned, contractor-operated (COCO) ammunition plants have all declined significantly since 1978. There also has been a corresponding decline in the commercial subcontractors that supply parts to the ammunition industry. As table 1 shows, commercially operated production facilities have experienced more closures than government-operated production facilities. However, the closures closely reflect those projected by the Army when it submitted its 1991 Production Base Planning Study and 1993 update to Congress. Since the end of Operation Desert Storm, ammunition production capacity in the United States has steadily declined. According to both military and industry projections, this trend will continue for several more years before capacity stabilizes within a smaller industrial base. In fiscal year 1990, the Army did production planning for 329 end items that were not commercially available. By fiscal year 1995, the number had dropped to 163. Indirect fire munitions are used to suppress enemy fire in addition to killing targets and have historically constituted a larger portion of the war reserve inventory than direct fire munitions. Indirect fire munitions continue to make up the largest portion of the war reserve inventory, but as the war reserve requirements have decreased (from 2,500,000 short tons in 1992 to 650,000 short tons in 1994), the percentage of direct fire ammunition has increased. The indirect fire portion of the ammunition stockpile is likely to continue its decline. Table 2 shows production capacity for indirect fire systems, such as artillery, is declining much faster than production capacity for direct fire systems, such as tanks. The ammunition industrial base has downsized considerably since 1987 as a result of significant reductions in ammunition procurement funding (from about $4 billion in fiscal year 1986 to about $1.2 billion in fiscal year 1996). However, the funding split between government-owned and contractor-owned facilities has remained fairly steady over these years. In fiscal year 1987, government-owned facilities received 35 percent of the procurement funding and contractor-owned facilities received the remaining 65 percent. In fiscal year 1994, the numbers were 32 percent and 68 percent, respectively (see table 3). DOD considers these percentages "very reasonable" and expects them to remain steady in the future. Likewise, in its May 1994 Conventional Munitions Assessment Report, the Munitions Industrial Base Task Force stated that "the public/private mix of production work is approximately correct." In commenting on this report, DOD noted that the distinction between GOCO and COCO facilities is blurring as the government leases inactive facilities to commercial contractors. The key role of the ammunition industrial base is to replenish the ammunition stockpile. In peacetime, the industrial base replenishes ammunition that is used for military training and testing. It also makes up shortages of war reserve items and supplies new types of ammunition to the stockpile. Since the major regional conflicts envisioned in the Defense Planning Guidance are short in duration, the ammunition industrial base is not required to surge during the conflicts. However, according to the Defense Planning Guidance, the key measure of the health of the base is its ability to replenish the stockpile following two major regional conflicts. While the services have shortages of many ammunition items, very few of these shortages appear to be due to inadequate production capacity. We discussed a random sample of 152 of the 752 items that had shortages with service officials to determine whether these shortages were attributable to industrial base problems. In addition, we asked them if they knew of any additional items that had shortages due to industrial base problems. None of the 152 items had shortages that service officials considered attributable to industrial base problems. However, Army officials identified three other items as having shortages attributable to industrial base issues, and Marine Corps officials identified four items. Most of these shortages appear to be minor and can be quickly corrected in an emergency by using substitute munitions or increasing production rates. Most ammunition production lines currently operate for one or two 8-hour shifts per day, 5 days per week. These production lines could run three shifts per day, 5 days per week, but worker fatigue and required maintenance of the equipment would prevent long-term continuous operation of the production lines. The first item with an industrial base-related shortage is the 155-mm Copperhead projectile. According to DOD, the supplier base and the technical ability to manufacture Copperhead parts have disappeared. Several years ago, military industrial base planners decided not to maintain a production capacity for the Copperhead because the round is expensive, requirements are low, the cost of maintaining a production line in layaway status would be prohibitive, and there are substitute items being developed. One substitute is the 155-mm Sense and Destroy Armor projectile, currently in low-rate initial production. The second and third items are the M58A3 and M59 mine clearing charges. These shortages result from an inadequate supply of the C-4 explosive that is used in the charges. Because C-4 is used in four other types of ammunition that require about 1 pound of C-4 for each round and the mine clearing charges require about 500 pounds of C-4 for each charge, the Army has allocated the available C-4 to the four other types of ammunition. The Army has no plans to increase C-4 production capacity because of cost. However, if an emergency arises, substitute explosives can be produced, and the Army can increase its production of C-4 by adding shifts to its current production line or it can use the C-4 from the other ammunition items. The fourth item is the 120-mm M830A1 high explosive antitank round, which is used by both the Army and the Marine Corps. The Army is planning one more procurement for this round and will layaway the production line after that procurement because it will have an adequate supply of the ammunition. However, the Marine Corps currently has a shortage of M830A1 rounds and is not scheduled to procure any more of them due to funding priorities. According to the Army, the production line for this round will be inactive after its final procurement, but the Army will still be able to produce this ammunition on short notice for the next 2 years. A quick production response is possible because the 120-mm tank training rounds and the M829A2 kinetic energy round will remain in active production through fiscal year 1998. In commenting on this report, DOD said without future buys, the entire tank ammunition base would be jeopardized, not just the M830A1 rounds. The fifth item is the 81-mm infrared illumination round. The manufacturer that developed this item declined further orders after supplying the Army with a quantity sufficient for a year. The Army is working toward establishing a production capability for this item at Crane Army Ammunition Activity, and it plans to load, assemble, and pack the round at Pine Bluff Arsenal. The last two items are the M821 and M889 81-mm high explosive mortar rounds. At the time of our review, the production line for these two rounds was shut down while engineers corrected a problem with the propellant charge. In addition, an engineering change proposal was pending that could delay production. However, according to Army officials, a fully automated production line that is presently in layaway status could be restarted if necessary. When we discussed the ammunition shortages caused by industrial base problems with service officials and reviewed DOD's industrial base studies, we did not identify any industrial base problems that would keep the military from fighting two major regional conflicts, as required by the current Defense Planning Guidance, or from replenishing the stockpile. However, ammunition shortages that result from funding problems will not be filled by a surging industrial base because the current guidance does not require the base to have a surge capability, as in the past. DOD officials stated that shortages of preferred munitions will be likely if two major regional conflicts arise and that shortages will be met with substitute munitions. This substitution is in accordance with the current Defense Planning Guidance. Army officials stated that although the industrial base is able to meet the replenishment requirements following a major regional conflict, replenishment is likely to be costly. Because production facilities for new items are being built for efficient production at peacetime requirement levels, funds will be required to expand some of these facilities to meet replenishment requirements. DOD's assessment of the adequacy of the industrial base is based on the results of several studies, the annual functional area analysis, and ongoing production planning efforts, including the single manager's June 1995 Production Base Plan. Two of the key studies were DOD's 1994 and 1995 studies that attempted to evaluate the financial viability of all the firms comprising the industrial base. Although DOD did not receive responses from all the firms in the base, between the two studies it captured adequate financial data for the firms holding most of the base's production capacity. From the data, DOD concluded that the industrial base was adequate to meet the services' ammunition requirements. In 1994, DOD attempted to evaluate the financial status of 102 key commercial producers and assess their projected financial viability during the 1995 through 1997 time frame based on the firms' profitability in 1992 and DOD's planned future ammunition spending. DOD obtained some financial data for about 80 firms but received enough financial data to perform break-even analyses for only 57 companies. The 57 firms that were fully evaluated held about 75 percent of the production capacity in the ammunition industrial base, according to Army officials. DOD assumed that the remaining 45 firms were financially viable, even though it did not have enough financial data to perform break-even analyses. While the validity of this assumption is open to question, it is important to note that DOD could not compel the firms to provide the requested information and none of the 45 firms were single or sole source producers. DOD's break-even analyses revealed that 16 of the 57 firms needed more detailed evaluations, based on their projected financial viability for 1995 through 1997. After further evaluation, DOD found that the production capabilities of most of the 16 firms could be absorbed by the remaining producers within the ammunition sector. However, three of the firms were single source producers. DOD concluded that if these three firms went out of business, their production capabilities could not be absorbed by the remaining producers within the ammunition sector. Therefore, DOD is continuing to monitor these firms to ensure it retains its necessary production capacity. In 1995, at the urging of the Munitions Industrial Base Task Force, DOD conducted another financial viability study of the ammunition industrial base. This study was broader in scope than the 1994 study, covering 154 firms that the task force had identified as part of the industrial base. DOD sent out surveys requesting financial data to all 154 firms, but only 29 firms responded in a timely manner. DOD officials attributed this low response rate to two reasons. First, DOD did not pay the contractors for this information. Second, many of the contractors had provided the same information the year before, for DOD's 1994 study. Once again, DOD assumed firms that did not submit timely responses were financially viable. The 29 firms with timely responses comprised only about 35 percent of the industrial base production capacity. Of the 29 respondents, 19 were identified to be at financial risk. Secondary screenings that were done on these firms from an industrial base perspective disclosed that none were essential to the industrial base. Therefore, no detailed on-site reviews were conducted. During its two surveys of ammunition producers, DOD assumed that nonresponding firms were financially viable. DOD said this was a reasonable assumption because the purpose of the survey was to identify firms that would exit the business without special DOD action. DOD stated that firms facing financial difficulties would be inclined to complete the financial viability surveys. Most of the firms that did not complete the survey were the smaller firms in the industry. If the key assumptions in the Defense Planning Guidance and DOD's industrial base studies are correct, the industrial base will be capable of simultaneously supplying peacetime ammunition needs and replenishing the ammunition stockpile as required, following one or two major regional conflicts. However, the ability of the industrial base to adequately respond to the military's replenishment requirements depends heavily on both the amount of ammunition that must be replenished and the time period over which the replenishment is to occur. Thus, if the response period is shortened, or if the required replenishment level is raised from that stated in current guidance, the industrial base may not be able to adequately respond to replenishment requirements. The Army's annual functional area analyses help to illustrate the role replenishment levels and time frames play in assessments of the industrial base. The 1994 analysis painted a bleak picture of the industrial base's replenishment capability. However, in the 1995 analysis, the base's replenishment capability improved dramatically. While part of the improvement was due to increased funding, much of the improvement was caused by changes in the replenishment levels and time frames. Army officials acknowledged that future changes in readiness requirements could affect their assessment of the industrial base's viability. In addition, they pointed out that once the existing industrial base is disposed of, there is a long time and a high cost involved in reestablishing it. In addition to the DOD industrial base studies, several private organizations have studied the industrial base. However, most of the private studies have concluded that the industrial base is inadequate to meet the services' ammunition requirements. One such study was completed in June 1994 by the Committee for the Common Defense, the national security arm of the Alexis de Tocqueville Institution. The study concluded that the nation's ammunition industrial base was "rapidly-deteriorating." The report based this conclusion primarily on the Korean War experience, but it also pointed out that the 323,000 tons of preferred munitions in the current U.S. stockpile represented less than the amount of ammunition sent to the Persian Gulf region in 1990 and 1991 for Operation Desert Storm. A private study conducted for the Munitions Industrial Base Task Force also found that the ammunition industrial base could not repeat the performance of Operations Desert Shield and Desert Storm. It stated that the industrial base could not support the demands of one major regional conflict, much less two simultaneously. However, the task force study assumed that the major regional conflicts would last 180 days, much longer than DOD's projected 60-120 days. The private studies' conclusions about the industrial base differed from DOD's conclusions largely because of differences in the studies' methodologies and underlying assumptions. For example, the Munitions Industrial Base Task Force study used three scenarios to compute ammunition requirements: a global war, two major regional conflicts, and operations other than war. In contrast, DOD's ammunition requirements were established based on two major regional conflicts. Also, the private studies used information for 2 years, the budget year and the out-year, while DOD's studies took into account planned expenditures over its entire 5-year POM. DOD reviewed a draft of this report and provided written comments that concurred with the report. Some minor technical comments were received earlier and incorporated into the final report. DOD's comments are reprinted in appendix I. To determine the current status of the ammunition industrial base, we examined statistics the Army, as the single manager, had gathered and met with Army industrial readiness officials. Specifically, we reviewed industrial base trend data concerning the number of production facilities, the public/private mix of facilities, and the capacity of the production facilities. To determine the industrial base's ability to meet current peacetime ammunition requirements, we met first with military officials to determine how requirements are established. Next, we obtained requirements data and stockpile levels and determined which items had shortages and which items had overages. (We relied on the data supplied by the services and did not physically verify the ammunition stockpile levels or trace requirements data back to the systems that generated the requirements.) Then, we randomly selected 152 ammunition items that had shortages and discussed these items with ammunition officials from the services. We also asked them to identify any additional items that had shortages due to industrial base problems. Finally, we investigated the causes of the industrial base shortages and the Army's plans to address these shortages, as the single manager for conventional ammunition. To determine whether the industrial base could respond as required, after one or more major regional conflicts, we reviewed (1) the current Defense Planning Guidance, (2) the Army's 1992 strategy to maintain adequate ammunition facilities into the 21st century and an independent assessment of that strategy, (3) DOD's 1994 and 1995 financial viability assessments, and (4) reports from industry officials and other non-DOD sources that addressed the industrial base's ability to provide adequate ammunition during a national emergency. We identified the differences in underlying assumptions that caused wide differences in the reports' conclusions. DOD's Defense Planning Guidance contains several assumptions that are open to question. However, since that guidance establishes the framework for all military actions, not just ammunition procurements, we used those assumptions in forming our conclusions. We conducted our review from July 1995 to March 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense and each of the military services; the Commanding General, Army Materiel Command; the Commanding General, Army Industrial Operations Command; and other interested parties. We will also make copies available to others upon request. Please contact me at (202) 512-5140 if you or your staffs have any questions concerning this report. Major contributors to this report are listed in appendix II. Antanas Sabaliauskas, Evaluator-in-Charge David A. Bothe, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) ability to meet peacetime ammunition requirements, and to replenish the ammunition stockpile following two major regional conflicts. GAO found that: (1) according to DOD, the ammunition stockpile has no major shortages due to the industrial base; (2) there is no longer a requirement to surge the industrial base during conflicts; (3) the most lethal, preferred munitions will be at a premium, and some requisitions will be filled with older, substitute munitions, but DOD considers these items adequate to defeat the expected threat; (4) DOD is confident in the results of its financial viability studies of firms comprising the ammunition industrial base, even though it did not receive sufficient data to evaluate the financial condition of all firms in the industrial base; (5) changes to DOD assumptions could cause the DOD industrial base assessment to change even if production capacity remains stable; and (6) private studies that have concluded that the industrial base is inadequate to meet replenishment requirements during and following a national emergency are based on underlying assumptions that differ considerably from DOD assumptions.
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We identified three key factors that affect delivery of humanitarian assistance to people inside Syria. First, the increasingly violent and widespread Syrian conflict has hindered effective delivery of humanitarian assistance. Based on our analysis of monthly UNSG reports on the situation inside Syria, as well as interviews with officials providing assistance to Syria based both inside and outside of the country, humanitarian assistance is routinely prevented or delayed from reaching its intended target due to shifting conflict lines, attacks on aid facilities and workers, an inability to access besieged areas, and other factors related to active conflict (see fig. 1). Second, administrative procedures put in place by the Syrian government have delayed or limited the delivery of humanitarian assistance, according to UNSG reports. These reports detail multiple instances of unanswered requests for approvals of convoys, denial or removal of medical supplies from convoys, difficulty obtaining visas for humanitarian staff, and restrictions on international and national NGOs' ability to operate. As of May 2016, the UNSG reported that 4.6 million people inside Syria are located in hard-to-reach areas and more than 500,000 of those remain besieged by Islamic State of Iraq and Syria, the government of Syria, or non-State armed opposition groups. The UN further reported that in 2015, only 10 percent of all requests for UN interagency convoys to hard-to-reach and besieged areas were approved and assistance delivered. In addition, according to implementing partner officials based in Damascus, Syria, even when these convoys were approved, the officials participating in delivering the assistance were subjected to hours-long delays. Third, due to restrictions, USAID and State staff manage the delivery of humanitarian assistance in Syria remotely from neighboring countries. The U.S. government closed its embassy in Damascus, Syria, in 2012 due to security conditions and the safety of personnel, among other factors. In the absence of direct program monitoring, USAID and State officials noted that they utilize information provided by implementing partners to help ensure effective delivery of assistance and to help their financial oversight, including mitigating risks such as fraud, theft, diversion, and loss. However, USAID officials in the region explained to us that while partners provide data and information, their inability to consistently access project sites--due to factors such as ongoing fighting, bombing raids, and border closures--limited the extent to which partners could obtain and verify progress. Past audit work has shown challenges to such an approach, including cases of partners not fully implementing monitoring practices, resulting in limited project accountability. Further, USAID Office of Inspector General (OIG) has reported that aid organizations providing life-saving assistance in Syria and the surrounding region face an extremely high-risk environment, and that the absence of adequate internal controls, among other challenges, can jeopardize the integrity of these relief efforts and deny critical aid to those in need. State, USAID, and their implementing partners have assessed some types of risk to their programs inside Syria, but most partners have not assessed the risk of fraud. Risk assessment involves comprehensively identifying risks associated with achieving program objectives; analyzing those risks to determine their significance, likelihood of occurrence, and impact; and determining actions or controls to mitigate the risk. In the context of Syria, such risks could include theft and diversion; fraud; safety; security; program governance; and implementing partner capacity risks. Most of the implementing partners in our sample have conducted formal risk assessments for at least one type of risk, especially security risk, and several maintain risk registers that assess a wide variety of risks (see table 1). However, few implementing partners have conducted risk assessments for the risk of fraud (four of nine), or for the risk of loss due to theft or diversion (four of nine). According to GAO's A Framework for Managing Fraud Risks in Federal Programs, effective fraud risk management involves fully considering the specific fraud risks the agency or program faces, analyzing the potential likelihood and impact of fraud schemes, and prioritizing fraud risks. In addition, risk assessment is essential for ensuring that partners design appropriate and effective control activities. Control activities to mitigate the risk of fraud should be directly connected to the fraud risk assessments and, over time, managers may adjust the control activities if they determine that controls are not effectively designed or implemented to reduce the likelihood or impact of an inherent fraud risk to a tolerable risk level. Although most of the implementing partners in our sample did not conduct assessments of the risk of fraud, there are elevated risks for fraud in U.S. funded humanitarian assistance projects for people inside Syria. According to officials at USAID OIG, they have four ongoing investigations of allegations of fraud and mismanagement related to programs for delivering humanitarian assistance to people inside Syria. Two of the investigations involve allegations of procurement fraud, bribery, and product substitution in USAID funded humanitarian cross- border programs related to procurements of non-food items. One of these investigations found that the subawardee of the implementing partner failed to distribute nonfood items in southern Syria, instead subcontracting the distribution to another organization, but nevertheless billed USAID for the full cost of the project. Additionally, the subawardee was reliant on one individual to facilitate the transfer of materials and salaries, and this individual was involved in the alteration and falsification of records related to the distribution of the nonfood items. According to the USAID OIG, senior leadership at the subawardee was aware of these facts. Further, in May 2016, USAID OIG reported the identification of bid- rigging and multiple bribery and kickback schemes related to contracts to deliver humanitarian aid in Syria, investigations of which resulted in the suspension of 14 entities and individuals involved with aid programs from Turkey. Without documented risk assessments, implementing partners may not have all of the information needed to design appropriate controls to mitigate fraud risks, and State and USAID may not have visibility into areas of risk, such as fraud and loss due to theft and diversion. We found that partners in our sample had implemented controls to mitigate certain risks of delivering humanitarian assistance inside Syria. For instance, many partners in our sample implemented controls to account for safety and security risks to their personnel and beneficiaries receiving assistance. Some partners identified aerial targeting of humanitarian aid workers and beneficiaries at distribution points as a major vulnerability and implemented controls to mitigate this risk, such as distributing goods to beneficiaries on overcast days and making door-to- door deliveries of aid packages. In addition, partners in our sample implemented controls to mitigate risks of fraud and loss within their operations. For example, officials from two implementing partners we interviewed in Amman, Jordan, stated that they conducted spot checks of assistance packages in warehouses to confirm the quantity of the contents and ensure that the quality of the items complied with the terms of the contract. According to another implementing partner, officials from its organization visit the vendor warehouses before signing contracts to verify that U.S. government commodity safety and quality assurance guidelines are met. However, the majority of controls to mitigate risks of fraud and loss were not informed by a risk assessment (see table 2). State and USAID have taken steps to oversee partner programs delivering humanitarian assistance inside Syria; nevertheless, opportunities to assess and mitigate the potential impact of fraud risks remain. U.S. officials cited a variety of oversight activities. For instance, State officials in the region conduct quarterly meetings with partners and collect information on programmatic objectives and on partner programs. State also has enhanced monitoring plans in place with its implementing partners to augment quarterly reporting with information on risks of diversion of assistance. Similarly, USAID officials in Washington, D.C., told us they screen proposals from partners to identify risk mitigation activities and USAID officials in the region noted they maintain regular contact with partners, attend monthly meetings with them, conduct random spot-checks of aid packages at warehouse facilities, and coordinate activities among partners to reduce or eliminate duplication or overlap of assistance. Moreover, according to USAID officials, the USAID OIG has conducted fraud awareness training for officials in the region to improve their ability to detect fraud, such as product substitution, when they conduct spot-checks of aid packages at warehouse facilities. Further, in October 2015, USAID's Office of U.S. Foreign Disaster Assistance hired a third party monitoring organization to review its projects in Syria. By February 2016, field monitors had conducted site visits and submitted monitoring reports to USAID, providing information on the status of projects and including major concerns that field monitors identified. We found that fraud oversight could be strengthened. Based on our analysis, USAID's third party monitoring contract and supporting documentation contain guidelines for verifying the progress of activities in Syria; however, they do not clearly instruct field monitors to identify potential fraud risks as they conduct site assessments of projects in Syria. Furthermore, the monitoring plan and site visit templates do not contain specific guidance on how to recognize fraud, and field monitors have not received the USAID OIG fraud awareness training, according to USAID officials. Leading practices in fraud risk management suggest evaluating outcomes using a risk-based approach and adapting activities to improve fraud risk management. This includes conducting risk-based monitoring and evaluation of fraud risk management activities with a focus on outcome measurement and using the results to improve prevention, detection, and response. The monitoring plan associated with the contract contains guidelines for field monitors to document their assessment of the project at the completion of a site visit. However, it lacks specific guidelines to identify potential fraud risks during site visits. Additionally, the templates created by the third party monitoring organization to document site visits instruct monitors to verify the presence or absence of supplies and their quality, among other instructions, but lack specific fraud indicators to alert field monitors to collect information on and identify potential fraud. Furthermore, the monitoring plan contains a training curriculum for field monitors, which has several objectives designed to familiarize them with the protocols, procedures, and instruments used for data collection and reporting. However, the curriculum does not have specific courses for recognizing potential or actual instances of fraud that may occur on site. Given the opportunity for fraud that exists in humanitarian assistance programs, as well as the ongoing USAID OIG investigations, without instructions to specifically collect data on fraud and training to identify it, USAID may be missing an opportunity to assist in its activities to mitigate fraud risks and design appropriate controls. We made several recommendations in our report. To provide more complete information to assist the agencies in conducting oversight activities, State and USAID should require their implementing partners to conduct fraud risk assessments. In addition, USAID should ensure its field monitors (1) are trained to identify potential fraud risks and (2) collect information on them. State and USAID concurred with our recommendations. Chairman Ros-Lehtinen, Ranking Member Deutch, 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. For further information about this testimony, please contact Thomas Melito, Director, International Affairs and Trade at (202) 512-9601 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Elizabeth Repko (Assistant Director), Jennifer Young, Kyerion Printup, Justine Lazaro, Cristina Norland, Karen Deans, Kimberly McGatlin, Diane Morris, Justin Fisher, and Alex Welsh. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony summarizes the information contained in GAO's July 2016 report, entitled Syria Humanitarian Assistance: Some Risks of Providing Aid inside Syria Assessed, but U.S. Agencies Could Improve Fraud Oversight ( GAO-16-629 ). Delivery of U.S. humanitarian assistance to people inside Syria is complicated by three factors including a dangerous operating environment, access constraints, and remote management of programs. Active conflict creates a dangerous environment characterized by attacks on aid facilities and workers, and humanitarian organizations face difficulties accessing those in need. Additionally, U.S. agency officials must manage programs in Syria remotely, increasing risks to the program, including opportunities for fraud. Despite these challenges, according to the U.S. Agency for International Development (USAID), U.S. humanitarian assistance has reached 4 million people inside Syria per month. The Department of State (State), USAID, and their implementing partners have assessed some types of risk to their programs inside Syria, but most partners have not assessed the risk of fraud. Of the 9 implementing partners in GAO's sample of funding instruments, most assessed risks related to safety and security, but only 4 of 9 assessed fraud risks. Such an assessment is important as USAID's Office of Inspector General (OIG) has uncovered multiple instances of fraud affecting U.S. programs delivering humanitarian assistance to Syria. In May 2016, USAID OIG reported that 1 of its active fraud investigations resulted in the suspension of 14 entities and individuals. Given the challenging environment in Syria, fraud risk assessments could help U.S. agencies better identify and address risks to help ensure aid reaches those in need. Partners have implemented controls to mitigate certain risks, but U.S. agencies could improve financial oversight. For example, almost all partners in our sample have controls to mitigate safety risks and some use technology to monitor the transport of goods. Additionally, U.S. agencies have taken steps to oversee activities in Syria, such as quarterly meetings with partners and spot checks of partner warehouses. Further, in October 2015, USAID hired a third party monitor to improve oversight of its activities and help verify progress of its programs. However, the monitors' training curriculum lacks modules on identifying fraud risks. Without such training, monitors may overlook potential fraud risks and miss opportunities to collect data that could help USAID improve its financial oversight.
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Under the NCLBA, the Secretary of Education had the authority to waive many statutory and regulatory requirements for states, school districts, and other entities that received funds under a program authorized by the law, provided that certain conditions were met. In September 2011, Education introduced the Flexibility initiative and invited states to request a waiver for flexibility from certain NCLBA requirements in effect at the time. For example, Education offered to waive requirements related to the timeline for determining whether states, districts, and schools were making adequate yearly progress toward improved academic achievement for all students, including specified subgroups. (See app. II for a full list of NCLBA provisions that could be waived under the Flexibility initiative.) To be approved for a Flexibility waiver, Education required states to address certain principles for improving elementary and secondary education, as seen in table 1. Education's Student Achievement and School Accountability Office was responsible for administering the Flexibility initiative until October 2014. At that time, the Student Achievement and School Accountability Office became part of the newly-created Office of State Support, which assumed responsibility for administering the initiative. As part of Education's process for reviewing and approving states' requests for waivers under the Flexibility initiative, Education invited states to submit their requests in one of several "windows" between 2011 and 2014. Almost every state applied for a waiver during one of these windows. Generally, Education approved states to implement their requests for a certain number of years. As of April 2016, Education had approved requests for Flexibility waivers in 43 states. In November 2014, Education invited states that had received approval for Flexibility waivers for the 2014-2015 school year to submit a request to renew their waivers for an additional 3 years, or through the end of the 2017-2018 school year. As shown in figure 1, Education established a process in which states requested Flexibility waivers, states' requests were peer-reviewed, and Education made final decisions. According to Education officials, the review and decision process was focused on whether states' requests were consistent with Flexibility principles. Education convened peer review panels to evaluate states' initial Flexibility waiver requests and suggest ways to strengthen a state's plan for implementing the principles of the Flexibility initiative. For example, peer reviewers in some cases suggested strengthening plans to ensure that students from racial and ethnic subgroups were sufficiently included in school accountability systems. Ultimately, Education used the results of peer review and the department's internal analysis to inform its final decision of whether or not to approve states' Flexibility waiver requests. After completing the initial review and decision process, Education conducted a monitoring process to oversee Flexibility waiver implementation and identify any areas in which states needed additional support. The first part of the monitoring process (referred to as "Part A" monitoring) was designed to provide Education with a more in-depth understanding of a state's goals and approach to implementing its Flexibility waiver and to ensure that the state had the critical elements in place to begin implementing its plan. The second part of the monitoring process (referred to as "Part B" monitoring) was designed to enable Education to review state implementation of the plan and follow up from the initial monitoring. By establishing a process to review, approve, and monitor states' Flexibility waivers, Education identified challenges to states' ability to fully implement their waivers, as shown in table 2. Recognizing that Flexibility waivers affected multiple significant aspects of state and local educational systems, Education took steps that enhanced its ability to identify implementation risks. For example, officials in Education's Office of State Support (the office responsible for the initiative) told us they coordinated with other Education offices to identify findings or concerns regarding how states were implementing other education programs that might affect a state's waiver implementation. Education's efforts to identify implementation risks were consistent with standards for internal control in the federal government, which define risk assessment as identifying and analyzing relevant risks associated with achieving program objectives. Agency management is to comprehensively identify risks and consider any effects they might have on the agency's ability to accomplish its mission for all projects, such as the Flexibility initiative. Education asked states to include information in their initial Flexibility waiver requests about how they consulted with teachers and their representatives and other stakeholders, such as parents and organizations representing students with disabilities and English learners, in developing their waiver proposals. However, officials we interviewed in two states, as well as an official from the National Conference of State Legislatures, discussed issues related to stakeholder consultation, especially with state legislatures, regarding their Flexibility waiver requests. For example, Washington state was unable to implement a teacher and principal evaluation and support system that included student learning growth as a significant factor. A state official told us they attempted to design a system that would meet the needs of various stakeholders, including teachers, but ultimately the system was not implemented because, according to Education, the state legislature did not approve the changes needed to put the system in place. In addition, Arizona officials said state laws and rules from the state board of education limited their ability to implement an accountability system that was consistent with their Flexibility waiver request. Under the ESSA, states will be required to develop their Title I state plans with timely and meaningful consultation with the governor and members of the state legislature and state board of education, among others. Of the 43 states with Flexibility waivers, we identified 12 states that faced multiple significant challenges throughout the initiative, affecting their ability to fully implement their waivers: Alabama, Arizona, Florida, Louisiana, Massachusetts, Nevada, New Hampshire, Ohio, Oklahoma, Pennsylvania, South Dakota, and Texas. As shown in table 3, these 12 states had at least two of the following designations: Education included conditions when approving the state's initial Education found during monitoring that the state was not implementing an element of its Flexibility waiver consistent with its approved request meeting Education's expectations for establishing systems and processes--particularly for monitoring schools and school districts--that supported waiver implementation; or Education included conditions when renewing the state's Flexibility waiver. Some of these states were unable to fully address the challenges Education identified when their waiver was initially approved. For example, Education identified risks related to Pennsylvania's capacity to monitor interventions in "focus schools" prior to approving the state's Flexibility waiver and subsequently found during Part B monitoring (nearly 2 years later) that the state lacked a plan to conduct such monitoring. Pennsylvania officials told us that, according to Education officials, these weaknesses resulted from not documenting how interventions in focus schools were consistent with the state's plan to improve student achievement in these schools. To help manage these challenges, Education included conditions when approving and renewing these states' Flexibility waivers and provided technical assistance. During Part B monitoring, Education found that most of these states were not meeting Education's expectations for establishing monitoring systems and processes that support implementation of their Flexibility waivers. Many of these states were particularly challenged to develop systems for overseeing local school districts and schools. Specifically, during Part B monitoring, Education found that 8 of the 12 states we identified as facing multiple challenges did not meet expectations regarding systems for monitoring local implementation of their Flexibility waivers (see table 4). According to Education officials, many states were not implementing monitoring activities consistent with their approved Flexibility waivers and the key Flexibility principles. For example, Education found that Alabama did not have a formal monitoring mechanism to ensure its interventions in priority schools, focus schools, and other Title I schools met the requirements of the Flexibility initiative; and New Hampshire did not monitor its districts' adoption and implementation of college- and career- ready standards. During the initial Flexibility waiver review and decision process and Part B monitoring, Education asked states about their plans to monitor local implementation and asked for documentation, such as monitoring schedules or reports. Education officials told us that state monitoring of local implementation is a persistent challenge across many education programs, and said that the possible reasons states continue to experience challenges related to monitoring include staff capacity and staff turnover at state departments of education. Education officials told us they could help states strengthen their monitoring efforts by disseminating best practices but have not yet done so because of time and resource constraints. Education did not establish specific timeframes for providing final Part B monitoring reports to states. According to our analysis of Education's documentation, it took over 4 months, on average, to provide states with final Part B monitoring reports; for 10 states, it was over 6 months. Education officials told us that many factors affected the time frames for finalizing its monitoring reports, such as the complexity of the approaches being used by a state to implement its Flexibility waiver, the need to balance this work with other high-priority work being done by department staff, and the U.S. government shutdown in October 2013. Recognizing that the length of time Education takes to notify a state about monitoring findings affects how long it will take a state to address any implementation risks the department identified, Education officials told us they provided draft reports to states earlier in the process and gave them an opportunity to provide technical edits to the draft reports. Although 12 states faced multiple challenges throughout the Flexibility waiver initiative, Education has not yet evaluated its process for reviewing, approving, and overseeing Flexibility waivers. Education officials told us they intend to identify lessons from the Flexibility initiative, particularly with regard to technical assistance for and oversight of state monitoring efforts and that such lessons learned would help them better support states with developing and implementing state plans for ESSA implementation. For example, Education officials told us they plan to determine how they can improve their use of the peer review process for ESSA state plans. As of yet, however, Education has not evaluated its oversight of Flexibility waivers and did not provide us with a time frame for doing so. According to standards for internal control in the federal government, agencies should consider lessons learned when planning agency activity, as doing so can help an agency communicate acquired knowledge more effectively and ensure that beneficial information is factored into planning, work processes, and activities. As Education begins its efforts to implement the ESSA, it has the opportunity to learn from its experiences with the Flexibility initiative. Without identifying lessons from oversight of the waiver process, Education may miss opportunities to better support ESSA implementation. The Flexibility waiver initiative affected multiple, complicated aspects of state and local systems for elementary and secondary education and, thus, was a significant undertaking by the department. In implementing its Flexibility initiative, Education's efforts identified many key challenges states faced in implementing their waiver requests, such as incomplete systems for school accountability or teacher and principal evaluation. We found that 12 of the 43 states with Flexibility waivers faced significant challenges in addressing risks identified throughout the initiative, affecting their ability to fully implement their waivers. These challenges included ensuring states were effectively monitoring their districts and schools, which is a key aspect of program effectiveness, and an area where the department has identified oversight issues across programs. The waivers granted under Education's Flexibility initiative will terminate on August 1, 2016, and states are preparing to develop and implement new Title I plans under the newly reauthorized law, the ESSA. Education continues to develop its oversight and technical assistance strategies for implementing the ESSA, which includes different requirements related to school accountability, among other things. Absent an evaluation of its oversight process for the Flexibility initiative to identify lessons learned, Education may miss an opportunity to strengthen its monitoring and oversight of states' implementation of plans under ESSA and better support them in the areas that have presented significant challenges. To better manage any challenges states may face implementing the ESSA, we recommend that the Secretary of Education direct the Office of State Support to evaluate its oversight process in light of the challenges states encountered in implementing the Flexibility initiative to identify lessons learned and, as appropriate, incorporate any lessons into plans for overseeing the ESSA, particularly around issues such as the design and implementation of states' monitoring systems. We provided a draft of this report to Education for its review and comment. Education's written comments are reproduced in appendix III. Education also provided technical comments, which we incorporated into the report, as appropriate. In its written comments, Education agreed that it is important to continuously evaluate its work and to consider ways to improve its efficiency and effectiveness and cited examples of the agency doing so during ESEA Flexibility implementation. For example, Education said it developed the Office of State Support, in part based on lessons learned while implementing the Flexibility initiative. In addition, Education said that since the ESSA was enacted in December 2015, it has continued to informally evaluate ESEA Flexibility implementation and oversight and cited several examples relevant to ESEA Flexibility and other Education programs and initiatives. For example, Education said that it has been considering changes to its planned performance review system designed to support state implementation of the Flexibility initiative and other programs. Further, the agency provided new information in its letter, telling us that it is piloting quarterly calls between Education program officers and states and piloting a fiscal review in eight states focused on components of the law it says did not change significantly between NCLBA and ESSA. As Education continues its efforts to evaluate lessons learned from the Flexibility initiative--including the peer review process-- and apply them to its oversight of ESSA, we encourage Education to incorporate these lessons into how it oversees the design and implementation of states' monitoring systems which are key to the success of ESSA's accountability provisions. We believe that by doing so, Education will be better positioned to support states as they implement the law's new requirements. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Education, and other interested parties. In addition, the report will be available at no charge on the GAO web site at http://www.gao.gov. If you or your staff should have any questions about this report, please contact me at (617) 788-0580 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In prior work, we interviewed selected states regarding the benefits and challenges of requesting and implementing waivers granted through the Department of Education's (Education) Flexibility initiative under the Elementary and Secondary Education Act of 1965 (ESEA), as amended by the No Child Left Behind Act of 2001 (NCLBA). To develop this information, we collected information from 20 states by conducting interviews with 15 states that had waivers and 5 states that did not have waivers at the time of our review. We presented this information orally to congressional requesters in August 2015. The following summarizes that briefing. Officials from 6 states told us the waivers allowed districts to better identify the lowest-performing schools and better target their resources. Officials from 10 states told us the waivers helped them develop a single school accountability system or align their existing federal and state school accountability systems to help streamline data collection and reporting. Officials from 14 states told us that implementing teacher and principal evaluation systems was a challenging aspect of their waivers, in some cases due to lack of stakeholder support for needed legislative or collective bargaining changes, or difficulty in meeting Education's requirements for incorporating student growth into teacher and principal evaluation systems. Officials from 9 states expressed concerns that Education's timeframes to implement waiver requirements were too rigid and accelerated for such large-scale reforms. Officials from 5 of these states told us that timelines for implementing teacher and principal evaluation systems were especially challenging. Officials in 4 states without waivers told us they do not have waivers because they could not come to agreement with Education about key aspects of requirements for accountability or teacher and principal evaluation systems. Officials in 3 states told us Education staff were responsive to day-to- day emails and phone calls; officials in 3 other states told us Education was slow to provide more substantive oversight, such as formal monitoring. Officials in 8 states told us that, because of staff turnover at Education during the waiver initiative, there was often an incomplete transfer of information from one staff person to the next, which required state officials to explain previous discussions or decisions, frustrating states, and wasting time. Appendix II: No Child Left Behind Act of 2001 (NCLBA) Provisions Waived Through the Flexibility Initiative the Every Student Succeeds Act (ESSA), enacted December 10, 2015. As a result, the provisions referenced in this table do not reflect current law. Under the ESSA, all approved Flexibility waivers will terminate on August 1, 2016; other changes made by ESSA will be phased in over time. After the initiative began, Education determined this provision was unnecessary and did not include it for states requesting to renew their waivers. States could request these optional flexibilities when renewing their Flexibility waivers. In addition to the contact named above, Scott Spicer (Assistant Director), Jason Palmer (Analyst-in-Charge), Sarah Cornetto, Brian Egger, Jean McSween, Linda Siegel, and Carmen Yeung made key contributions to this report. Also contributing to this report were James Bennett, Deborah Bland, Holly Dye, Nisha Hazra, John Lack, Avani Locke, and David Perkins.
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Beginning in 2011, Education used its statutory authority to invite states to apply for waivers from certain provisions in the ESEA through its Flexibility initiative. To receive Flexibility waivers, states had to agree to meet other requirements related to college- and career-ready expectations, school accountability and support, and effective instruction. Education approved Flexibility waivers for 43 states. In December 2015, Congress reauthorized the ESEA which modified Education's waiver authority. GAO was asked to review Education's Flexibility initiative. GAO examined the extent to which Education assessed states' ability to fully implement their Flexibility waivers and the process it used to oversee the waivers. GAO reviewed relevant federal laws, guidance, and key documents related to the Flexibility initiative, such as monitoring reports; and interviewed Education officials. GAO reviewed Education's documents and identified states facing multiple challenges in implementing their waivers. GAO also interviewed officials in five states, selected to reflect a range of challenges states faced in implementing the waivers. Since introducing its Flexibility initiative in 2011--inviting states to request a waiver from certain provisions of the Elementary and Secondary Education Act of 1965 (ESEA) in effect at the time--the Department of Education (Education) has monitored states' efforts and identified challenges to states' ability to fully implement their waivers. According to GAO's analysis of Education letters and monitoring reports, 12 of the 43 states with Flexibility waivers faced multiple challenges that affected their ability to fully implement their waivers. Education used a risk assessment process to document these challenges throughout the waiver approval, monitoring, and renewal phases (see table). For example, Education identified risks with one state's capacity to oversee and monitor schools needing improvement prior to approving the state's waiver in 2013 and noted similar issues, as a result of monitoring, in 2015. Overseeing local districts and schools was particularly challenging for states, according to GAO's analysis of Education documents. Meanwhile, Education has not yet evaluated its process to review, approve, and monitor the Flexibility waivers given to states or incorporated any relevant lessons learned into its plans for implementing the December 2015 reauthorization of the ESEA. According to federal internal control standards, agencies should consider lessons learned when planning agency activities. As Education begins to implement the new law, it has an opportunity to learn from its experiences with the Flexibility initiative and incorporate any applicable lessons learned. Absent such an evaluation, Education may miss opportunities to better oversee state implementation of the new law. GAO recommends that Education evaluate its Flexibility initiative oversight process to identify lessons learned and incorporate any applicable lessons into its plans for overseeing state implementation of the new law. Education generally agreed and outlined steps to address the recommendation.
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SAFETEA-LU authorized a total of $45.3 billion for a variety of transit programs, including financial assistance to states and localities to develop, operate, and maintain transit systems from fiscal year 2005 through fiscal year 2009. Under one program, New Starts, FTA identifies and selects fixed guideway transit projects for funding--including heavy, light, and commuter rail; ferry; and certain bus projects (such as bus rapid transit). The New Starts program serves as an important source of federal funding for the design and construction of transit projects throughout the country. FTA generally funds New Starts projects through FFGAs, which establish the terms and conditions for federal participation in a New Starts project and also define a project's scope, including the length of the system and the number of stations; its schedule, including the date when the system is expected to open for service; and its cost. For a project to obtain an FFGA, it must progress through a local or regional review of alternatives and meet a number of federal requirements, including requirements for information used in the New Starts evaluation and rating process (see fig. 1). As required by SAFETEA-LU, New Starts projects must emerge from a regional, multimodal transportation planning process. The first two phases of the New Starts process--systems planning and alternatives analysis--address this requirement. The systems planning phase identifies the transportation needs of a region, while the alternatives analysis phase provides information on the benefits, costs, and impacts of different corridor-level options, such as rail lines or bus routes. The alternatives analysis phase results in the selection of a locally preferred alternative--which is intended to be the New Starts project that FTA evaluates for funding, as required by statute. After a locally preferred alternative is selected, project sponsors submit a request to FTA for entry into the preliminary engineering phase. Following completion of preliminary engineering and federal environmental requirements, the project may be approved by FTA to advance into final design, after which the project may be approved by FTA for an FFGA and proceed to construction, as provided for in statute. FTA oversees grantee management of projects from the preliminary engineering phase through construction and evaluates the projects for advancement into each phase of the process, as well as annually for the New Starts report to Congress. To help inform administration and congressional decisions about which projects should receive federal funds, FTA assigns ratings on the basis of various financial and project justification criteria, and then assigns an overall rating. For the fiscal year 2007 evaluation cycle, FTA primarily used the financial and project justification criteria identified in TEA-21. These criteria reflect a broad range of benefits and effects of the proposed project, such as cost-effectiveness, as well as the ability of the project sponsor to fund the project and finance the continued operation of its transit system (see fig. 2). Projects are rated at several points during the New Starts process--as part of the evaluation for entry into preliminary engineering and final design, and yearly for inclusion in the New Starts annual report. FTA assigns the proposed project a rating for each criterion and then assigns a summary rating for local financial commitment and project justification. Finally, FTA develops an overall project rating. The exceptions to this process are statutorily "exempt" projects, which are those with requests for less than $25 million in New Starts funding. These projects do not have requirements for submitting project justification information--although FTA encourages their sponsors to do so--do not receive ratings from FTA and are not eligible for FFGAs; thus, the number of projects in preliminary engineering or final design may be greater than the number of projects evaluated and rated by FTA. As required by statute, the administration uses the FTA evaluation and rating process, along with the stage of development of New Starts projects, to decide which projects to recommend to Congress for funding. Although many projects receive a summary rating that would make them eligible for FFGAs, only a few are proposed for FFGAs in a given fiscal year. FTA proposes projects for FFGAs when it believes that the projects will be able to meet certain conditions during the fiscal year for which funding is proposed. These conditions include the following: All non-New Starts funding must be committed and available for the project. The project must be in the final design phase and have progressed to the point where uncertainties about costs, benefits, and impacts (e.g., environmental or financial) are minimized. The project must meet FTA's tests for readiness and technical capacity, which confirm that there are no cost, project scope, or local financial commitment issues remaining. FTA's Annual Report on New Starts: Proposed Allocations of Funds for Fiscal Year 2007 (annual report) identified 24 projects in preliminary engineering and final design (see fig. 3). FTA evaluated and rated 20 of these projects, and 4 projects were statutorily exempt from being rated because their sponsors requested less than $25 million in New Starts funding. FTA evaluated and rated fewer projects during the fiscal year 2007 cycle than in fiscal year 2006. According to FTA, this decrease occurred because 12 proposed projects are no longer in preliminary engineering or final design. FTA stated in its annual report that the sponsors of these projects have either (1) fully implemented the project; (2) received the total New Starts funding requested to implement the project; (3) terminated or suspended project development activities; (4) withdrawn from the New Starts process while they address outstanding issues; or (5) decided not to pursue New Starts funding. Of the 20 projects that were rated in the fiscal year 2007 evaluation cycle, 1 was rated as "high," 17 were rated as "medium," and 2 were rated as "low." Under TEA-21, during fiscal years 2000 through 2006, FTA designated projects as highly recommended, recommended, or not recommended, based on the results of FTA's evaluation of each of the criteria for project justification and local financial commitment. SAFETEA-LU replaced this rating scale with a 5-point scale of high, medium-high, medium, medium- low, and low. To help transition to the new rating scale, FTA used a 3-point scale of high, medium, and low for the fiscal year 2007 evaluation cycle, but used the same decision rules to determine overall project ratings as it did in previous years (see table 1). According to FTA officials, FTA intends to work closely with the industry to implement the SAFETEA-LU provisions so that they can be applied in subsequent annual project evaluation cycles. In addition, FTA's current schedule anticipates that the final rule will be completed in time to use the 5-point scale for the fiscal year 2010 evaluation cycle. FTA's evaluation process informed the administration's recommendation to fund 12 projects. FTA recommended five projects for new FFGAs. The total capital cost of these five projects is estimated to be $3.3 billion, of which the total federal New Starts share is expected to be $1.9 billion. In addition, FTA recommended funding for two projects with pending FFGAs. The total capital cost of these two projects is estimated to be $8.2 billion, of which the total federal New Starts share is expected to be $2.8 billion. FTA also recommended reserving $101.9 million in New Starts funding for five "other projects." In its annual report, FTA stated that four of the five other projects (1) were in or nearing final design, (2) received overall medium or higher ratings, and (3) had medium or better cost- effectiveness ratings, or (4) were exempt from the requirement to achieve a medium cost-effectiveness rating. According to FTA, no other project in preliminary engineering or final design met these criteria. The fifth project--Washington, D.C., Largo Metrorail Extension--did not meet these criteria but was congressionally designated for funding in SAFETEA- LU. Similar to last year, FTA did not specify funding levels for the five other projects because it wanted to ensure that the projects were moving forward as anticipated before making specific funding recommendations to Congress. FTA also notes in its annual report that some projects may encounter unexpected obstacles that slow their progress. For example, FTA stated that some of the projects must still complete the environmental planning process and address FTA-identified concerns related to capital costs or project scope. Reserving funds for these projects without specifying a particular amount for any given project will allow the administration to make "real time" funding recommendations when Congress is making appropriations decisions. FTA does not expect that all five other projects will be recommended for funding in fiscal year 2007. (See table 2 for more information about the 12 projects recommended for funding.) The administration's fiscal year 2007 budget proposal requests that $1.47 billion be made available for the New Starts program. This total includes funding for 16 projects already under an FFGA. Figure 4 illustrates the planned uses of the administration's proposed fiscal year 2007 budget for New Starts, including the following: $571.9 million would be shared among the 16 projects with existing $355 million would be shared between the 2 projects with pending FFGAs, $302.6 million would be shared by the 5 projects proposed for new FFGAs, $101.9 million would be shared by as many as 5 "other" projects to continue their development, and $100 million would be used for new Small Starts projects. In January 2006, FTA proposed nine procedural changes for the New Starts program beginning with the fiscal year 2008 evaluation cycle. These changes include linking the New Starts and NEPA planning requirements and processes and capping New Starts funding when projects enter the final design phase. FTA's guidance states that these procedural changes are generally intended to improve the management of the New Starts process and to ensure the accuracy and consistency of the information submitted to the agency as part of the New Starts evaluation and rating process. According to FTA, these procedural changes do not alter the New Starts evaluation and rating framework, and they are not subject to the formal rule-making process. Table 3 summarizes the proposed procedural changes and FTA's rationale for proposing these changes. As we have previously recommended and SAFETEA-LU now requires, FTA published its proposed procedural changes in policy guidance and sought public comments on them. FTA obtained comments on its proposals by asking sponsors to submit comments to the docket for up to 60 days. In addition, FTA held three New Starts/Small Starts Seminar and Listening Sessions ("listening sessions") across the country. The listening sessions were intended to solicit comments from attendees on the implementation of New Starts and Small Starts provisions of SAFETEA- LU, as well as to share information about planning and project development activities for projects seeking New Starts funding. FTA received 41 written comments in response to these changes, including submissions from 33 transit agencies and government entities and 8 consultants, associations, and organizations. Most of the project sponsors and industry representatives we interviewed told us that they appreciated FTA's efforts to obtain their input and to encourage an open discussion about the proposed changes. Similarly, FTA officials said that they were pleased with the volume of written comments they received from the docket and the strong attendance at the three listening sessions conducted in February and March 2006. Although the project sponsors and industry representatives were supportive of some proposals that they thought would improve the New Starts program, they also expressed a number of concerns about all of the changes. (See table 4 for a summary of these concerns.) For example, the commenters were generally supportive of FTA's proposal to require sponsors to keep and update the information produced during alternatives analysis prior to each phase of project development until the FFGA is awarded, since this information is necessary for the before-and-after study. In contrast, most project sponsors and transit industry groups opposed FTA's proposed certification of technical methods, planning assumptions, and project development procedures, citing concerns that such a certification would raise questions about professional liability and lead to potential federal prosecution, and noting that a single individual is typically not responsible for producing all the underlying assumptions used to develop cost estimates and ridership forecasts. On the basis of the comments received, FTA adopted four proposals, including the mandatory completion of NEPA scoping before entry into preliminary engineering (PE), the presentation of the New Starts information in the NEPA documents, the preservation of information for the before and after study, and the capping of New Starts funds upon approval into final design. For two of the four adopted proposals, FTA slightly revised its original proposals on the basis of the comments received. FTA did not adopt five proposals; however, FTA noted that it may revisit these proposed changes in the future. More recently, FTA hired a consulting firm to conduct an assessment of the New Starts project development process. According to FTA's Deputy Administrator, the impetus for the review is to streamline the project development process while still ensuring that projects recommended for funding are delivered in a timely manner and stay within budget. We have previously reported that project sponsors have raised concerns about the number of changes FTA has made to the New Starts process, such as requiring project sponsors to prepare risk assessments, and the time and cost associated with implementing these changes. According to FTA, the results of the review may help inform the development of the Notice of Proposed Rulemaking (NPRM) for the New Starts program. SAFETEA-LU made a number of changes to the New Starts program, including establishing a new eligibility category, the Small Starts program, and identifying new evaluation criteria. The Small Starts program is intended to expedite and streamline the application and review process for small projects, but the transit community has questioned whether FTA would implement the program in a way that would do so. FTA has also proposed and sought public input on the new evaluation criteria and other possible changes to the New Starts program that would affect traditional New Starts projects. In addition, FTA identified possible implementation challenges, including how to distinguish between land use and economic development criteria in the evaluation framework. SAFETEA-LU introduced eight changes to the New Starts program, codified an existing practice, and clarified federal funding requirements. The changes include the creation of the Small Starts program and the introduction of new evaluation criteria, such as economic development. In addition, SAFETEA-LU codified FTA's requirement that project sponsors conduct before and after studies for all completed projects. SAFETEA-LU also clarified the federal share requirements for New Starts projects. Specifically, SAFETEA-LU continues to require that the federal share for a New Starts project may be up to 80 percent of the project's net capital project cost, unless the project sponsor requests a lower amount, and prohibits the Secretary of Transportation from requiring a nonfederal share of more than 20 percent of the project's total net capital cost. This language changes FTA's policy of rating a project as low if it seeks a federal New Starts share of more than 60 percent of the total cost. FTA had instituted this policy beginning with the fiscal year 2004 evaluation cycle in response to language contained in appropriation committee reports. Table 5 describes SAFETEA-LU provisions for the New Starts program and compares them with TEA-21's requirements. FTA has taken some initial steps in implementing SAFETEA-LU changes. For example, in January 2006, FTA published the proposed New Starts policy guidance and, as will be discussed later in this report, the ANPRM for the Small Starts program. In addition, in the final policy guidance published in May 2006, FTA took steps to support its use of incentives for accurate cost and ridership forecasts and assessing contractors' performance by requiring that projects requesting entry into PE submit information on the variables and assumptions used to prepare forecasts and the parties responsible for developing the different elements of the forecasts. FTA will continue to implement the changes outlined in SAFETEA-LU through the rule-making process over the next 1 1/2 years. Specifically, in response to SAFETEA-LU changes, FTA is developing the NPRM for the New Starts and Small Starts programs. FTA plans to issue the NPRM in January 2007, with the goal of implementing the final rule in January 2008. Figure 5 shows a time line of FTA's actual and planned implementation of SAFETEA-LU changes. The creation of the Small Starts program was a significant change made by SAFETEA-LU. The Small Starts program is a discretionary grant program for public transportation capital projects that (1) have a total cost of less than $250 million and (2) are seeking less than $75 million in federal Small Starts program funding. The Small Starts program is a component of the existing New Starts program that, according to the conference reports accompanying SAFETEA-LU, is intended to provide project sponsors with an expedited and streamlined evaluation and ratings process. Table 6 compares New Starts and Small Starts program statutory requirements. In January 2006, FTA published an ANPRM to give interested parties an opportunity to comment on the characteristics of and requirements for the Small Starts program. In its ANPRM, FTA suggested that the planning and project development process for proposed Small Starts projects could be simplified by allowing analyses of fewer alternatives for small projects, allowing the development of evaluation measures for mobility and cost- effectiveness without the use of complicated travel demand modeling procedures in some cases, and possibly defining some classes of preapproved low-cost improvements as effective and cost-effective in certain contexts. FTA also sought the transit community's input on three key issues in its ANPRM, including eligibility, the rating and evaluation process, and the project development process. For each of these issues, FTA outlined different options for how to proceed and then posed questions for public comment. FTA's ANPRM for Small Starts generated a significant volume of public comment. Members of the transit community were supportive of some proposals for the Small Starts program, but also had a number of concerns. In particular, the transit community questioned whether FTA's proposals would, as intended, provide smaller projects with a more streamlined evaluation and rating process. As a result, some commenters recommended that FTA simplify some of its original proposals in the NPRM to reflect the smaller scope of these projects. For example, several project sponsors and industry representatives thought that FTA should redefine the baseline alternative as the "no-build" option and make the before-and-after study optional for Small Starts projects to limit the time and cost of their development. In addition, others were concerned that FTA's proposals minimized the importance of the new land use and economic development evaluation criteria introduced by SAFETEA-LU, and they recommended that the measures for land use and economic development be revised. Since FTA does not plan to issue its final rule for the New Starts and Small Starts programs until early 2008, FTA issued final interim guidance for the Small Starts program in July 2006 to ensure that project sponsors would have an opportunity to apply for Small Starts funding and proposed projects could be evaluated in the upcoming cycle (i.e., the fiscal year 2008 evaluation cycle). The final interim guidance describes the process that FTA plans to evaluate proposed Small Starts projects to support (1) the decision to approve or disapprove their advancement to project development and (2) decisions on project construction grant agreements, including whether proposed projects are part of a broader strategy to reduce congestion. In addition, FTA introduced a separate eligibility category within the Small Starts program for "Very Small Starts" projects in the final interim guidance. Small Starts projects that qualify as Very Small Starts are projects that have all of the following elements: have substantial transit stations; include traffic signal priority and preemption, where appropriate; provide low-floor vehicles or level boarding; include branding of the proposed service; offer 10 minute peak and 15 minute off-peak headways or better while operating at least 14 hours per weekday; are in corridors with existing riders who will benefit from the proposed project and number more than 3,000 on an average weekday; and have a total capital cost of less than $50 million (including all project elements) and less than $3 million per mile (excluding rolling stock). According to the final interim guidance, FTA intends to scale the planning and project development process to the size and complexity of the proposed projects. Therefore, Very Small Starts projects will undergo a very simple and streamlined evaluation and rating process. For instance, according to the guidance, Very Small Starts projects are cost-effective and produce land use and economic development benefits commensurate with their costs; thus, if a project meets the Very Small Starts eligibility criteria, it will automatically receive "medium" ratings for land use and cost-effectiveness. Small Starts projects that do not meet all of the criteria for Very Small Starts projects will be evaluated and rated using a framework similar to that used for traditional New Starts projects, with the exception that fewer measures are required and their development is simplified. In particular, FTA's evaluation and rating process for Small Starts will diverge from the traditional New Starts process in several ways. For example, the project's cost-effectiveness will be rated based on a shorter time frame (i.e., opening year); other technically acceptable ridership forecasting procedures, besides traditional "four-step" travel demand models can be used; the opening year's estimate of user benefits will be adjusted upward when determining a project's cost-effectiveness; the financial and land use reporting requirements have been simplified; and the project's economic development benefits and inclusion in a congestion reduction strategy will be considered an "other factor" in the evaluation process. In response to SAFETEA-LU, FTA identified possible changes to the New Starts program that would affect traditional New Starts projects in its January 2006 guidance. According to FTA, some SAFETEA-LU provisions could lead to changes in the definition of eligibility, the evaluation and rating process, and the project development process. (See app. II for a description of the different changes FTA is considering.) In the guidance, FTA outlined changes it is considering and solicited public input, through a series of questions, on the potential changes. For example, FTA identified two options for revising the evaluation and rating process to reflect SAFETEA-LU's changes to the evaluation criteria. The first option would extend the current process to include economic development impacts and the reliability of cost and ridership forecasts. (See fig. 6.) Specifically, FTA suggested that economic development impacts and the reliability of forecasts simply be added to the list of criteria considered in developing the project justification rating. The second option would be to develop a broader process to include the evaluation criteria identified by SAFETEA-LU and to organize the measures to support a more analytical discussion of the project and its merits. (See fig. 7.) According to FTA, the second option would broaden the evaluation process beyond a computation of overall ratings based on individual evaluation measures and develop better insights into the merit of a project than are possible from using the quantified evaluation measures alone. In addition, the second option would also consider the major uncertainties associated with any of the information used to evaluate the project, such as ridership forecasts, cost estimates, projected land use, and other assumptions. According to FTA, understanding a project's uncertainties is needed for informed decision making. In its guidance, FTA also identified potential challenges in implementing some SAFETEA-LU changes. In particular, FTA described the challenges of incorporating and distinguishing between two measures of indirect benefits in the New Starts evaluation process--land use and economic development impacts. For example, FTA noted that its current land-use measures (e.g., land-use plans and policies) indicate the transit- friendliness of a project corridor both now and in the future, but do not measure the benefits generated by the proposed project. Rather, the measures describe the degree to which the project corridor provides an environment in which the proposed project can succeed. According to FTA's guidance, FTA's evaluation of land use does not include economic development benefits because FTA has not been able to find reliable methods of predicting these benefits. FTA further stated that because SAFETEA-LU introduces a separate economic development criterion, the potential role for land use as a measure of development benefits becomes even less clear, given its potential overlap with the economic development criterion. In addition, FTA noted that many economic development benefits result from direct benefits (e.g., travel time savings), and therefore including them in the evaluation could lead to double counting the benefits FTA already measures and uses to evaluate projects. Furthermore, FTA noted that some economic development impacts may represent transfers between regions rather than a net benefit for the nation, raising questions of whether these impacts are useful for a national comparison of projects. To address some of the challenges, FTA suggested that an appropriate strategy might be combining land use and economic development into a single measure. In our January 2005 report on the costs and benefits of highway and transit investments, we identified many of the same challenges of measuring and forecasting indirect benefits, such as economic development and land-use impacts. For example, we noted that it is challenging to predict changes in land use because current transportation demand models are unable to predict the effect of a transportation investment on land-use patterns and development, since these models use land-use forecasts as inputs into the model. In addition, we noted that certain benefits are often double counted when evaluating transportation projects. In particular, indirect benefits, such as economic development, may be more correctly considered transfers of direct user benefits or economic activity from one area to another. Therefore, estimating and adding such benefits to direct benefits could constitute double counting and lead to overestimating a project's benefits. Despite these challenges, experts told us that evaluating land use and economic development impacts is important since they often drive local transportation investment choices. To help overcome some of the challenges, experts suggested several potential solutions, including using qualitative information about the benefits rather than relying strictly on quantitative information and expanding the use of risk assessment or probability analysis in conjunction with economic analysis. For example, weather forecasters talk about the probability of rain rather than suggesting that they can accurately predict what will happen. This approach could illustrate that projects with similar rates of return have very different risk profiles and different probabilities of success. FTA's second option for revising the New Starts evaluation process, which would consider qualitative information about the project and the project's uncertainties, appear to be in line with these suggestions. FTA received a large number of written comments on its online docket in response to its proposed changes. (See app. II for common comments submitted for each proposed change.) While members of the transit community were supportive of some proposals, they expressed concerns about a number of FTA's proposed changes. For example, a number of commenters expressed concerns about FTA's options for revising the evaluation process, noting that both proposals deemphasized the importance of economic development and land use. For example, as described in FTA's January 2006 guidance, land use would receive less weight in calculating the overall project rating in both proposals than it receives in the current process. Some commenters also noted that land use and economic development should not be combined into a single measure and that they should receive the same weight as cost-effectiveness in the evaluation and rating process. These commenters argued that combining land use and economic development into a single measure or assigning them less weight than cost-effectiveness serves to deemphasize these benefits. FTA's New Starts program is in a period of transition. SAFETEA-LU made a number of significant changes to the program, and FTA is off to a good start in implementing these changes. Tough decisions and implementation challenges remain, however. For example, FTA must determine how to incorporate economic development into the evaluation process and implement the Small Starts program in the upcoming evaluation cycle. Through the issuance of the final interim guidance on the Small Starts program, FTA has acted to provide a streamlined evaluation process for small projects by simplifying the evaluation measures and introducing the Very Small Starts eligibility category. As the Small Starts program is implemented in the upcoming cycle, FTA officials will have the opportunity to determine whether the Small Starts program is sufficiently streamlined and whether the streamlined evaluation process provides adequate information to differentiate among projects for funding purposes. FTA will also have the opportunity to make necessary modifications to the Small Starts program as it learns through its experience in implementing the program and working to develop the final rule. Thus, the coming months will be a critical period for the New Starts program, as FTA works through these remaining decisions and implementation challenges to fully incorporate SAFETEA-LU changes. We provided a draft of this report to the Department of Transportation, including FTA, for review and comment. FTA officials provided technical clarifications, which we incorporated as appropriate. We are sending copies of this report to the congressional committees with responsibilities for transit issues; the Secretary of Transportation; the Administrator, Federal Transit Administration; and the Director, Office of Management and Budget. We also will make copies available to others upon request. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions on matters discussed in this report, please contact me on (202) 512-2834 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. Individuals making key contributions to this report were Nikki Clowers, Assistant Director, Vidhya Ananthakrishnan, and Daniel Hoy. To address our objectives, we reviewed the administration's fiscal year 2007 budget request, the Federal Transit Administration's (FTA) annual New Starts report, FTA's New Starts policy guidance and Small Starts Advanced Notice of Proposed Rulemaking (ANPRM), public comments received on FTA's docket on New Starts and Small Starts, FTA's fiscal year 2008 reporting instructions for the New Starts program, federal statutes pertaining to the New Starts program, and previous GAO reports. We also interviewed FTA officials and representatives from the American Public Transportation Association and the New Starts Working Group. In addition, we attended FTA's New Starts/Small Starts Seminar and Listening Session with project sponsors in Washington, D.C., in March 2006. We also conducted semistructured interviews with the sponsors of five projects that were evaluated and rated in the fiscal year 2007 evaluation cycle, including Raleigh, Regional Rail System; Dallas, Northwest/Southeast Light Rail Transit MOS; Minneapolis, Northstar Corridor Rail; Philadelphia, Schuylkill Valley Metrorail; and Seattle, University Link Light Rail Transit Extension. We selected these projects because they represent different phases of project development (preliminary engineering and final design), received different overall project justification and finance ratings, varied in size based on the project's total capital cost, received different levels of New Starts funding, and are geographically diverse. We obtained this information from FTA's annual New Starts report for fiscal year 2007. Our interviews were designed to gain project sponsors' perspectives on three main topics, including the impact of FTA's proposed changes to the New Starts application and project development process during the fiscal year 2008 evaluation cycle, FTA's implementation of the newly established Small Starts program, and FTA's plans to align and revise its evaluation and ratings process with the changes required by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). Specifically, we asked for their opinions on how FTA plans to measure and weight new criteria in its evaluation framework. We provided all project sponsors with a list of topics and questions prior to our interviews, and we reviewed the comments they submitted to FTA's docket. Because the five projects were selected as part of a nonprobability sample, the results cannot be generalized to all projects. In addition to our interviews, we analyzed the content of the comments submitted to FTA's docket on the New Starts policy guidance and the Small Starts ANPRM to systematically determine the project sponsors' views on key issues and identify common themes in their responses to different questions. We received from FTA a summary of all the written comments submitted to the docket on both the Small Starts ANPRM and the New Starts guidance on policies and procedures. These comments were organized by topic. To verify the accuracy of the summaries, we checked 20 percent of the comments against the original source documents. Two analysts reached consensus on the coding of the responses, and a third analyst was consulted in case of disagreement to ensure that our codes were reliable. To ensure the reliability of the information presented in this report, we interviewed FTA officials about FTA's policies and procedures for compiling the New Starts annual reports, including FTA's data collection and verification practices for New Starts information. Specifically, we asked the officials whether their policies and procedures had changed significantly since we reviewed them for our 2005 report on New Starts. FTA officials told us that there were no significant changes in their data collection and verification policies and procedures for New Starts information. Therefore, we concluded that the FTA information presented is sufficiently reliable for the purposes of this report. We conducted our work from February 2006 through August 2006 in accordance with generally accepted auditing standards, including standards for data reliability. In its January 2006 guidance, FTA identified possible long-term changes to the New Starts program. According to FTA, some of these changes were driven by SAFETEA-LU, while others were designed to improve the New Starts program or correct past problems. Table 7 summarizes FTA's proposed changes to the definition of eligibility, the evaluation and rating process, and the project development process as well as FTA's rationale for the proposed changes and the transit community's response to the proposed changes.
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The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) authorized about $7.9 billion in commitment authority, through fiscal year 2009, for the Federal Transit Administration's (FTA) New Starts program, which is used to select fixed guideway transit projects, such as rail and trolley projects, and to award full funding grant agreements (FFGAs). The New Starts program serves as an important source of federal funding for the design and construction of transit projects throughout the country. SAFETEA-LU requires GAO to report each year on FTA's New Starts process. As such, GAO examined (1) the number of projects that were evaluated, rated, and proposed for FFGAs for the fiscal year 2007 evaluation cycle and the proposed funding commitments for the fiscal year 2007 budget; (2) procedural changes that FTA proposed for the New Starts program beginning with the fiscal year 2008 evaluation cycle; and (3) changes SAFETEA-LU made to the New Starts program and FTA's implementation of these changes. GAO reviewed New Starts documents and interviewed FTA officials and project sponsors, among other things, as part of its review. GAO is not making recommendations in this report. In commenting on a draft of this report, FTA provided technical clarifications, which we incorporated as appropriate. For the fiscal year 2007 evaluation cycle, FTA evaluated and rated 20 projects, recommended 5 projects for new FFGAs and 2 projects with pending FFGAs. FTA also identified 5 other projects that may be eligible for funding outside of FFGAs. The administration's fiscal year 2007 budget proposal requests $1.47 billion for the New Starts program, which is about $200 million more than the amount received last year. FTA proposed nine procedural, or nonregulatory, changes for the New Starts program beginning with the fiscal year 2008 evaluation cycle that were generally intended to improve the management of the New Starts process. These changes include linking the New Starts and National Environmental Policy Act planning requirements and processes and capping New Starts funding when projects enter the final design phase. As required by SAFETEA-LU, FTA published these proposals in policy guidance and sought public input. Members of the transit community supported changes that they thought would make the New Starts process more efficient, but many commenters expressed strong opposition to other changes, citing, for example, the time and resources required to analyze ridership and cost uncertainties. Consequently, FTA implemented only 4 of the proposed procedural changes, but indicated that a final decision on the other 5 proposed changes would be made through the rulemaking process. SAFETEA-LU introduced eight statutory changes to the New Starts program that include establishing the Small Starts program and identifying new evaluation criteria. FTA has taken some initial steps to implement these changes, including issuing an Advanced Notice of Proposed Rulemaking (ANPRM) for the Small Starts program and proposed policy guidance for the New Starts program, both in January 2006. The Small Starts program is a new component of the New Starts program and is intended to offer an expedited and streamlined application and review process for small projects. The transit community, however, questioned whether the Small Starts program, as outlined in the ANPRM, would provide such a process. In July 2006, FTA introduced a new eligibility category called Very Small Starts, which is for the simplest and least costly projects. Very Small Starts projects will qualify for an even simpler and more expedited evaluation process. FTA also identified and sought public input on possible changes to the New Starts program that would have an impact on traditional New Starts projects, such as revising the evaluation process to incorporate the new evaluation criteria identified by SAFETEA-LU. According to FTA, a potential challenge in moving forward is incorporating both land use and economic development as separate criteria in the evaluation process, including developing appropriate measures for the criteria and avoiding duplication in counting benefits.
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The Pick-Sloan Missouri Basin Program was authorized by the Flood Control Act of 1944 as a comprehensive plan to manage the water and hydropower resources of the Missouri River Basin. The act was a combination of two plans: (1) the Sloan Plan, developed by the Department of the Interior's Bureau of Reclamation (Bureau) and designed primarily to irrigate lands in the Upper Missouri River Basin and (2) the Pick Plan, developed by the Department of the Army's Corps of Engineers (Corps) and designed primarily to control floods and provide for navigation on the Lower Missouri River Basin. The program encompasses an extensive network of multipurpose projects that provide for, among other things, flood control, navigation, irrigation, municipal and industrial water supply, and power generation. (Fig. 1 shows the location of the program's hydropower generating facilities and the overall program area.) To accomplish these multiple purposes, the plan required compromise among the program's participants. For example, in exchange for having their land permanently flooded by dams to produce such benefits as electricity and flood control, some participants anticipated the construction of irrigation projects. The program is administered by three federal agencies: (1) the Bureau, which operates seven multipurpose projects and is responsible for the water supply functions of the program's projects, (2) the Corps, which operates six multipurpose projects and administers the flood control and navigation aspects of the program's projects, and (3) Western, which markets the hydropower generated at the program's generating facilities and constructs, operates, and maintains the program's power transmission system. The federal investment in the Pick-Sloan Program has nonreimbursable and reimbursable components. The nonreimbursable component consists of the capital costs of constructing, among other things, the program's flood control and navigation facilities. The reimbursable component consists of the capital costs of constructing the program's power generation and transmission, irrigation, and municipal and industrial water supply facilities. The reimbursable federal investment is further divided into investments repaid with interest (for power facilities and municipal and industrial water supply facilities) and investments repaid without interest (for irrigation facilities). Irrigation fees, power revenues, and other revenues are used to repay the federal investment in constructing irrigation facilities. Irrigation fees repay the portion of the investment in irrigation facilities that the Secretary of the Interior determines to be within the irrigators' ability to pay. In general, power revenues are used to recoup both power costs and that portion of the investment determined to exceed the irrigators' ability to pay. The Pick-Sloan Program accounted for about 33 percent of the operating revenues generated during fiscal year 1994 by the 14 separate programs from which Western markets and transmits power. In annual revenues from the sale and transmission of electric power, Pick-Sloan is Western's second largest program. The total federal investment in the program as of September 30, 1994, was about $4.5 billion. About $2.6 billion of the federal investment in the program is reimbursable through power revenues, and about $898 million of that amount had been repaid through September 30, 1994. Because certain of the Pick-Sloan Program's irrigation facilities will not be completed as planned, a portion of the federal investment is unrecoverable. As originally authorized in 1944, portions of the program's power facilities and water storage reservoirs were intended for use with irrigation facilities. The federal investment for these portions was thus considered an investment in irrigation, and repayment was to be made without interest and deferred until the irrigation facilities were completed. As a result of this deferral, power customers would not be obliged to repay the investment in facilities that were ultimately intended for irrigation. Under the original plan, about 33 percent of the program's generating capacity was to be used to irrigate about 5.3 million acres. As the program progressed, only about 15 percent of the program's power capacity would be needed for irrigation because the acreage planned for irrigation was reduced to about 3.1 million acres. As of September 30, 1994, the federal investment in power facilities intended for use with existing and planned irrigation facilities was $286 million, or about 15 percent of the approximately $1.9 billion total for that purpose. In addition, a portion of the program's water storage reservoirs were intended for use with existing and planned irrigation facilities. As of September 30, 1994, the capital cost associated with this portion of the reservoirs totaled about $224 million. Although the program's power facilities and storage reservoirs have been largely completed as planned, most of the planned irrigation facilities have not been constructed. As of September 30, 1994, only about 25 percent of the acreage planned for irrigation had been developed. Some of the program's power facilities and reservoirs are now being used in conjunction with those irrigation facilities that have been completed.As a result, the associated federal investment is now scheduled for repayment. Power facilities representing about $7 million of the federal investment are now being used to provide irrigation pumping service to about 212,000 acres, and water storage reservoirs representing about $49 million of the federal investment are now being used to provide irrigation water to about 182,000 acres. These investments are scheduled for repayment between 2042 and 2047, according to Bureau officials. These officials also stated that the remaining portions of the program's power facilities and reservoirs, which are intended for use with future irrigation facilities, are currently used to generate electricity for sale to power customers. The Bureau now considers all but one of the program's incomplete irrigation facilities to be infeasible and believes that these projects will likely not be constructed. According to Bureau officials, the costs of developing the remaining acreage planned for irrigation outweigh the benefits that would accrue from irrigating that acreage. They said that although their conclusions are based on preliminary estimates, a more expensive and time-consuming analysis would probably not change their conclusions. As a result, the remaining federal investment--$454 million-- is deferred. In addition, the amount of the federal investment that is considered unrecoverable will increase over time. As mentioned earlier, the portion of the power facilities planned for use with irrigation facilities represents about 15 percent of the program's overall power capacity. As the overall federal investment in power increases, the amount of the investment associated with irrigation increases correspondingly. For example, while the total federal investment in power facilities increased from about $1.6 billion at the end of fiscal year 1987 to about $1.9 billion at the end of fiscal year 1994, the corresponding 15-percent portion of this investment that was associated with irrigation increased from about $249 million to about $286 million. Legislation currently precludes reallocation of the investment by the Bureau and Western from one purpose of the program to another without congressional authorization. The DOE Organization Act of 1977 precludes revision by the Bureau of the cost allocations and project evaluation standards without prior congressional approval. The Water Resources Development Act of 1986 directed that the program proceed to its ultimate development. According to Western officials, these acts preclude changes in the program's repayment criteria. The Congress reallocated a portion of the federal investment in power facilities and storage reservoirs intended for irrigation when it passed the Garrison Diversion Unit Reformulation Act of 1986. The act implemented recommendations in the Garrison Diversion Unit Commission's Final Report, submitted to the Congress and to the Secretary of the Interior on December 20, 1984. The Commission was created by the Congress to review North Dakota's needs for water development and to propose modification to the Garrison Diversion Unit. Among other things, the act terminated the development of about 876,000 of the acres planned for irrigation under the program. Also as a result of the act, Western scheduled repayment of the existing federal investment in the power facilities and storage reservoirs intended for use in irrigating this acreage. Thus, about $147 million in federal investment was reallocated for recovery through power revenues. The act directed that Western (1) attempt to minimize any rate increase and (2) phase in any such increase over a 10-year period. According to Western officials, because the investment is to be repaid over 50 years, the power rate was not appreciably affected by this reallocation of the federal investment. The impact of recovering the $454 million investment through power revenues could vary significantly depending on many factors, including the amount Western passes on to its power customers. Consistent with the way investments in power are typically repaid (within 50 years and with interest), recovering the full amount through power revenues could result in an increase in Western's wholesale power rate of as much as 14.6 percent, according to Western's calculations. Western officials said the following about this scenario: The potential rate increase of 14.6 percent assumes that the entire amount of the increased financial requirement would be passed through to existing power customers, without any offsetting reductions in the operating expenses of Western, the Corps, or the Bureau (any offsetting reductions could lessen the need for a rate increase). Western officials noted that such expenses could decrease as a result of Western's ongoing restructuring efforts. Since Pick-Sloan's power customers purchase power wholesale and resell it to retail customers, it is difficult to estimate accurately to what extent, if any, the retail customers would be affected by a rate increase at the wholesale level. Changes in the terms of repayment, such as phasing in a rate increase as was done in 1986, would lessen the effect of the increase. The estimated rate increase assumes repayment of the $454 million through power revenues without an overall assessment of the program. Any general assessment of the program could lead to changes in the current cost allocations and rates. Factors outside of Western's control, such as the amount of water available for power generation, could affect any potential impact on the rates. The amount of the federal investment in storage reservoirs that would be redirected for repayment through power revenues is uncertain because some of this investment could be assigned to other program purposes, thereby lessening any effect on the rates. The Department of the Interior's Inspector General reported in 1993 on the unrecoverable federal investment in the Pick-Sloan Program attributable to infeasible irrigation projects. Recognizing that the majority of the program's irrigation facilities were infeasible and thus would likely never be completed, the report was critical of the Bureau's continuing assumption that the project would ultimately be developed as planned. The Inspector General recommended, among other things, that the Bureau request that the Congress deauthorize--that is, terminate from the program--the infeasible acreage and reallocate the federal investment in the power facilities and storage reservoirs intended for planned irrigation facilities for repayment through power revenues. The Bureau concurred with the Inspector General's recommendations and agreed to a target date of February 1995 for submitting information to the Congress in response to these recommendations. The Bureau provided us with a draft copy of the list of the infeasible irrigation facilities that it developed in response to the Inspector General's report, but as of April 18, 1996, the Bureau had not yet submitted this information to the Congress.According to Bureau officials, the Bureau is continuing to analyze the potential alternatives for recovering the portion of the federal investment that is currently unrecoverable. For example, the Bureau is assessing the impact of reallocating the investment on the basis of the current use of the program's facilities rather than on the program's planned long-term development. The Inspector General's 1993 report also identified another impact of recovering the $454 million through power revenues. Based on 1992 data, the Inspector General calculated, using a 7.25 percent interest rate, that carrying the unrecoverable federal investment in power facilities and storage reservoirs as an investment in irrigation facilities results in an interest cost to the Treasury of about $30 million annually because the investment is carried without interest. Repaying the unrecoverable federal investment through power revenues would necessitate an annual interest charge. Western officials noted that such an interest payment would likely be less than that calculated by the Inspector General because Western would expect to use a lower interest rate (likely 4 percent) that is based on the weighted average of the interest rates associated with the program's outstanding debt. We provided a draft of this statement to and discussed its contents with the Bureau's Regional Director of the Great Plains Region; the Bureau's Washington Director, Policy and External Affairs; Western's Acting Area Manager for the Pick-Sloan Program; and the Deputy Assistant Administrator from the Department of Energy's Power Marketing Liaison Office. They clarified several points about the estimate of the potential impact on the power rate of recovering a portion of the federal investment through power revenues. These officials also suggested several technical revisions to our statement, which we incorporated as appropriate. We conducted our review between December 1995 and April 1996 in accordance with generally accepted government auditing standards. This concludes our prepared statement. It also concludes our work on this issue. Appendix I shows the operating characteristics of the Pick-Sloan Program's hydropower generating facilities, appendix II shows the allocation of the reimbursable and nonreimbursable federal investment among the program's purposes, appendix III shows the status of the federal investment reimbursable through power revenues, appendix IV shows the status of the program's irrigation facilities. We will be glad to answer any questions you may have. Nameplate capacity (MW) Nonpower (irrigation assistance) The following four tables provide information on the status of the Pick-Sloan Program's existing, planned, and reauthorized irrigation facilities as provided by the Bureau in its draft list. Table IV.1 summarizes all these facilities. Tables IV.2, IV.3, and IV.4 provide details on existing, planned, and reauthorized units, respectively. The benefit-cost ratios that appear in these tables reflect the Bureau's calculation of the feasibility of developing the irrigation facilities. The ratio for an individual facility results from dividing the benefits expected to be derived from developing a facility by the expected cost of constructing and operating that facility. The Bureau considers a ratio exceeding 1.0 to indicate feasibility and a ratio of less than 1.0 to reflect infeasibility. We did not assess the accuracy of the information in the tables or in the notes, which were also provided by the Bureau. Capacity (kW) Capacity (kW) Benefit- cost ratio for irrigation and date of analysis (continued) Capacity (kW) Benefit- cost ratio for irrigation and date of analysis 1.47, Mar. 1956 1.67, Mar. 1952 1.22, Apr. 1956 (continued) Capacity (kW) In 1967, the benefit-cost ratio for this facility (0.55) indicated that the irrigation development was infeasible, and the irrigation storage in the Bonny Reservoir was sold to the state of Colorado for recreation purposes. The project was authorized for completion on the basis of all of its benefits. The Reclamation Projects Act deauthorized funding for irrigation at Cedar Bluff because of a lack of water. The irrigation district was relieved of its obligation, and the state of Kansas paid the costs of irrigation storage on a discounted present-value basis. The available water is used by the state for recreation, fish and wildlife, and supplemental municipal water supply. The Kirwin Unit Definite Plan Report (June 1952) showed a benefit-cost ratio of 0.9. Correspondence in September 1952 from the Acting Commissioner and the Regional Director, Lower Missouri Region, requested that intangible (indirect) benefits be included in the justification. Subsequent correspondence from the Regional Director provided the requested benefits that were included to justify the construction. The facility is part of the Three Forks Division, which has a total pumping demand of 3,199 kilowatts. Since Boysen storage is designated for water service, irrigation assistance reflects the currently unassigned storage costs for the reservoir. This facility has been integrated as part of the Bureau's Rehabilitation and Betterment Program. Capacity (kW) (continued) Capacity (kW) (continued) Capacity (kW) 122,269 $84,210,328 $74,894,665 (Table notes on next page) Under the latest plan, the facility would use a hydraulic turbine from the Yellowtail Dam instead of electric pumps for irrigation pumping. Unit 2 is infeasible. Since Boysen storage is designated for water service, the irrigation assistance reflects the currently unassigned storage costs for the reservoir. Storage assignment for unsold water out of Glendo. The sale of Glendo water is being impeded by unresolved environmental concerns. Capacity (kW) These facilities were individually reauthorized by acts of Congress. The date a facility will be placed in service is indeterminate pending a finding of feasibility and reauthorization or, in the case of reauthorized but suspended facilities, a determination of the facility's status or the disposition of the facility's construction appropriations. The appropriation was deauthorized by P.L. 100-516, which authorized the Mni-Wiconi Rural Water Supply Project. No studies were conducted to determine the facility's feasibility, but local interests suggested deauthorizing the irrigation development as a trade-off for developing a rural domestic water supply and distribution system to serve the needs of the Native American and non-Native American populations in the area. The power allocation for the facility was made available for the municipal and industrial system, and funding for irrigation was deauthorized. The irrigation facility was to remain as a planned facility of the Pick-Sloan Program. Approximately $1.1 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress. The acreage for the Garrison Diversion Unit was reduced from 1,000,007 acres to 130,940 acres by P.L. 99-294 and to 115,740 acres by P.L. 102-575. At the time of the reformulation in 1986, it was recognized that the reduced scope of the project would result in economic infeasibility because of the loss of economies of scale and other factors. The reformulation was a compromise. Subsequent to the reallocation of the project's costs, it was determined that the project was also financially infeasible because the annual operation and maintenance costs exceeded irrigators' ability to pay. A team appointed by the Secretary of the Interior recommended a halt to further development of the project. Approximately $132.9 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress. The facility was reauthorized by the Lake Andes-Wagner/Marty II Unit Act of 1992 (P.L. 102-575). The benefit-cost ratio for this unit was based on post-1979 methodologies. The Bureau employed "customized procedures" in calculating the ratio that allowed the consideration of a specialty crop (potatoes) as a benefit. The Planning Report/Draft Environmental Impact Statement (1985) included a benefit-cost ratio of 0.56. Under the customized procedures that included specialty crops, livestock intensification, and alternative price normalization, the benefit-cost was calculated at 1.02. On this basis, the Congress reauthorized the project. Approximately $3.7 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress. Suspended; the assigned cost is for a Corps reservoir. Approximately $3.0 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress. Approximately $7.1 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress. 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 Western Area Power Administration's (WAPA) repayment of the federal investment in hydropower facilities and water storage reservoirs in the Pick-Sloan Missouri Basin Program, focusing on the: (1) portion of the investment that may not be recoverable; and (2) actions that could be implemented to recover a larger portion of the investment. GAO noted that: (1) about $454 million of the Pick-Sloan investment is not recoverable because some of the facilities were intended for use with irrigation facilities that have not been completed or are no longer feasible; (2) Department of Energy (DOE) expects the amount of federal investment that is unrecoverable to increase, since some facilities will require renovation and replacement; (3) as a result of the completion of some irrigation facilities, DOE expects about $56 million of the federal investment to be repaid between 2042 and 2047; (4) some of the $454 million investment that is considered unrecoverable could be recovered through the WAPA hydroelectric power revenues; (5) the WAPA hydroelectric power revenues cannot be used to repay the federal investment without legislative changes; (6) the impact of recovering the investment through power revenues could vary significantly depending on the terms of repayment and amount that WAPA passes on to its customers; and (7) if the WAPA passed the entire investment amount on to its customers, power rates could increase by 14.6 percent.
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Since the early 1990s, GSA and the federal judiciary have been carrying out a multibillion-dollar courthouse construction initiative to address the judiciary's growing needs. In 1993, the judiciary identified 160 court facilities that required either the construction of a new building or a major annex to an existing building. From fiscal year 1993 through fiscal year 2005, Congress appropriated approximately $4.5 billion for 78 courthouse construction projects. Since fiscal year 1996, the judiciary has used a 5 year plan to prioritize new courthouse construction projects, taking into account a court's need for space, security concerns, growth in judicial appointments, and any existing operational inefficiencies. The judiciary's most recent 5-year plan (covering fiscal years 2005 through 2009) identifies 57 needed projects that are expected to cost $3.8 billion. GSA and the judiciary are responsible for managing the multibillion-dollar federal courthouse construction program, which is designed to address the judiciary's long-term facility needs. The Administrative Office of the United States Courts (AOUSC), the judiciary's administrative agency, works with the nation's 94 judicial districts to identify and prioritize needs for new and expanded courthouses. The U.S. Courts Design Guide (Design Guide) specifies the judiciary's criteria for designing new court facilities and sets the space and design standards that GSA uses for courthouse construction. First published in 1991, the Design Guide has been revised several times to address budgetary considerations, technological advancements, and other issues, and the guide is currently undergoing another revision. GSA provides a range of real property services including maintenance, repairs, alterations, and leasing to numerous federal agencies and the federal judiciary. The Public Buildings Amendments of 1972 made several important revisions to the Federal Property and Administrative Services Act. First, the 1972 law created a new revolving fund, later named FBF. Next, it required agencies that occupy GSA-controlled buildings to pay rent to GSA, which is to be deposited in the revolving fund to be used for GSA real property services. GSA charges rent based on appraisals for facilities it owns and the actual lease amount for facilities it leases on the tenants' behalf. The legislation also authorized any executive agency other than GSA that provides space and services to charge for the space and services. The rent requirement is intended to reduce costs and encourage more efficient space utilization by making agencies accountable for the space they use. GSA proposes spending from FBF for courthouses as part of the President's annual budget request to Congress. GSA has been using the judiciary's 5-year plan for new courthouse projects since fiscal year 1996 to develop requests for both new courthouses and expanded court facilities. GSA also prepares feasibility studies to assess various courthouse construction alternatives and serves as the central point of contact with the judiciary and other stakeholders throughout the construction process. For courthouses that are to be selected for construction, GSA prepares detailed project descriptions called prospectuses that include the justification, location, size, and estimated cost of the new or annexed facility. GSA typically submits two prospectuses to Congress. The first prospectus generally requests authorization and funding to purchase the site and design the building, and the second prospectus generally requests authorization and funding for construction, as well as any additional funding needed for site and design work. Once Congress authorizes and appropriates funds for a project, GSA refines the project budget and selects private-sector firms for the design and construction work. Figure 1 illustrates the process for planning, approving, and constructing a courthouse project. Courthouse projects continue to be costly, and increasing rents and budgetary constraints have given the judiciary further incentive to control its costs. The judiciary pays rent to GSA for the use of the courthouses, which GSA owns, and the proportion of the judiciary's budget that goes to rent has increased as the judiciary's space requirements have grown. According to the judiciary, rent currently accounts for just over 20 percent of its operating budget and is expected to increase to over 25 percent of its operating budget in fiscal year 2009, when the rental costs of new court buildings are included. Additionally, in fiscal year 2004, the judiciary faced a budgetary shortfall and, according to the judiciary, reduced its staff by 6 percent. In September 2004, the judiciary announced a 2-year moratorium on new courthouse construction projects as part of an effort to address its increasing operating costs and budgetary constraints. During this moratorium, AOUSC officials said that they plan to reevaluate the courthouse construction program, including reassessing the size and scope of projects in the current 5-year plan, reviewing the Design Guide's standards, and reviewing the criteria and methodology used to prioritize projects. Judiciary officials also said that they plan to reevaluate their space standards in light of technological advancements and opportunities to share space and administrative services. Our work in the 1990s showed that decision makers within GSA and the judiciary had wide latitude in making choices that significantly affected costs. The judiciary's 5-year plan did not reflect all of the judiciary's most urgently needed projects. However, the judiciary has since made some of our recommended changes. We also found that the judiciary did not compile data that would allow it to determine how many and what types of courtrooms it needs. The judiciary concluded that additional data and analysis were not necessary. In 1995, we testified that a primary reason for differences in the construction costs of courthouses was that GSA and the judiciary had wide latitude in making choices about the location, design, construction, and finishes of courthouse projects. These choices were made under circumstances in which budgets or designs were often committed to before requirements were established. In addition, design guidance was flexible, and systematic oversight was limited. As a result, some courthouses had more expensive features than others. While recognizing that some flexibility was needed and that some costly features may be justifiable, we found that the flexibility in the process should have been better managed. We recommended that GSA and AOUSC clearly define the scope of construction projects and refine construction cost estimates before requesting project approval and final funding levels; establish and implement a systematic and ongoing project oversight and evaluation process to compare courthouse projects, identify opportunities for reducing costs, and apply lessons learned to future projects; and establish a mechanism to monitor and assess the use of flexibility within design guidance to better balance choices made about courthouse design, features, and finishes. GSA and the judiciary said that since 1996, they have also taken several actions to improve the courthouse construction program, including developing priority lists of locations needing additional space (the 5-year plan), revising the Design Guide, and placing greater emphasis on cost consciousness in its courthouse construction guidance for GSA. In a 2004 congressional briefing, we reported that GSA had attributed some cost growth in courthouse construction projects to a number of factors, including changes in the scope of the projects. In Buffalo, New York, for example, GSA had to change the scope of the courthouse project and acquire an entirely new site in order to achieve the necessary security based setbacks from the street. The judiciary said that funding delays have slowed the progress of the program by creating a backlog of projects, and increased costs by 3 to 4 percent per year because of inflation. The judiciary also indicated that limiting the size of courthouses to stay within budget has resulted in space shortages sooner than expected at some courthouses. In a 2004 report related specifically to a new federal courthouse proposed for Los Angeles, we found that the government will likely incur additional construction and operational costs beyond the $400 million estimated as needed for the new courthouse. Some of these additional costs are attributable to operational inefficiencies. Specifically, the court is split between a new building and an existing courthouse in Los Angeles, both of which will, according to the judiciary, require additional courtrooms to meet the district court's projected space requirements in 2031. In 1993, we reviewed the long-term planning process used by the judiciary to estimate its space requirements. We found that AOUSC's process for projecting long-term space requirements did not produce results that were sufficiently reliable to form the basis for congressional authorization and funding approval of new construction and renovation projects for court space. Specifically, three key problems impaired the accuracy and reliability of the judiciary's projections. First, AOUSC did not treat all districts consistently. For example, the procedure used to convert caseload estimates to staffing requirements did not reflect differences among districts that affect space requirements. Second, according to AOUSC's assumptions about the relationship between caseloads and staff needs, many district baseline estimates did not reflect the districts' current space requirements. For example, when a district occupied more space than the caseload warranted, future estimates of needs were overstated. Third, AOUSC's process did not provide reliable estimates of future space requirements because the methodology used to project caseloads did not use standard acceptable statistical methods. We recommended that AOUSC revise the long-term planning process to increase consistency across regions, establish accurate caseload baselines for each district, and increase the reliability of the projected caseloads by applying an accepted statistical methodology and reducing subjectivity in the process. In May 1994, we testified that the judiciary had implemented some of these recommendations. For example, on the basis of our recommendation, whenever a decision was made to proceed on a particular building project, AOUSC provided GSA with detailed 10-year space requirements for prospectus development and an overall summary of its projected 30-year space requirements for purposes of site planning. In 2001, we reported that since 1994, AOUSC had continued its efforts to improve its long-term planning process in implementing our previous recommendations. Specifically, the judiciary began (1) using an automated computer program that applied Design Guide standards to estimate space requirements, (2) employing a standard statistical forecasting technique to improve caseload projections, and (3) providing GSA with data on its 10-year projected space requirements to support the judiciary's request for congressional approval of funds to build new facilities. In 1996 we reported that the judiciary had developed a methodology for assessing project urgency and a short-term (5-year) construction plan to communicate its urgent courthouse construction needs. Our analysis suggested that its 5-year plan did not reflect all of the judiciary's most urgent construction needs. We found that the judiciary, in preparing the 5 year plan, developed urgency scores for 45 projects, but did not develop urgency scores for other locations that, according to AOUSC, also needed new courthouses. Our analysis of available data on conditions at the 80 other locations showed that 30 of them likely would have had an urgency score higher than some projects in the plan. We recommended that the Director of AOUSC work with the Judicial Conference Committee on Security, Space, and Facilities to make improvements to the 5-year plan, including fully disclosing the relative urgency of all competing projects and articulating the rationale or justification for project priorities, including information on the conditions that are driving urgency--such as specific security concerns or operational inefficiencies. In commenting on the report, AOUSC generally agreed with our recommendations and indicated that many of the improvements we recommended were already under consideration. It also recognized that some courthouse projects, which were currently underway, may have had lower priority scores because the funding had already been provided by the time the priority scores were developed. In 1997, we reported that the judiciary maintains a general practice of, whenever possible, assigning a trial courtroom to each district judge.However, we also noted that the judiciary did not compile data on how often and for what purposes courtrooms are actually used and it did not have analytically based criteria for determining how many and what types of courtrooms are needed. We concluded that the judiciary did not have sufficient data to support its practice of providing a trial courtroom for every district judge. We recommended that the judiciary establish criteria for determining effective courtroom utilization and a mechanism for collecting and analyzing data at a representative number of locations so that trends can be identified over time and better insights obtained on court activity and courtroom usage; design and implement a methodology for capturing and analyzing data on usage, courtroom scheduling, and other factors that may substantially affect the relationship between the availability of courtrooms and judges' ability to effectively administer justice; use the data and criteria to explore whether the one-judge, one-courtroom practice is needed to promote efficient courtroom management or whether other courtroom assignment alternatives exist; and establish an action plan with time frames for implementing and overseeing these efforts. In 1999, AOUSC contracted for a study of the judiciary's facilities program to address, among other things, the courtroom-sharing issue and identify ways to improve its space and facility efforts. As part of this study, the contractor analyzed how courtrooms are used, assigned, and shared by judges. We reviewed the courtroom use and sharing portion of this study and concluded, along with others, that the study was not sufficient to resolve the courtroom sharing issue. We recommended that the Director, AOUSC, in conjunction with the Judicial Conference's Committee on Court Administration and Case Management and Committee on Security and Facilities, design and implement cost-effective research more in line with the recommendations in our 1997 report. We also recommended that AOUSC establish an advisory group made up of interested stakeholders and experts to assist in identifying study objectives, potential methodologies, and reasonable approaches for doing this work. In responding to the report, AOUSC disagreed with our recommendations because it believed the contractor study was sufficient and additional statistical studies would not be productive. In a 2002 report, we found that the judiciary's policies recognized that senior district judges with reduced caseloads were the most likely candidates to share courtrooms and some active and senior judges were sharing courtrooms in some locations primarily when there were not enough courtrooms for all judges to have their own courtroom. However, because of the judiciary's belief in the strong relationship between ensured courtroom availability and the administration of justice and the wide discretion given to circuits and districts in determining how and when courtroom sharing may be implemented, we concluded that there would not be a significant amount of courtroom sharing in the foreseeable future, even among senior judges. We have reported over the years that GSA has struggled to address its repair and alteration needs identified in its inventory of owned buildings. In 1989, we found that FBF's inability to generate sufficient revenue in the past was due, in large part, to restrictions imposed on the amount of rent GSA could charge federal agencies, and we recommended in 1989 that Congress remove all rent restrictions and not mandate any further restrictions. It is also important to note that not all federal property is subject to FBF rent payments because GSA does not control all federal properties. We are currently conducting a review for this committee regarding the issues associated with the judiciary's request of a $483 million permanent, annual exemption from rent payments to GSA. As part of our series on high-risk issues facing the federal government, we have reported that GSA has struggled over the years to meet the requirements for repairs and alterations identified in its inventory of owned buildings. By 2002, its estimated backlog of repairs had reached $5.7 billion. We have reported that adverse consequences of the backlog included poor health and safety conditions, higher operating costs associated with inefficient building heating and cooling systems, restricted capacity to modernize information technology, and continued structural deterioration resulting from such things as water leaks. We reported that FBF has not historically generated sufficient revenue to address the backlog. On the basis of the work we did in the late 1980s and early 1990s, we concluded that federal agencies' rent payments provided a relatively stable, predictable source of revenue for FBF, but that this revenue has not been sufficient to finance both growing capital investment needs and the cost of leased space. We found that FBF's inability to generate sufficient revenue during that time was compounded by restrictions imposed on the amount of rent GSA could charge federal agencies. Congress and OMB had instituted across-the-board rent restrictions that reduced FBF by billions of dollars over several years, and later continued to restrict what GSA could charge some agencies, such as the Departments of Agriculture and Transportation. Because these rent restrictions were a principal reason why FBF has accumulated insufficient money for capital investment, we recommended that Congress remove all rent restrictions and not mandate any further restrictions. According to GSA, most of the restrictions initiated by Congress and OMB have been lifted. However, the GSA Administrator has the authority to grant rent exemptions to agencies. GSA data show that several rent exemptions are currently in place. In general, these exemptions are narrowly focused on a single building or even part of a single building or are granted for a limited duration. Table 2 summarizes the current rent exemptions that exist in GSA buildings, according to data GSA provided. In fiscal year 2006, according to data from GSA, $7.7 billion in expected FBF revenue is projected to come from rent paid by over 60 different federal tenant agencies, such as the Departments of Justice and Homeland Security. Congress sets annual limits on how much FBF revenue can be spent for various activities through the appropriations process. In addition, Congress may appropriate additional amounts for FBF and between fiscal year 1990 and fiscal year 2005, Congress made direct appropriations into FBF for all but 3 fiscal years. This additional funding was not tied directly to any specific projects or types of projects. The statutory language relating to the direct appropriations states that additional amounts are being deposited into FBF for the purposes of the fund. It is also important to note that not all federal property is subject to FBF rent payments. While GSA owns and leases property and provides real estate services for numerous federal agencies, we reported in 2003 that GSA owns only about 6 percent of federal facility space in terms of building floor area. Other agencies, including the Department of Defense (DOD), the U.S. Postal Service, and the Department of Energy have significant amounts of space that they own and control without GSA involvement. In all, over 30 agencies control real property assets. Property owning agencies do not pay rent into FBF or receive services from GSA for the space they occupy in the buildings that they own. For example, the Pentagon and military bases are owned by DOD, and national parks facilities are owned by Interior. As a result, these facilities are maintained by DOD and Interior, respectively. In December 2004, the judiciary requested that the GSA Administrator grant a $483 million permanent, annual exemption from rent payments-- an amount equal to about 3 times the amount of all other rent exclusions combined. This exemption would equal about half of the judiciary's $900 million annual rent payment to GSA for occupying space in federal courthouses. The judiciary has expressed concern that the growing proportion of its budget allocated to GSA rent payments is having a negative effect on court operations. According to GSA data, the judiciary increased the owned space it occupies by 15 percent from 2000 to 2004. In February 2005, the GSA Administrator declined the request because GSA considered it unlikely that the agency could replace the lost income with direct appropriations to FBF. In April 2005, this subcommittee requested that we look into issues associated with the judiciary's request for a permanent, annual exemption from rent payments to GSA. Our objectives for this work are to determine the following: 1. How are rent payments calculated by GSA and planned and accounted for by the judiciary? 2. What changes, if any, has the judiciary experienced in rent payments in recent years? 3. What impact would a permanent rent exemption have on FBF? Our work is still underway, but our past work on related issues shows that rent exemptions have been a principal reason why FBF has accumulated insufficient money for capital investment. We conducted our work for this testimony in June 2005 in accordance with generally accepted government auditing standards. During our work, we reviewed past GAO work on federal real property and courthouse construction issues, analyzed AOUSC and GSA documents, and interviewed AOUSC and GSA officials. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or the other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-2834 or [email protected]. Keith Cunningham, Randy De Leon, Maria Edelstein, Bess Eisenstadt, Joe Fradella, Susan Michal-Smith, David Sausville, and Gary Stofko also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Over the last 20 years, GAO has compiled a large body of work on courthouse construction and federal real property. The General Services Administration (GSA) owns federal courthouses and funds related expenses from its Federal Buildings Fund (FBF)--a revolving fund used to finance GSA real property services, including the construction and maintenance of federal facilities under GSA control. The judiciary pays rent to GSA for the use of these courthouses, and the proportion of the judiciary's budget that goes to rent has increased as its space requirements have grown. In December 2004, the judiciary requested a $483 million permanent, annual exemption from rent payments to GSA to address budget shortfalls. In this testimony, GAO (1) summarizes its previous work on courthouse construction and (2) provides information on FBF and GAO's ongoing work on the federal judiciary's request for a permanent, annual rent exemption of $483 million from rent to GSA. GAO's courthouse construction work to date has focused primarily on courthouse costs, planning, and courtroom sharing. In the 1990s, GAO reported that wide latitude among judiciary and GSA decision makers in choices about location, design, construction, and finishes often resulted in expensive features in some courthouse projects. The judiciary has since placed greater emphasis on cost consciousness in the guidelines for courthouse construction that it provides to GSA. Related to planning, GAO also found in the 1990s that long-range space projections by the judiciary were not sufficiently reliable, and that the judiciary's 5-year plan did not reflect all of the its most urgently needed projects. The judiciary has made changes to improve its planning and data reliability. During previous work, GAO also found that the judiciary did not track sufficient courtroom use data to gauge the feasibility of courtroom sharing. GSA has been unable to generate sufficient revenue through FBF over the years and thus has struggled to meet the requirements for repairs and alterations identified in its inventory of owned buildings. By 2002, the estimated backlog of repairs had reached $5.7 billion, and consequences included poor health and safety conditions, higher operating costs, restricted capacity for modern information technology, and continued structural deterioration. GSA's inability to generate sufficient revenue in the past has been compounded by restrictions imposed on the rent GSA could charge federal agencies. Consequently, GAO recommended in 1989 that Congress remove all rent restrictions and not mandate any further restrictions, and the most restrictions have been lifted. Some narrowly focused rent exemptions, many of limited duration, still exist today, but together they represent roughly a third of the $483 million permanent exemption the judiciary is currently requesting from GSA. The judiciary has requested the exemption, equaling about half of its annual rent payment, because of budget problems it believes that its growing rent payments have caused. GSA data show that GSA-owned space, occupied by the judiciary, has increased significantly. GAO is currently studying the potential impact of such an exemption on FBF, but past GAO work shows rent exemptions have been a principal reason why FBF has accumulated insufficient money for capital investment.
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The same speed and accessibility that create the enormous benefits of the computer age can, if not properly controlled, allow individuals and organizations to inexpensively eavesdrop on or interfere with computer operations from remote locations for mischievous or malicious purposes, including fraud or sabotage. In recent years, the sophistication and effectiveness of cyberattacks have steadily advanced. These attacks often take advantage of flaws in software code, circumvent signature-based tools that commonly identify and prevent known threats, and use social engineering techniques designed to trick the unsuspecting user into divulging sensitive information or propagating attacks. These attacks are becoming increasingly automated with the use of botnets-- compromised computers that can be remotely controlled by attackers to automatically launch attacks. Bots (short for robots) have become a key automation tool used to speed the infection of vulnerable systems. Government officials are increasingly concerned about attacks from individuals and groups with malicious intent, such as crime, terrorism, foreign intelligence-gathering, and acts of war. As greater amounts of money are transferred through computer systems, as more sensitive economic and commercial information is exchanged electronically, and as the nation's defense and intelligence communities increasingly rely on commercially available information technology, the likelihood increases that information attacks will threaten vital national interests. Recent attacks and threats have further underscored the need to bolster the cybersecurity of our government's and our nation's computer systems and, more importantly, of the critical operations and infrastructures they support. Recent examples of attacks include the following: In March 2005, security consultants within the electric industry reported that hackers were targeting the U.S. electric power grid and had gained access to U.S. utilities' electronic control systems. Computer security specialists reported that, in a few cases, these intrusions had "caused an impact." While officials stated that hackers had not caused serious damage to the systems that feed the nation's power grid, the constant threat of intrusion has heightened concerns that electric companies may not have adequately fortified their defenses against a potential catastrophic strike. In January 2005, a major university reported that a hacker had broken into a database containing 32,000 student and employee Social Security numbers, potentially compromising their identities and finances. In similar incidents during 2003 and 2004, it was reported that hackers had attacked the systems of other universities, exposing the personal information of over 1.8 million people. In June 2003, the U.S. government issued a warning concerning a virus that specifically targeted financial institutions. Experts said the BugBear.b virus was programmed to determine whether a victim had used an e-mail address for any of the roughly 1,300 financial institutions listed in the virus's code. If a match was found, the software attempted to collect and document user input by logging keystrokes and then provided this information to a hacker, who could use it in attempts to break into the banks' networks. In November 2002, a British computer administrator was indicted on charges that he accessed and damaged 98 computers in 14 states between March 2001 and March 2002, causing some $900,000 in damage. These networks belonged to the Department of Defense, the National Aeronautics and Space Administration, and private companies. The indictment alleges that the attacker was able to gain administrative privileges on military computers, copy password files, and delete critical system files. The attacks rendered the networks of the Earle Naval Weapons Station in New Jersey and the Military District of Washington inoperable. In May 2005, we reported that federal agencies are facing a set of emerging cybersecurity threats that are the result of increasingly sophisticated methods of attack and the blending of once distinct types of attack into more complex and damaging forms. Examples of these threats include spam (unsolicited commercial e-mail), phishing (fraudulent messages used to obtain personal or sensitive data), and spyware (software that monitors user activity without the user's knowledge or consent). Spam consumes significant resources and is used as a delivery mechanism for other types of cyberattacks; phishing can lead to identity theft, loss of sensitive information, and reduced trust and use of electronic government services; and spyware can capture and release sensitive data, make unauthorized changes, and decrease system performance. Federal law and policies call for critical infrastructure protection (CIP) activities that are intended to enhance the cyber and physical security of both the public and private infrastructures that are essential to national security, national economic security, and national public health and safety. Federal policy designates certain federal agencies as lead federal points of contact for the critical infrastructure sectors and assigns them responsibility for infrastructure protection activities in their assigned sectors and for coordination with other relevant federal agencies, state and local governments, and the private sector to carry out related responsibilities (see app. 1). In addition, federal policy establishes the Department of Homeland Security (DHS) as the focal point for the security of cyberspace--including analysis, warning, information sharing, vulnerability reduction, mitigation, and recovery efforts for public and private critical infrastructure information systems. To accomplish this mission, DHS is to work with other federal agencies, state and local governments, and the private sector. Among the many CIP responsibilities established for DHS and identified in federal law and policy are 13 key cybersecurity-related responsibilities. These include general CIP responsibilities that have a cyber element (such as developing national plans, building partnerships, and improving information sharing) as well as responsibilities that relate to the five priorities established by the National Strategy to Secure Cyberspace. The five priorities are (1) developing and enhancing national cyber analysis and warning, (2) reducing cyberspace threats and vulnerabilities, (3) promoting awareness of and training in security issues, (4) securing governments' cyberspace, and (5) strengthening national security and international cyberspace security cooperation. Table 1 provides a description of each of these responsibilities. In June 2003, DHS established the National Cyber Security Division (NCSD), under its Information Analysis and Infrastructure Protection Directorate, to serve as a national focal point for addressing cybersecurity issues and to coordinate implementation of the cybersecurity strategy. NCSD also serves as the government lead on a public/private partnership supporting the U.S. Computer Emergency Response Team (US-CERT) and as the lead for federal government incident response. NCSD is headed by the Office of the Director and includes a cybersecurity partnership program as well as four branches: US-CERT Operations, Law Enforcement and Intelligence, Outreach and Awareness, and Strategic Initiatives. DHS has initiated efforts that begin to address each of its 13 key responsibilities for cybersecurity; however, the extent of progress varies among these responsibilities, and more work remains to be done on each. For example, DHS (1) has recently issued an interim plan for infrastructure protection that includes cybersecurity plans, (2) is supporting a national cyber analysis and warning capability through its role in US-CERT, and (3) has established forums to build greater trust and to encourage information sharing among federal officials with information security responsibilities and among various law enforcement entities. However, DHS has not yet developed a national cyber threat assessment and sector vulnerability assessments--or the identification of cross-sector interdependencies--that are called for in the cyberspace strategy. The importance of such assessments is illustrated in our recent reports on vulnerabilities in infrastructure control systems and in wireless networks. Further, the department has not yet developed and exercised government and government/industry contingency recovery plans for cybersecurity, including a plan for recovering key Internet functions. The department also continues to have difficulties in developing partnerships, as called for in federal policy, with other federal agencies, state and local governments, and the private sector. Without such partnerships, it is difficult to develop the trusted, two-way information sharing that is essential to improving homeland security. Table 2 provides an overview of the steps that DHS has taken related to each of its 13 key responsibilities and identifies the steps that remain. DHS faces a number of challenges that have impeded its ability to fulfill its cyber CIP responsibilities. Key challenges include achieving organizational stability, gaining organizational authority, overcoming hiring and contracting issues, increasing awareness about cybersecurity roles and capabilities, establishing effective partnerships with stakeholders (other federal, state, and local governments and the private sector), achieving two-way information sharing with these stakeholders, and providing and demonstrating the value DHS can provide. Organizational stability: Over the last year, multiple senior DHS cybersecurity officials--including the NCSD Director, the Deputy Director responsible for Outreach and Awareness, and the Director of the US-CERT Control Systems Security Center, the Under Secretary for the Information Analysis and Infrastructure Protection Directorate and the Assistant Secretary responsible for the Information Protection Office--have left the department. Infrastructure sector officials stated that the lack of stable leadership has diminished NCSD's ability to maintain trusted relationships with its infrastructure partners and has hindered its ability to adequately plan and execute activities. According to one private-sector representative, the importance of organizational stability in fostering strong partnerships cannot be over emphasized. Organizational authority: NCSD does not have the organizational authority it needs to effectively serve as a national focal point for cybersecurity. Accordingly, its officials lack the authority to represent and commit DHS to efforts with the private sector. Infrastructure and cybersecurity officials, including the chairman of the sector coordinators and representatives of the cybersecurity industry, have expressed concern that the cybersecurity division's relatively low position within the DHS organization hinders its ability to accomplish cybersecurity-related goals. NCSD's lack of authority has led to some missteps, including DHS's cancellation of an important cyber event without explanation and its taking almost a year to issue formal responses to private sector recommendations that resulted from selected National Cyber Security Summit task forces--even though responses were drafted within months. A congressional subcommittee also expressed concern that DHS's cybersecurity office lacks the authority to effectively fulfill its role. In 2004 and again in 2005, the subcommittee proposed legislation to elevate the head of the cybersecurity office to an assistant secretary position. Among other benefits, the subcommittee reported that such a change could provide more focus and authority for DHS's cybersecurity mission, allow higher level input into national policy decisions, and provide a single visible point of contact within the federal government for improving interactions with the private sector. To try to address these concerns, DHS recently announced that it would elevate responsibility for cybersecurity to an assistant secretary position. Hiring and contracting: Ineffective DHS management processes have impeded the department's ability to hire employees and maintain contracts. We recently reported that since DHS's inception, its leadership has provided a foundation for maintaining critical operations while it undergoes transformation. However, in managing its transformation, we noted that the department still needed to overcome a number of significant challenges, including addressing systemic problems in human capital and acquisition systems. Federal and nonfederal officials expressed concerns about its hiring and contracting processes. For example, an NCSD official reported that the division has had difficulty in hiring personnel to fill vacant positions. These officials stated that once they found qualified candidates, some candidates decided not to apply and another one withdrew his acceptance because he felt that DHS's hiring process had taken too long. In addition, a cybersecurity division official stated that there had been times when DHS did not renew NCSD contracts in a timely manner, requiring that key contractors work without pay until approvals could be completed and payments could be made. In other cases, NCSD was denied services from a vendor because the department had repeatedly failed to pay this vendor for its services. External stakeholders, including an ISAC representative, also noted that NCSD is hampered by how long it takes DHS to award a contract. Awareness of DHS roles and capabilities: Many infrastructure stakeholders are not yet aware of DHS's cybersecurity roles and capabilities. Department of Energy critical infrastructure officials stated that the roles and responsibilities of DHS and the sector- specific agencies need to be better clarified in order to improve coordination. In addition, during a regional cyber exercise, private- sector and state and local government officials reported that the mission of NCSD and the capabilities that DHS could provide during a serious cyber-threat were not clear to them. NCSD's manager of cyber analysis and warning operations acknowledged that the organization has not done an adequate job reaching out to the private sector regarding the department's role and capabilities. Effective partnerships: NCSD is responsible for leveraging the assets of key stakeholders, including other federal, state, and local governments and the private sector, in order to facilitate effective protection of cyber assets. The ability to develop partnerships greatly enhances the agency's ability to identify, assess, and reduce cyber threats and vulnerabilities, establish strategic analytical capabilities, provide incident response, enhance government cybersecurity, and improve international efforts. According to one infrastructure sector representative, effective partnerships require building relationships with mutually developed goals; shared benefits and responsibilities; and tangible, measurable results. However, this individual reported that DHS has not typically adopted these principles in pursuing partnerships with the private sector, which dramatically diminishes cybersecurity gains that government and industry could otherwise achieve. For example, it has often informed the infrastructure sectors about government initiatives or sought input after most key decisions have been made. Also, the department has not demonstrated that it recognizes the value of leveraging existing private sector mechanisms, such as information-sharing entities and processes that are already in place and working. In addition, the instability of NCSD's leadership positions to date has led to problems in developing partnerships. Representatives from two ISACs reported that turnover at the cybersecurity division has hindered partnership efforts. Additionally, IT sector representatives stated that NCSD needs continuity of leadership, regular communications, and trusted policies and procedures in order to build the partnerships that will allow the private sector to share information. Information sharing: We recently identified information sharing in support of homeland security as a high-risk area, and we noted that establishing an effective two-way exchange of information to help detect, prevent, and mitigate potential terrorist attacks requires an extraordinary level of cooperation and perseverance among federal, state, and local governments and the private sector. However, such effective communications are not yet in place in support of our nation's cybersecurity. Representatives from critical infrastructure sectors stated that entities within their respective sectors still do not openly share cybersecurity information with DHS. As we have reported in the past, much of the concern is that the potential release of sensitive information could increase the threat to an entity. In addition, sector representatives stated that when information is shared, it is not clear whether the information will be shared with other entities--such as other federal entities, state and local entities, law enforcement, or various regulators--and how it will be used or protected from disclosure. Representatives from the banking and finance sector stated that the protection provided by the Critical Infrastructure Information Act and the subsequently established Protected Critical Infrastructure Information Program is not clear and has not overcome the trust barrier. Sector representatives have expressed concerns that DHS is not effectively communicating information to them. According to one infrastructure representative, DHS has not matched private sector efforts to share valuable information with a corresponding level of trusted information sharing. An official from the water sector noted that when representatives called DHS to inquire about a potential terrorist threat, they were told that DHS could not share any information and that they should "watch the news." Providing value: According to sector representatives, even when organizations within their sectors have shared information with NCSD, the entities do not consistently receive useful information in return. They noted that without a clear benefit, they are unlikely to pursue further information sharing with DHS. Federal officials also noted problems in identifying the value that DHS provides. According to Department of Energy officials, the department does not always provide analysis or reports based on the information that agencies provide. Federal and nonfederal officials also stated that most of US-CERT's alerts have not been useful because they lack essential details or are based on already available information. Further, Treasury officials stated that US-CERT needed to provide relevant and timely feedback regarding the incidents that are reported to it. Clearly, these challenges are not mutually exclusive. That is, addressing challenges in organizational stability and authority will help NCSD build the credibility it needs in order to establish effective partnerships and achieve two-way information sharing. Similarly, effective partnerships and ongoing information sharing with its stakeholders will allow DHS to better demonstrate the value it can add. DHS has identified steps in its strategic plan for cybersecurity that can begin to address these challenges. Specifically, it has established goals and plans for improving human capital management that should help stabilize the organization. Further, the department has developed plans for communicating with stakeholders that are intended to increase awareness of its roles and capabilities and to encourage information sharing. Also, it has established plans for developing effective partnerships and improving analytical and watch and warning capabilities that could help build partnerships and begin to demonstrate added value. However, until it begins to address these underlying challenges, DHS cannot achieve significant results in coordinating cybersecurity activities, and our nation will lack the effective focal point it needs to better ensure the security of cyberspace for public and private critical infrastructure systems. Over the last several years, we have made a series of recommendations to enhance the cybersecurity of critical infrastructures, focusing on the need to (1) develop a strategic analysis and warning capability for identifying potential cyberattacks, (2) protect infrastructure control systems, (3) enhance public/private information sharing, and (4) conduct important threat and vulnerability assessments and address other challenges to effective cybersecurity. These recommendations are summarized below. Strategic Analysis and Warnings: In 2001, we reported on the analysis and warnings efforts within DHS's predecessor, the National Infrastructure Protection Center, and identified several challenges that were impeding the development of an effective strategic analysis and warning capability. We reported that a generally accepted methodology for analyzing strategic cyber-based threats did not exist. Specifically, there was no standard terminology, no standard set of factors to consider, and no established thresholds for determining the sophistication of attack techniques. We also reported that the Center did not have the industry-specific data on factors such as critical systems components, known vulnerabilities, and interdependencies. We therefore recommended that the responsible executive-branch officials and agencies establish a capability for strategic analysis of computer-based threats, including developing a methodology, acquiring expertise, and obtaining infrastructure data. However, officials have taken little action to establish this capability, and therefore our recommendations remain open today. Control Systems: In March 2004, we reported that several factors--including the adoption of standardized technologies with known vulnerabilities and the increased connectivity of control systems to other systems--contributed to an escalation of the risk of cyber-attacks against control systems. We recommended that DHS develop and implement a strategy for coordinating with the private sector and with other government agencies to improve control system security, including an approach for coordinating the various ongoing efforts to secure control systems. DHS concurred with our recommendation and, in December 2004, issued a high- level national strategy for control systems security. This strategy includes, among other things, goals to create a capability to respond to attacks on control systems and to mitigate vulnerabilities, bridge industry and government efforts, and develop control systems security awareness. However, the strategy does not yet include underlying details and milestones for completing activities. Information Sharing: In July 2004, we recommended actions to improve the effectiveness of DHS's information-sharing efforts. We recommended that officials within the Information Analysis and Infrastructure Protection Directorate (1) proceed with and establish milestones for developing an information-sharing plan and (2) develop appropriate DHS policies and procedures for interacting with ISACs, sector coordinators (groups or individuals designated to represent their respective infrastructure sectors' CIP activities), and sector-specific agencies and for coordination and information sharing within the Information Analysis and Infrastructure Protection Directorate and other DHS components. These recommendations remain open today. Moreover, we recently designated establishing appropriate and effective information- sharing mechanisms to improve homeland security as a new high- risk area. We reported that the ability to share security-related information can unify the efforts of federal, state, and local government agencies and the private sector in preventing or minimizing terrorist attacks. Threat and Vulnerability Assessments and Other Challenges: Most recently, in May 2005, we reported that while DHS has made progress in planning and coordinating efforts to enhance cybersecurity, much more work remains to be done to fulfill its basic responsibilities--including conducting important threat and vulnerability assessments and recovery plans. Further, we reported that DHS faces key challenges in building its credibility as a stable, authoritative, and capable organization and in leveraging private/public assets and information in order to clearly demonstrate the value it can provide. We made recommendations to strengthen the department's ability to implement key cybersecurity responsibilities by prioritizing and completing critical activities and resolving underlying challenges. We recently met with DHS's acting director for cybersecurity who told us that DHS agreed with our findings and has initiated plans to address our recommendations. He acknowledged that DHS has not adequately leveraged their public and private stakeholders in a prioritized manner and it plans to begin its prioritized approach by focusing stakeholders on information sharing, preparedness, and recovery. He also added that NCSD is attempting to prioritize its major activities consistent with the secretary's vision of risk management and the National Infrastructure Protection Plan approach. In summary, as our nation has become increasingly dependent on timely, reliable information, it has also become increasingly vulnerable to attacks on the information infrastructure that supports the nation's critical infrastructures (including the energy, banking and finance, transportation, telecommunications, and drinking water infrastructures). Federal law and policy acknowledge this by establishing DHS as the focal point for coordinating cybersecurity plans and initiatives with other federal agencies, state and local governments, and private industry. DHS has made progress in planning and coordinating efforts to enhance cybersecurity, but much more work remains to be done for the department to fulfill its basic responsibilities--including conducting important threat and vulnerability assessments and recovery plans. As DHS strives to fulfill its mission, it faces key challenges in building its credibility as a stable, authoritative, and capable organization and in leveraging private and public assets and information in order to clearly demonstrate the value it can provide. Until it overcomes the many challenges it faces and completes critical activities, DHS cannot effectively function as the cybersecurity focal point intended by law and national policy. As such, there is increased risk that large portions of our national infrastructure are either unaware of key areas of cybersecurity risks or unprepared to effectively address cyber emergencies. Over the last several years, we have made a series of recommendations to enhance the cybersecurity of critical infrastructures. These include (1) developing a strategic analysis and warning capability for identifying potential cyberattacks, (2) protecting infrastructure control systems, (3) enhancing public/private information sharing, and (4) conducting important threat and vulnerability assessments and address other challenges to effective cybersecurity. Effectively implementing these recommendations could greatly improve our nation's cybersecurity posture. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or members of the subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact me at (202) 512-9286 or by e-mail at [email protected]. Other key contributors to this report include Joanne Fiorino, Michael Gilmore, Barbarol James, Colleen Phillips, and Nik Rapelje. Provides for the fundamental need for food. The infrastructure includes supply chains for feed and crop production. Provides the financial infrastructure of the nation. This sector consists of commercial banks, insurance companies, mutual funds, government- sponsored enterprises, pension funds, and other financial institutions that carry out transactions, including clearing and settlement. Transforms natural raw materials into commonly used products benefiting society's health, safety, and productivity. The chemical industry produces more than 70,000 products that are essential to automobiles, pharmaceuticals, food supply, electronics, water treatment, health, construction, and other necessities. Includes prominent commercial centers, office buildings, sports stadiums, theme parks, and other sites where large numbers of people congregate to pursue business activities, conduct personal commercial transactions, or enjoy recreational pastimes. Comprises approximately 80,000 dam facilities, including larger and nationally symbolic dams that are major components of other critical infrastructures that provide electricity and water. Supplies the military with the means to protect the nation by producing weapons, aircraft, and ships and providing essential services, including information technology and supply and maintenance. Sanitizes the water supply through about 170,000 public water systems. These systems depend on reservoirs, dams, wells, treatment facilities, pumping stations, and transmission lines. Saves lives and property from accidents and disaster. This sector includes fire, rescue, emergency medical services, and law enforcement organizations. Provides the electric power used by all sectors, including critical infrastructures, and the refining, storage, and distribution of oil and gas. The sector is divided into electricity and oil and natural gas. Carries out the post-harvesting of the food supply, including processing and retail sales. Ensures national security and freedom and administers key public functions. Includes the buildings owned and leased by the federal government for use by federal entities. Provides communications and processes to meet the needs of businesses and government. Includes key assets that are symbolically equated with traditional American values and institutions or U.S. political and economic power. Includes 104 commercial nuclear reactors; research and test nuclear reactors; nuclear materials; and the transportation, storage, and disposal of nuclear materials and waste. Delivers private and commercial letters, packages, and bulk assets. The U.S. Postal Service and other carriers provide the services of this sector. Mitigates the risk of disasters and attacks and also provides recovery assistance if an attack occurs. The sector consists of health departments, clinics, and hospitals. Enables movement of people and of assets that are vital to our economy, mobility, and security via aviation, ships, rail, pipelines, highways, trucks, buses, and mass transit. 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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Increasing computer interconnectivity has revolutionized the way that our government, our nation, and much of the world communicate and conduct business. While the benefits have been enormous, this widespread interconnectivity also poses significant risks to our nation's computer systems and, more importantly, to the critical operations and infrastructures they support. The Homeland Security Act of 2002 and federal policy established the Department of Homeland Security (DHS) as the focal point for coordinating activities to protect the computer systems that support our nation's critical infrastructures. GAO was asked to summarize previous work, focusing on (1) DHS's responsibilities for cybersecurity-related critical infrastructure protection (CIP), (2) the status of the department's efforts to fulfill these responsibilities, (3) the challenges it faces in fulfilling its cybersecurity responsibilities, and (4) recommendations GAO has made to improve cybersecurity of our nation's critical infrastructure. As the focal point for CIP, the Department of Homeland Security (DHS) has many cybersecurity-related roles and responsibilities that GAO identified in law and policy. DHS established the National Cyber Security Division to take the lead in addressing the cybersecurity of critical infrastructures. While DHS has initiated multiple efforts to fulfill its responsibilities, it has not fully addressed any of the 13 responsibilities, and much work remains ahead. For example, the department established the United States Computer Emergency Readiness Team as a public/private partnership to make cybersecurity a coordinated national effort, and it established forums to build greater trust and information sharing among federal officials with information security responsibilities and law enforcement entities. However, DHS has not yet developed national cyber threat and vulnerability assessments or government/industry contingency recovery plans for cybersecurity, including a plan for recovering key Internet functions. DHS faces a number of challenges that have impeded its ability to fulfill its cybersecurity-related CIP responsibilities. These key challenges include achieving organizational stability, increasing awareness about cybersecurity roles and capabilities, establishing effective partnerships with stakeholders, and achieving two-way information sharing with these stakeholders. In its strategic plan for cybersecurity, DHS identifies steps that can begin to address the challenges. However, until it confronts and resolves these underlying challenges and implements its plans, DHS will have difficulty achieving significant results in strengthening the cybersecurity of our critical infrastructures. In recent years, GAO has made a series of recommendations to enhance the cybersecurity of critical infrastructures that if effectively implemented could greatly improve our nation's cybersecurity posture.
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FHWA provides funding to the states for roadway construction and improvement projects through various programs collectively known as the federal-aid highway program. Most highway program funds are distributed to the states through annual apportionments according to statutory formulas; once apportioned, these funds are generally available to each state for eligible projects. The responsibility for choosing projects to fund generally rests with state departments of transportation and local planning organizations. The states have considerable discretion in selecting specific highway projects and in determining how to allocate available federal funds among the various projects they have selected. For example, section 145 of title 23 of the United States Code describes the federal-aid highway program as a federally assisted state program and provides that the federal authorization of funds, as well as the availability of federal funds for expenditure, "shall in no way infringe on the sovereign right of the states to determine which projects shall be federally financed." While FHWA approves state transportation plans, environmental impact assessments, and the acquisition of property for highway projects, its role in approving the design and construction of projects varies. Relatively few projects are subject to "full" oversight, in which FHWA prescribes design and construction standards, approves design plans and estimates, approves contract awards, inspects construction progress, and renders final acceptance on projects when they are completed. Under TEA-21, FHWA exercises full oversight only of certain high-cost Interstate system projects. For other federally assisted projects, there are two options. First, for a project that is not located on the Interstate system but is part of the National Highway System, a state may assume responsibility for overseeing the project's design and construction unless the state or FHWA determines that this responsibility is not appropriate for the state. Second, for a project that is not part of the National Highway System, the state is required to assume responsibility for overseeing the project's design and construction unless the state determines that this responsibility is not appropriate for it. Under both options, TEA-21 requires FHWA and each state to enter into an agreement documenting the types of projects for which the state will assume oversight responsibilities. A major highway or bridge construction or repair project usually has four stages: (1) planning, (2) environmental review, (3) design and property acquisition, and (4) construction. The state's activities and FHWA's corresponding approval actions are shown in figure 1. In TEA-21, Congress required states to submit annual finance plans to DOT for highway and bridge projects estimated to cost $1 billion or more. Congress further required each finance plan to be based on detailed estimates of the costs to complete the project and on reasonable assumptions about future increases in such costs. Our work has raised issues concerning the cost and oversight of major highway and bridge projects, including the following: Cost growth has occurred on many major highway and bridge projects. For example, on 23 of 30 projects initially expected to cost over $100 million, our 1997 report identified increases ranging from 2 to 211 percent--costs on about half these projects increased 25 percent or more. In addition, the DOT Inspector General has recently identified cost increases on major projects such as the Wilson Bridge, Springfield Interchange, and Central Artery/Tunnel projects. As I testified in 2002, reviews by state audit and evaluation agencies have also highlighted concerns about the cost and management of major highway and bridge programs. For example in January 2001, Virginia's Joint Legislative Audit and Review Commission found that final project costs on Virginia Department of Transportation projects were well above their cost estimates and estimated that the state's 6-year, $9 billion transportation development plan understated the costs of projects by up to $3.5 billion. The commission attributed these problems to several factors, including not adjusting estimates for inflation, expanding the scope of projects, not consistently including amounts for contingencies, and committing design errors. Although cost growth has occurred on many major highway and bridge projects, overall information on the amount of and reasons for cost increases on major projects is generally not available because neither FHWA nor state highway departments track this information over the life of projects. Congressional efforts to obtain such information have met with limited success. For example, in 2000 the former Chairman of this subcommittee asked FHWA to provide information on how many major federal-aid highway projects had experienced large cost overruns. Because FHWA lacked a management information system to track this information, officials manually reviewed records for over 1,500 projects authorized over a 4-year period. FHWA's information, however, measured only the increases in costs that occurred after the projects were fully designed. Thus, cost increases that occurred during the design of a project--where we have reported that much of the cost growth occurs--were not reflected in FHWA's data. In contrast to the federal-aid highway program, the Office of Management and Budget requires federal agencies, for acquisitions of major capital assets, to prepare baseline cost and schedule estimates and to track and report the acquisitions' cost performance. These requirements apply to programs managed by and acquisitions made by federal agencies, but they do not apply to the federal-aid highway program, a federally assisted state program. While many factors can cause costs to increase, we have found, on projects we have reviewed, that costs increased, in part, because initial cost estimates were not reliable predictors of the total costs or financing needs of projects. Rather, these estimates were generally developed for the environmental review--whose purpose was to compare project alternatives, not to develop reliable cost estimates. In addition, each state used its own methods to develop its estimates, and the estimates included different types of costs, since FHWA had no standard requirements for preparing cost estimates. For example, one state we visited for our 1997 report included the costs of designing projects in its estimates, while two other states did not. We also found that costs increased on projects in the states we visited because (1) initial estimates were modified to reflect more detailed plans and specifications as projects were designed and (2) the projects' costs were affected by, among other things, inflation and changes in scope to accommodate economic development over time. In 1997, we reported that cost containment was not an explicit statutory or regulatory goal of FHWA's full oversight. On projects where FHWA exercised full oversight, it focused primarily on helping to ensure that the applicable safety and quality standards for the design and construction of highway projects were met. According to FHWA officials, controlling costs was not a goal of their oversight and FHWA had no mandate in law to encourage or require practices to contain the costs of major highway projects. While FHWA influenced the cost-effectiveness of projects when it reviewed and approved plans for their design and construction, we found it had done little to ensure that cost containment was an integral part of the states' project management. Finally, we have noted that FHWA's oversight and project approval process consists of a series of incremental actions that occur over the years required to plan, design, and build a project. In many instances, states construct a major project as a series of smaller projects, and FHWA approves the estimated cost of each smaller project when it is ready for construction, rather than agreeing to the total cost of the major project at the outset. In some instances, by the time FHWA approves the cost of a major project, a public investment decision may, in effect, already have been made because substantial funds have already been spent on designing the project and acquiring property, and many of the increases in the project's estimated costs have already occurred. Since 1998, FHWA has taken a number of steps to improve the management and oversight of major projects. FHWA implemented TEA- 21's requirement that states develop an annual finance plan for any highway or bridge project estimated to cost $1 billion or more. Specifically, FHWA developed guidance that requires state finance plans to include a total cost estimate for the project, adjusted for inflation and annually updated; estimates about future cost increases; a schedule for completing the project; a description of construction financing sources and revenues; a cash flow analysis; and a discussion of other factors, such as how the project will affect the rest of the state's highway program. As of May 2003, FHWA had approved finance plans for 10 federal-aid highway projects and expected finance plans to be prepared for 5 additional projects at the conclusion of those projects' environmental review phase. In addition, FHWA established a major projects team that currently tracks and reports each month on these 15 projects, and has assigned--or has requested funding to assign--a full-time manager to each project to provide oversight. These oversight managers are expected to monitor their project's cost and schedule, meet periodically with project officials, assist in resolving issues and problems, and help to bring "lessons learned" on their projects to other federally assisted highway projects. As I testified in 2002, there are indications that the finance plan requirement has produced positive results. For example, in Massachusetts, projections of funding shortfalls identified in developing the Central Artery/Tunnel project's finance plan helped motivate state officials to identify new sources of state financing and implement measures to ensure that funding was adequate to meet expenses for the project. However, some major corridor projects will not be covered by the requirement. FHWA has identified 22 corridor projects that will be built in "usable segments"--separate projects costing less than $1 billion each--and therefore will not require finance plans. According to FHWA officials, states plan these long-term projects in segments because it is very difficult for them to financially plan for projects extending many years into the future. Nevertheless, these major projects represent a large investment in highway infrastructure. For example, planned corridor projects that will not require finance plans total almost $5 billion in Arkansas, about $12.3 billion in Texas, about $5.3 billion in Virginia, and about $4.2 billion in West Virginia. In addition, the $1 billion threshold does not consider the impact of a major highway and bridge project on a state's highway program. In Vermont, for instance, a $300 million project would represent a larger portion of the state's federal highway program funding than a $1 billion dollar project would represent in California. In addition to implementing TEA-21's requirements, FHWA convened a task force on the stewardship and oversight of federal-aid highway projects and, in June 2001, issued a policy memorandum to improve its oversight. The memorandum directed FHWA's field offices to conduct risk assessments within their states to identify areas of weakness, set priorities for improvement, and work with the states to meet those priorities. Soon afterwards, FHWA convened a review team to examine its field offices' activities, and in March 2003, it published an internal "best practices" guide to assist the field offices in conducting risk assessments. FHWA also began an effort during 2003 to identify strategies for assessing and managing risks and for allocating resources agencywide. FHWA's policy memorandum further sought to address the task force's conclusion that changes in the agency's oversight role since 1991 had resulted in conflicting interpretations of the agency's role in overseeing projects. The task force found that because many projects were classified as "exempt" from FHWA's oversight, some of the field offices were taking a "hands off" approach to these projects. The policy stipulates that while states have responsibility for the design and construction of many projects, FHWA is ultimately accountable for the efficient and effective management of all projects financed with federal funds and for ensuring compliance with applicable laws, regulations, and policies. While FHWA has been moving forward to incorporate risk-based management into its oversight through the use of risk assessments, it has not yet developed goals or measurable outcomes linking its oversight activities to the business goals in its performance plan, nor has it developed a monitoring plan as its task force recommended in 2001. As I testified in May 2002, until FHWA takes these actions, it will be limited in its ability to judge the success of its efforts or to know whether the conflicting interpretations of its roles discussed above have been resolved. Finally, FHWA has taken actions to respond to a DOT task force report on the management and oversight of major projects. In December 2000, this task force concluded that a significant effort was needed to improve the oversight of major transportation projects--including highway and bridge projects. The task force made 24 recommendations, including recommendations to establish an executive council to oversee major projects, institute regular reporting requirements, and establish a professional cadre of project managers with required core competencies, training, and credentials. The task force's recommendations were not formally implemented for several reasons, including turnover in key positions and the need to reevaluate policy following the change in administrations in January 2001, and higher priorities brought on by the events of September 11, 2001. However, FHWA believes it has been responsive to the task force's recommendations by establishing a major projects oversight team, designating an oversight manager for each project, and, most recently, developing and publishing core competencies for managers overseeing major projects. In addition, 7 of the task force's 24 recommendations would have required legislation. For example, the task force recommended establishing a separate funding category for preliminary engineering and design--those activities that generally accomplish the first 20 to 35 percent of a project's design. The task force concluded that a separate funding category would allow a new decision point to be established. Initial design work could proceed far enough so that a higher-quality, more reliable cost estimate would be available for decisionmakers to consider before deciding whether to complete the design and construction of a major project--and before a substantial federal investment had already been made. In my testimony of May 2002, I presented options for enhancing FHWA's role in overseeing the costs of major highway and bridge projects, should Congress, in reauthorizing TEA-21, determine that such action is needed and appropriate. Each of these options would be difficult and possibly costly; each represents a commitment of additional resources that must be weighed against the option's potential benefits. Adopting any of these options would require Congress to determine the appropriate federal role--balancing the states' sovereign right to select its projects and desire for flexibility and more autonomy with the federal government's interest in ensuring that billions of federal dollars are spent efficiently and effectively. These options include the following: Have FHWA develop and maintain a management information system on the cost performance of selected major highway and bridge projects, including changes in estimated costs over time and the reasons for such changes. While Congress has expressed concern about cost growth on major projects, it has had little success obtaining timely, complete, and accurate information about the extent of and the reasons for this cost growth on projects. Such information could help define the scope of the problem with major projects and provide insights needed to fashion appropriate solutions. Improve the quality of initial cost estimates by having states develop--and having FHWA assist the states in developing--more uniform and reliable total cost estimates at an appropriate time early in the development of major projects. This option could help policymakers understand the extent of the proposed federal, state, and local investment in these projects, serve as a baseline for measuring cost performance over time, and assist program managers in reliably estimating financing requirements. Have states track the progress of projects against their initial baseline cost estimates. Expanding the federal government's practice of having its own agencies track the progress of the acquisition of major capital assets against baseline estimates to the federally assisted highway program could enhance accountability and potentially improve the management of major projects by providing managers with real-time information for identifying problems early, and for making decisions about project changes that could affect costs. Tracking progress could also help identify common problems and provide a better basis for estimating costs in the future. Establish performance goals for containing costs and implement strategies for doing so as projects move through their design and construction phases. Such performance goals could provide financial or other incentives to the states for meeting agreed-upon goals. Performance provisions such as these have been established in other federally assisted grant programs and have also been proposed for use in the federal-aid highway program. Requiring or encouraging the use of goals and strategies could also improve accountability and make cost containment an integral part of how states manage projects over time. Expand FHWA's finance plan requirement to other projects. While Congress has decided that enhanced federal oversight of the costs and funding of projects estimated to cost over $1 billion is important, projects of importance for reasons other than cost may not, as discussed earlier, receive such oversight. Should Congress believe such an action would be beneficial, additional criteria for defining projects would need to be incorporated into FHWA's structure for overseeing the costs and financing of major projects. Clarify FHWA's role in overseeing and reviewing the costs and management of major projects. Changes in FHWA's oversight role since 1991 have created conflicting interpretations about FHWA's role, and our work has found that FHWA questions its authority to encourage or require practices to contain the costs of major highway projects. Should uncertainties about FHWA's role and authority continue, another option would be to resolve the uncertainties through reauthorization language. Establish a process for the federal approval of major projects. This option, which would require federal approval of a major project at the outset, including its cost estimate and finance plan, would be the most far- reaching and the most difficult option to implement. Potential models for such a process include the full funding grant agreement process that the Federal Transit Administration uses for major transit projects, and the DOT task force's December 2000 recommendation calling for the establishment of a separate funding category for initial design work and a new decision point for advancing projects. Establishing such a federal approval process could have the potential to improve the reliability of the initial baseline estimates and the cost performance of major projects over time. For further information on this statement, please contact JayEtta Z. Hecker ([email protected]) or Steve Cohen ([email protected]). Alternatively, they may be reached at (202) 512-2834. Transportation Infrastructure: Cost and Oversight Issues on Major Highway and Bridge Projects. GAO-02-702T. Washington, D.C.: May 1, 2002. Surface Infrastructure: Costs, Financing, and Schedules for Large-Dollar Transportation Projects. GAO/RCED-98-64. Washington, D.C.: February 12, 1998. DOT's Budget: Management and Performance Issues Facing the Department in Fiscal Year 1999. GAO/T-RCED/AIMD-98-76. Washington, D.C.: February 12, 1998. Transportation Infrastructure: Managing the Costs of Large-Dollar Highway Projects. GAO/RCED-97-27. Washington, D.C.: February 27, 1997. Transportation Infrastructure: Progress on and Challenges to Central Artery/Tunnel Project's Costs and Financing. GAO/RCED-97-170. Washington, D.C.: July 17, 1997. Transportation Infrastructure: Central Artery/Tunnel Project Faces Financial Uncertainties. GAO/RCED-96-1313. Washington, D.C.: May 10, 1996. Central Artery/Tunnel Project. GAO/RCED-95-213R. Washington, D.C.: June 2, 1995. 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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Improving the oversight and controlling the costs of major highway and bridge projects is important for the federal government, which often pays 80 percent of these projects' costs. Widespread consensus exists on the need to fund such projects, given the doubling of freight traffic and worsening congestion projected over the next 20 years, yet growing competition for limited federal and state funding dictates that major projects be managed efficiently and cost effectively. The Federal Highway Administration (FHWA) provides funding to the states for highway and bridge projects through the federal-aid highway program. This funding is apportioned to the states, and state departments of transportation choose eligible projects for funding. FHWA provides oversight to varying degrees, and, under the Transportation Equity Act for the 21st Century (TEA-21), FHWA and each state enter into an agreement documenting the types of projects the state will oversee. This statement for the record summarizes cost and oversight issues raised in reports and testimonies GAO has issued since 1995 on major highway and bridge projects and describes options that GAO has identified to enhance federal oversight of these projects, should Congress determine that such action is needed and appropriate. GAO and others have reported that cost growth has occurred on major highway and bridge projects; however, overall information on the amount of and reasons for cost increases is generally not available because neither FHWA nor state highway departments track this information for entire projects. GAO has found that costs grow, in part, because initial cost estimates, which are generally developed to compare project alternatives during a required environmental review phase, are not reliable predictors of projects' total costs. In addition, FHWA approves the estimated costs of major projects in phases, rather than agreeing to the total costs at the outset. By the time FHWA approves the total cost of a major project, a public investment decision might, in effect, already have been made because substantial funds could already have been spent on designing the project and acquiring property. FHWA's implementation of a TEA-21 requirement that states develop annual finance plans for major projects estimated to cost $1 billion or more has improved the oversight of some major projects, and FHWA is incorporating more risk assessment in its day-to-day oversight activities. Should Congress determine that enhancing federal oversight of major highway and bridge projects is needed and appropriate, GAO has identified options, including improving information on the cost performance of selected major projects, improving the quality of initial cost estimates, and enhancing and clarifying FHWA's role in reviewing and approving major projects. Adopting any of these options would require balancing the states' sovereign right to select projects and desire for flexibility and more autonomy with the federal government's interest in ensuring that billions of federal dollars are spent efficiently and effectively. In addition, the additional costs of each of these options would need to be weighed against its potential benefits.
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The Arms Export Control Act authorizes the President to control the export and import of defense articles and defense services. The statutory authority of the President to promulgate regulations with respect to exports of defense articles and defense services and designate those items to be considered defense articles and defense services for export control purposes has been delegated to the Secretary of State. State administers the arms export control system through requirements contained in the International Traffic in Arms Regulations (ITAR) and designates the articles and services deemed to be defense articles and defense services. These designations are made by State, with the concurrence of DOD, and constitute the United States Munitions List (USML), which comprises 21 major categories--for example Aircraft, Spacecraft, Military Electronics, and Guns and Armament--and more detailed subcategories. The ITAR also designates defense services subject to export controls, including furnishing assistance, technical data, or training to foreign entities. As defense exports are part of U.S. foreign policy, Congress requires reports to enable its oversight, including annual reports under the Foreign Assistance Act of 1961, as amended, Section 655 on defense exports, commonly referred to as Section 655 reports. U.S. defense articles and services generally can be exported to foreign entities in two ways--by FMS or DCS. Under FMS, the U.S. government procures defense articles and services on behalf of the foreign entity. Countries approved to participate in this program may obtain defense articles and services by paying with their own funds or with funds provided through U.S. government-sponsored assistance programs. While State has overall regulatory responsibility for the FMS program and approves the export of defense articles and services, DOD's DSCA directs the execution of the program, and the individual military departments implement the sale and export process. DOD bills foreign entities and tracks the export of articles and services through its financial systems. For FMS, an approved Letter of Offer and Acceptance authorizes the export. Under DCS, U.S. companies obtain permanent export licenses generally valid for 4 years from State's DDTC, which authorizes the export of defense articles and services directly to foreign entities. State also licenses defense articles for temporary export--when the article will be exported for a period of less than 4 years and will be returned to the United States without transfer of title. While most defense articles and services require a license for export, the ITAR contains numerous exemptions from licensing requirements that have defined conditions and limitations. For both FMS and DCS, the actual export of defense articles or services may occur years after the authorization--or may not take place at all. In addition to State and DOD, other U.S. government entities are involved with oversight of defense exports and management of export data. CBP oversees exports of defense articles leaving the country for compliance with export control laws and regulations and collects information on those exports through AES. AES is jointly managed and operated by CBP and Census, and the data it collects are used by State and other federal agencies. It is the central point through which export data required by multiple agencies are filed electronically to CBP. Foreign Trade Regulations and the ITAR require AES filings for all articles on the USML that are sent, taken, or transported out of the United States, and the exporter must provide either a license number or a citation of the license exemption. The data obtained through AES are maintained by Census's Foreign Trade Division and CBP for the purpose of developing merchandise trade statistics and enforcement of U.S. export control laws, but also are provided to State for reporting purposes. DCSA information on the FMS program identifies several considerations for foreign entities in choosing between FMS and DCS. Under FMS, DOD procures defense articles and services for the foreign entity under the same acquisition process used for its own military needs, and recipients may benefit from economies of scale achieved through combining FMS purchases with DOD's. In addition, DOD provides contract administration services that may not be available through the private sector. To recover its administration costs, DOD applies a surcharge to each FMS agreement that is a percentage of the value of each sale. Under DCS, foreign entities may have more direct involvement during contract negotiation with U.S. defense companies, may obtain firm-fixed pricing, and may be better able to fulfill nonstandard requirements. However, according to State officials, some types of defense articles, such as certain types of missiles, can only be exported through FMS. In addition, DOD administers other programs through which defense articles can be exported to foreign governments. For example, the fiscal year 2006 National Defense Authorization Act provides funding authorities for DOD to jointly formulate and coordinate with State in the implementation of security assistance programs, which can include the export of U.S. defense articles and services. DOD also may export certain defense articles deemed "excess" to our national security needs to foreign governments or international organizations on a reduced or no-cost basis. From calendar years 2005 through 2008, the value of U.S. exports of defense articles remained relatively stable, from about $19 billion and $20 billion, with an increase to about $22 billion in 2009. Of the approximately $101 billion total in U.S. defense articles exported from 2005 through 2009, about 60 percent were exported through DCS, as shown in figure 1. This figure also shows that exports through DCS increased from $10.6 billion to $13.3 billion during this period--an increase of about 25 percent--while the value of FMS exports remained relatively stable. Although there are currently no data available on the export of defense services through DCS, we found that the value of defense services exported through FMS was also relatively stable over the last 5 calendar years, ranging from about $3.8 billion to $4.2 billion annually from 2005 through 2009. Overall, services account for about one-third of the value of all FMS exports annually. Over the last 5 years, aircraft and their related parts and equipment accounted for about 44 percent of the value of all defense articles exported. The second largest category was satellites, communications, and electronics equipment and their related parts--accounting for about 20 percent of defense articles. We also found differences in the method of export for defense articles, with values for some types of articles higher through FMS versus DCS and vice versa. As shown in figure 2, of the approximately $26 billion in aircraft equipment and parts exported over the 5-year period, almost 66 percent (about $17.2 billion) was exported through DCS. A much larger value of other equipment and parts; satellites, communications and electronics equipment, and related parts; and firearms were also exported through DCS. On the other hand, a larger value of missiles, ships, and their related parts were exported through FMS. For two categories--aircraft and vehicles, weapons, and their parts--export values were about evenly divided between DCS and FMS. Although defense articles and services are exported to hundreds of countries, we found that exports of defense articles were highly concentrated in a few countries. Over the past 5 years, the top three recipient countries--Japan, the United Kingdom, and Israel--accounted for almost one-third of the value of defense article exports. The top seven recipient countries, which include South Korea, Australia, Egypt, and the United Arab Emirates, accounted for about half of the value of all U.S. defense article exports. We also identified differences by the method of export through either FMS or DCS. In general, the value of FMS exports was higher for developing countries, while the value of DCS exports was higher for developed countries. State officials noted that developing countries may benefit from the FMS logistics, infrastructure, and other support that come with the FMS program. As shown in figure 3, of the $13 billion in defense articles that Japan imported, 85 percent ($11.15 billion) was exported through DCS. Similarly, of the $8.3 billion that the United Kingdom imported, 82 percent (about $6.8 billion) was exported through DCS. On the other hand, Israel and Egypt import a higher value of their U.S. defense articles through the FMS program. Israel and Egypt receive annual U.S. security assistance funding that according to DOD and State officials, generally is used to purchase U.S. defense articles and services through the FMS program. FMS exports of defense services were also concentrated in a relatively few countries, with Saudi Arabia, Japan, and Egypt accounting for over one-third of the value over the last 5 years. Although Congress requires reporting on various aspects of U.S. defense exports, State's and DOD's annual reports on "military assistance and military exports"--as required by Section 655 of the Foreign Assistance Act of 1961, as amended--do not provide a complete picture of the magnitude and nature of defense exports because the agencies use different reporting methodologies and have information inconsistencies and gaps--in part, because of the separate purposes of their data systems. Although the data we obtained and analyzed were sufficiently reliable to develop high-level, overall information on the magnitude and nature of defense exports, the differences in agencies' data--including the lack of information for defense services exported under DCS licenses, differences in agencies' item and country categorizations, and the inability to separate some permanent and temporary exports--hinder the ability to provide a comprehensive and transparent picture of defense exports. Current export reform discussions acknowledge that the proliferation of individual data systems make export licensing and enforcement more difficult; however, the FMS system has not been specifically cited in these proposals. Because defense exports are used for furthering U.S. foreign policy objectives, there are legislatively mandated reporting requirements to enable congressional oversight. State has overall responsibility to report on exports of defense articles and defense services. DOD also reports on defense exports under FMS and other programs. The most comprehensive reporting requirement is contained in Section 655 of the Foreign Assistance Act of 1961, as amended, which requires annual reporting of defense articles and services that were authorized and provided (exported) to each foreign country and international organization for the previous fiscal year under State export license or furnished under FMS, including those furnished with the financial assistance of the U.S. government. Also, for defense articles licensed for export by State, the act requires "a specification of those defense articles that were exported during the fiscal year covered by the report." There is not a parallel provision for a specification of defense services exported under licenses issued by State. In addition, the act requires that unclassified portions of the report be made public on the Internet through State. Although State publishes its Section 655 reports on its Web site, DOD's Section 655 reports are not available either through DOD's or State's Web site. Other reporting requirements are focused on discrete aspects of defense exports and, as such, are not intended to provide a complete picture of such exports. For example, Section 36 of the Arms Export Control Act requires advance notifications to Congress for proposed sales based on certain dollar thresholds, as well as reports on defense exports sold. DOD also noted numerous additional reporting requirements for defense exports that occur under other programs, such as Excess Defense Articles and International Military Education and Training. While State and DOD each provide annual reports to Congress in response to the Section 655 requirement, we identified differences in the way each agency reports its data--in some cases based on differing interpretations of the same requirement--that lead to an incomplete overall picture of the magnitude and nature of such exports, as shown in table 1. The differences in reporting also occur because the data on defense exports are gathered and maintained by multiple government agencies for a variety of purposes using different data systems. State and DOD officials told us that information reported on defense exports is based on data that are contained in existing systems developed to satisfy the operational requirements of each organization and was not designed to integrate with other agencies' systems. For example, State's system was designed to manage the DCS licensing process, DSCA's system was developed to facilitate the management of the FMS program, and data collected in the AES system are maintained by Census primarily for generating trade statistics. Nonetheless, these systems are the principal sources of information on defense exports. In areas where these systems differ from each other, certain data fields need to be reconciled before data can be aggregated. Even with these adjustments, these and other system differences hinder the ability to perform a more detailed and in-depth analysis of defense exports. For example, one difference between State's and DOD's reporting is the lack of data on defense services exported under DCS licenses. According to State's reporting to Congress, for fiscal year 2005, it licensed over $27 billion in defense services. By fiscal year 2008, the most recent data available, the value of approved licenses for defense services almost tripled to over $71 billion. However, State does not report on the value of defense services exported under license authorizations because it does not have such information. This is in part because AES does not capture data on the export of services to foreign entities as it was developed to track information on the export of physical articles. Also, State officials noted that they have no operational requirement to have information on the value of exported defense services, and they do not require such information to be reported to State as it could create an additional burden on exporters. Further, these officials noted that they have not received feedback from congressional committees on the lack of such data in prior reports to Congress and therefore are not planning to obtain these data from exporters. In contrast, because DOD bills FMS customers for the export of defense services--including logistical support, repairs, training, and technical assistance--it tracks data on the value of services exported. As noted earlier in this report, defense services constitute about one-third of annual FMS exports. Further complicating efforts to combine and compare State and DOD data reported in the Section 655 reports is that agencies involved in the licensing, export, and collection of related data lack a unified item categorization scheme. According to agency officials, these item categorization schemes were developed for their specific purposes and were not designed to integrate with other agencies' data for reporting defense exports. In issuing DCS licenses, State uses the categories for defense articles and services enumerated on the USML and reports license values by USML categories and subcategories. However, when exporters file their export information through AES for these licensed exports, they include the USML category that provides a high-level categorization of articles (e.g., "Aircraft and Associated Equipment") but does not allow for the more detailed breakout of articles by subcategories, which State uses to report license values. Exporters also categorize articles according the Harmonized Tariff Schedule, based on the international "Harmonized System," which was developed for reporting merchandise trade statistics. The Harmonized System and USML are not directly comparable. For example, while the USML has a category for "tanks and military vehicles" separate from other categories for weapons, the Harmonized System has one combined category that includes both weapons and "weaponized" vehicles such as tanks and armored vehicles. As a result, a more detailed combined analysis of the types of military vehicles is not possible using existing category schemes. Under the FMS program, DOD reports export values based on information used to bill foreign entities using a unique item categorization system that also is not directly comparable to the USML. For example, the USML has separate categories for explosives, bombs, training equipment, and guidance equipment; DOD's single category for "bomb" includes items in all of those USML categories. Further, some of the articles and services exported through the FMS program, such as fuel and construction, are not controlled under the USML. However, since DOD bills foreign entities for these articles and services, they are included in DOD's reports along with defense articles and services. DOD officials noted that there is no requirement to report exports by USML categories. Defense export data comparisons also are limited because DOD, Census, and State define some countries and international organizations differently. For example, DOD's FMS data and State export license authorizations include exports to international organizations such as the United Nations. Exports documented through AES are coded for the country of destination and not for international organizations that may be located within those countries. Furthermore, each agency's system uses different codes for some countries, requiring manual analysis to enable combining and comparing of these data. For example, the code used for a country in one database may be used for a different country in another database, and some country names are different. These differences hamper efforts to make comparisons between the systems or to combine the databases to analyze like exports to countries and international organizations. Another difference between State's and DOD's Section 655 reports is State's inclusion of U.S. government end users in its data. While all exports under FMS are to foreign entities, State reports license authorization values for exports that are used by U.S. government agencies within the recipient country as well as articles exported for use by U.S. and allied forces operating on foreign soil. Because the values reported for exports of defense articles include these U.S. government end users, the value of such articles exported to foreign entities is overstated. In addition, obtaining precise data on DCS exports is further limited for certain types of exports where permanent and temporary exports are grouped together. For example, both temporary and permanent exports of classified items are identified under a single export license type. For 2005 through 2009, this license type included a total of about $7 billion in exports, which can include temporary exports. In addition, the ITAR provides for a license exemption for some defense articles exported to Canada. However, the ITAR provides a single Canadian exemption that includes both permanent and temporary exports. As noted earlier, defense export data for Canada are likely understated since the data do not delineate permanent exports from temporary ones in the approximately $4.1 billion reported under this exemption from 2005 through 2009. DOD's reporting of total defense exports is also limited by the lack of data on exports of defense articles and services under certain U.S. government- funded programs. For example, until recently DSCA did not have access to centralized data on defense exports authorized under sections 1206 and 1207 of the National Defense Authorization Act for Fiscal Year 2006. Such exports are tracked separately from FMS cases--generally by the appropriation that funded the export. In 2009, the DSCA system identified a cumulative total for these exports that included multiple years with no way to separate the data by the year of export. However, DSCA officials told us that they now receive monthly updates on these exports and are considering options for including these data in future reporting. Furthermore, officials at Census, CBP, and DOD told us that reporting through AES for FMS exports is not complete, although the U.S. Foreign Trade Regulations and the ITAR require AES filings for all USML items exported from the United States including those exported through FMS. DOD officials noted that while AES filing is required, not all DOD components fully comply. Census officials stated that they are providing outreach and training for DOD components to encourage compliance with this requirement. CBP officials noted that reporting of FMS exports through AES has improved over the years, and our analysis of AES data showed that the value of FMS exports reported in AES has increased from 2005 to 2009. Under the U.S. export control reform effort currently under way, the administration has noted that the myriad of U.S. government agencies involved in export controls continue to maintain separate information technology systems and databases that are not accessible or easily compatible with each other. According to a recent statement by the U.S. National Security Advisor, this proliferation of individual systems makes export licensing and enforcement more difficult. In our High-Risk Series, we found weaknesses in the effectiveness and efficiency of U.S. government programs that are related to the protection of technologies critical to national security interests, such as FMS and DCS, and recommended that these programs be reexamined to determine how they can collectively achieve their missions. The U.S. government is currently considering consolidating the current export control lists and adopting a single multiagency system for licensing with a single interface for exporters, ultimately leading to a single enterprisewide information technology system that can track an export from the filing of a license application until the item leaves a U.S. port. However, the administration has not announced plans on how defense articles and services authorized and exported under FMS and other government-to-government programs will be incorporated into a reformed U.S. export control system. A complete picture of defense exports--including which method of export is used more often by individual countries or for certain types of items--is not available under current reporting to Congress. Although State has overall responsibility to regulate the export of defense articles and services, it reports separately from DOD on some aspects of defense exports. Information from DOD and State cannot be readily combined to provide a complete picture of defense exports. Gaps and limitations in these data--including the lack of information on defense services exported under DCS, which could be substantial given the high dollar value of such services authorized by State--may inhibit congressional oversight and transparency into the entirety of U.S. defense exports. For example, Congress does not have complete data to determine whether specific U.S. foreign policy objectives are being furthered through the various export programs. While State has noted a potential burden for exporters if they were required to report on exports of defense services under DCS, there may be value to Congress in having such information, especially in light of the large and growing value of license authorizations for defense services. As U.S. export control reform efforts move beyond the initial phase of revising and consolidating control lists, it will be important to consider ways to standardize and integrate data across agencies to mitigate the gaps and limitations noted in this report. Recognizing that complete integration and standardization across agencies' data systems is a long- term effort that may require additional resources, State could improve overall reporting of defense exports under the constraints of current data systems by using a methodology similar to ours to enhance congressional oversight and transparency of such exports. Also, as policymakers develop and debate export control reform proposals, it is important to consider whether other programs related to the protection of technologies critical to U.S. national security, such as the FMS program, should be included in the reform efforts. In order to obtain a more complete picture of defense exports, Congress should consider whether it needs specific data on exported defense services similar to what it currently receives on defense articles and, if so, request that State provide such data as appropriate. To improve transparency and consistency of reporting on defense exports required by the Foreign Assistance Act, we recommend that the Secretary of State direct the Directorate of Defense Trade Controls to coordinate with the Departments of Defense and Commerce to identify and obtain relevant defense export information under existing agency data systems and provide a consolidated report to Congress on DCS and FMS that specifies articles exported using a common category system; separates U.S. government end users from foreign entities; separates permanent and temporary exports; incorporates all defense exports, including U.S. government-funded programs; and is made public through the Internet. We provided a draft of this report to the Departments of State, Homeland Security, and Defense and to Census under the Department of Commerce for their review and comment. Census and the Department of Homeland Security provided technical comments, which we incorporated as appropriate, and DOD did not comment on our draft. State provided written comments that are reprinted in appendix II. In commenting on the draft, State acknowledged the importance of maintaining and reporting to Congress and the public reliable data on U.S. defense exports through FMS and DCS, and notes that gaps and inconsistencies in current reporting are caused by differences in accounting by agencies for transfers of defense exports. However, State did not agree with our recommendation to report consolidated defense export data on FMS and DCS in a consistent manner. State reiterated that Congress has not requested any change to the substance of its current reporting, and State does not believe that the added resources necessary to change reporting formats are merited. However, based on our work and analysis of defense export data, we believe that congressional oversight and transparency into the entirety of U.S. defense exports could be improved with existing data and systems by utilizing more consistent reporting methodologies similar to those that we developed. State also noted that providing consolidated defense export data to Congress and the public was consistent with the goals of current export control reform efforts and encouraged Congress to provide criteria and the resources to develop appropriate information. We agree that ongoing export control reform efforts may provide opportunities to improve information and reporting, but recognizing that reforms may take years to implement, we believe that congressional oversight and transparency can be improved in the short term by implementing our recommendation. We are sending copies of this report to interested congressional committees, the Secretary of State, the Secretary of Defense, the Secretary of Commerce, and the Secretary of Homeland Security. This report also is available at no charge on the GAO Web site at http://www.gao.gov. If you have questions about this report or need additional information, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To identify information on the magnitude and nature of defense exports, we obtained data for calendar years 2005 through 2009 on direct commercial sales (DCS) from the U.S. Census Bureau's (Census) Automated Export System (AES) and on the Foreign Military Sales (FMS) program from the Department of Defense's (DOD) Defense Security Cooperation Agency (DSCA). For the purpose of this report, we defined "defense exports" as articles permanently exported under a Department of State (State) license to foreign end users. As such, we did not include temporary exports that return to the United States without transfer of ownership, shipments to U.S. government end users as identified in AES by the export information code, or articles exported under a license exemption. For DCS, we obtained a data extract from Census for AES records for this time frame of electronic information filings designated with a State "license type," a required field for all exports covered by the United States Munitions List (USML). State has several different license types that generally identify the nature of the export or import, including permanent exports, temporary exports, temporary imports, agreements, articles exported with an exemption, or articles exported through the FMS program. For FMS data, although Foreign Trade Regulations and the International Traffic in Arms Regulations require AES filings for all articles on the USML, including those exported via FMS, we were told by both U.S. Customs and Border Protection (CBP) and Census officials that AES filings for DOD exports of FMS articles are not complete. Therefore, we could not use AES as a single data source for exports of defense articles. For this reason, we obtained data from DSCA for FMS exports for the same time frame from DSCA's 1200 Delivery Subsystem. We did not include articles exported under Section 1206 or 1207 programs under the National Defense Authorization Act for Fiscal Year 2006. As noted, DSCA did not obtain export data on Section 1206 and 1207 exports until 2009. We also did not include data on DOD's excess defense article program. Although most of our analysis focuses on exports of defense articles, we obtained data from State on DCS licenses that were in effect during 2005 through 2009, primarily for the purpose of assessing the reliability of AES data for these exports. For each of these three data sets, we also obtained the relevant reference tables and documentation from each agency. These reference tables translate the codes used in the databases--such as those for country name or commodity/item type--into their names or descriptions. We also reviewed relevant laws and regulations regarding the export of defense articles and requirements for reporting export information through AES. In order to combine and compare information from FMS and AES on the types of articles exported, we analyzed the item categorization systems used by each system to identify areas of commonality. We determined that the broad categories used by DOD for grouping like items together could be adapted to accommodate the lowest level of detail identified between the two systems. This allowed us to develop relatively large categories, but precluded us from further refining the analysis by breaking these out into more detailed categories because some types of items were combined into one category in either of the two systems. To assess overall defense exports by country, we created a cross-reference table to enable us to relate the data for a specific country in one data set to information for that same country in the other data set. We also identified groupings of countries considered developed or developing according to the United Nations' definition. We did not include data on classified exports for either FMS or DCS. DOD officials stated that classified data on FMS exports could not be used in an unclassified report, even if aggregated with other data. We obtained and reviewed classified data for FMS and determined that excluding the FMS classified data from our analysis would not materially affect the high-level trend analysis and other information we discuss in this report. For classified DCS exports, temporary and permanent exports are grouped together in one license type in AES, with no way to separate permanent from temporary exports. For trend information across the 5-year time frame, we adjusted for the effects of inflation by converting values to 2009 dollars. We assessed the reliability of these data by performing electronic testing; reviewing system documentation, including system edits and validations; comparing our data to published or other available information; and interviewing knowledgeable officials about data quality and reliability. For the purposes of our analyses, we determined that the data were sufficiently reliable. To assess information reported on U.S. defense exports, we reviewed relevant reporting requirements and reviewed State and DOD reports to Congress on various portions of the export process, including notification of potential sales, authorizations, and exports. Specifically, we reviewed the reporting requirements in the Foreign Assistance Act of 1961, as amended, Section 655, on foreign military assistance that requires an annual report on both defense articles and services authorized and provided/exported to foreign countries and international organizations. We then analyzed and compared the relevant reports that State and DOD annually submit to Congress, identifying differences in reporting methodologies between the reports, and identified where such information is available to the public. We also interviewed agency officials at State's Directorate of Defense Trade Controls (DDTC) and DOD's DSCA responsible for generating these reports to obtain information on methodologies and definitions used in their respective reports. To identify limitations and gaps in available defense export data, we reviewed information and available system documentation for the data systems at DSCA, DDTC, and Census and interviewed knowledgeable officials at these agencies regarding data system purposes and functionality. We also interviewed officials at CBP who manage the AES interface with exporters. We conducted this performance audit from February 2010 to September 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Department of State Comments on GAO Draft Report Reporting on Exported Articles and Services Needs to Be Improved (GAO-10-952, GAO Code 120862) Thank you for the opportunity to comment on your draft report entitled "DEFENSE EXPORTS: Reporting on Exported Articles and Services Needs to Be Improved." The Department of State recognizes the importance of maintaining and reporting to the Congress and public reliable data on United States defense exports through direct commercial sales or the Foreign Military Sales program. The draft report identifies gaps and inconsistencies in reports of this nature by the Executive Branch. However, the State Department notes that gaps and inconsistencies in reporting are inherent in accounting for transfers of defense export across agencies. While Foreign Military sales may, for example, include items such as tanks and weaponry on the U.S. Munitions List under the jurisdiction of the Department of State, dual-use items under the licensing jurisdiction of Commerce will not be included in State reports. Likewise, the requirements of the Congress for reporting direct commercial sales and Foreign Military Sales are also different. The Department of State faithfully reports to Congress all data pertaining to exported articles and services that are within its jurisdiction to collect. To date, the Congress has expressed no desire to change the substance of our current reporting. The Department does not believe that devising additional reporting formats would merit the commitment or allocation of additional resources and therefore disagrees with the report's recommendations. Providing consolidated defense export data to Congress and the public is consistent with the goals of Export Control Reform and the Executive Branch task force evaluating proposals and recommendations associated with it. As decisions are made on Export Control Reform, the Department of State encourages the Congress to furnish criteria and resources to develop appropriate information technology platforms and reporting criteria of benefit to both the Congress and the public. In addition to the contact named above, John Neumann, Assistant Director; Marie Ahearn; Richard Brown; Sharron Candon; Julia Kennon; Roxanna Sun; Robert Swierczek; and Bradley Terry made key contributions to this report.
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The U.S. government exports billions of dollars of defense articles and services annually to foreign entities, generally through direct commercial sales (DCS) from U.S. companies under licenses issued by the State Department (State) or through the Department of Defense (DOD) Foreign Military Sales (FMS) program. GAO has previously reported on weaknesses in the export control system. As requested, GAO (1) identified the magnitude and nature of defense articles and services exported and (2) assessed information currently reported on defense exports and any gaps and limitations in defense export data. To conduct this work, GAO analyzed export data from DOD for FMS and the Department of Commerce's U.S. Census Bureau (Census) for DCS for 2005 through 2009; reviewed relevant laws and regulations; assessed State and DOD reports on defense exports; reviewed agency data systems documentation; and interviewed officials from State, DOD, Homeland Security, and Census. U.S. exports of defense articles--such as military aircraft, firearms, and explosives--ranged from about $19 billion to $22 billion annually in calendar years 2005 to 2009. Of these defense articles, about 60 percent have been exported by companies to foreign entities through DCS licenses, while the remaining 40 percent were exported under the FMS program. Aircraft and related parts constitute the largest category of such exports--about 44 percent--followed by satellites, communications, and electronics equipment and their related parts. U.S. exports of defense articles were concentrated in a few countries: about half went to Japan, the United Kingdom, Israel, South Korea, Australia, Egypt, and the United Arab Emirates. Although no data are available on the export of defense services--such as technical assistance and training--provided through DCS, exports of defense services through FMS were stable, accounting for about one-third of the value of FMS exports. Congress does not have a complete picture of defense exports under current reporting--including which method of export is used more often by individual countries or for certain types of items. State--which has overall responsibility for regulating defense exports--and DOD, report to Congress in response to various requirements. However, their annual reports on DCS and FMS exports have several information gaps and inconsistencies--in part, because of the differing purposes of the agencies' data systems and different reporting methodologies. For example, State does not obtain data from U.S. companies on the export of defense services under DCS licenses, although it authorizes several billion dollars of such exports annually. State officials noted that they do not have an operational requirement to collect such information and doing so could be burdensome on exporters. Other limitations on defense export data include differences in agencies' item and country categorizations and the inability to separate data on some permanent and temporary exports. Further, while State's report is available on its Web site, DOD's is not. These differences and limitations may inhibit congressional oversight and transparency into the entirety of U.S. defense exports. GAO suggests that Congress consider whether it needs specific data on exported defense services and is recommending that State publicly report consolidated defense export data on DCS and FMS in a consistent manner. In the absence of additional direction and resources from Congress, State did not agree. GAO believes the recommendation remains valid.
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OPM contracts with almost 400 health plans, including fee-for-service plans and health maintenance organizations, to operate the Federal Employees Health Benefits Program (FEHBP). The Blue Cross and Blue Shield Association's plan is the largest, covering almost 42 percent of about 4 million FEHBP enrollees in 1994. The Association's contract with PCS for retail prescription drug services began in 1993; its contract with Medco for mail order drug services began in 1987. In operating the retail drug program, PCS contracts with a network of pharmacies to provide the Association's federal employee health plan prescriptions at discounted prices. In 1996, this network included 44,751 pharmacies, about 60 percent of which were chain drug stores; the remaining 40 percent were independently owned. In operating the mail order program, Medco provides the plan prescriptions also at discounted prices. Medco receives and dispenses prescriptions from pharmacies in Florida, New Jersey, Ohio, and Texas. Under its FEHBP contract, the Association must submit to OPM any proposal to change its federal employee health plan benefits. OPM reviews such proposals to assess their cost-effectiveness to the program and potential effect on the delivery of benefits to federal enrollees. In addition, the Association oversees the activities of Medco and PCS and must report to OPM any significant problems that could affect the delivery of benefits to enrollees, such as those Medco initially experienced in implementing the benefit change. The Association submitted its benefit change proposal to OPM on May 31, 1995, citing the need to control the Blue Cross and Blue Shield Service Benefit Plan's rising prescription drug costs while maintaining quality service for enrollees. Between 1988 and 1995, the Association's payments for the plan's prescription drugs increased at an average annual rate of about 21 percent, compared with an average annual rate of about 12 percent for total benefit payments. Moreover, prescription drug payments have constituted an increasingly greater share of total benefit payments, rising from about 13 percent in 1988 to about 23 percent in 1995 (see fig. 1). These payment increases appear to result mainly from increases in the number of prescriptions per enrollee and the price of prescriptions. Before the benefit change, the approximately 800,000 people insured under the Association's Standard Option Plan who also had Medicare part B coverage did not pay anything for prescription drugs purchased at network retail pharmacies or through the mail order program. These people must now pay 20 percent of the price of prescriptions purchased at network retail pharmacies. Copayments for retail prescriptions were already required of other enrollees and are similar to those required in several other federal employee health plans. Without the benefit change, the Association contended that it would have had to increase monthly premiums for all of its federal enrollees with Standard Option coverage. To review Medco's strategy for managing the anticipated increase in prescriptions and calls about them, Association staff met with Medco representatives on August 24, 1995. According to Medco officials, they estimated the size and timing of the increase by relying primarily on their own claims experience in managing pharmacy benefits for about 50 million people as well as data from a comparable benefit change made by Massachusetts Blue Cross and Blue Shield. The resulting Medco forecast estimated a gradual 64-percent growth in 1996 mail order prescriptions. Using this data, Medco planned to gradually increase its capacity to handle prescriptions from about 110,000 a week during the last quarter of 1995 to 180,000 a week during the last quarter of 1996. Medco also planned to handle occasional surges in demand of up to 13 percent more than the forecasted number and increase its telephone capacity to respond to greater demand for customer service. More immediate growth in mail order prescriptions could have been expected from this cost-conscious group of enrollees, however, according to our actuarial consultant's review of this forecast. OPM notified the Association that the benefit change had been approved in September 1995. Both OPM and Association officials contended that the change would promote more cost-effective use of the prescription drug benefit by encouraging enrollees to use the less expensive mail order program. According to the Association's actuarial analysis, which included Medco savings estimates related to its contract, the benefit change would save the plan about $193 million in 1996. OPM's actuarial analysis supported this estimated level of savings. Although these analyses did not include an audit of Medco's estimates or related supporting documentation, our actuarial consultant's review of the Association and OPM analyses indicated that the overall savings estimates were reasonable, though possibly understated. The number of prescriptions received by Medco quickly surpassed Medco and Association expectations. During the first week of January 1996, the number of prescriptions rose to 157,000, and during the week ending January 27, 1996, they reached 233,000--an amount about 66 percent greater than expected. By the week ending March 9, 1996, and continuing through the week ending April 6, 1996, the number of weekly prescriptions received ranged between 175,000 and 187,000. Enrollees with Medicare part B benefits accounted for most of the increase in prescriptions. About 9 percent of these enrollees' prescriptions were purchased through the mail order program in 1995, a percentage that increased to about 38 percent by February 1996. Figure 2 shows the increase in mail order prescriptions contrasted with the number of forecasted prescriptions. Medco's processing capacity could not absorb this rapid increase. The number of pharmacists was insufficient to handle prescription orders, and many enrollees did not get their prescriptions filled promptly. For example, although Medco's contract requires that it dispense or return 99 percent of the prescriptions it receives daily within 5 business days, Medco reported that this performance measure was met about 87 percent of the time in January 1996 and about 94 percent of the time in February 1996. In addition, many customer calls were delayed or went unanswered during January and February 1996. Medco's contract specifies that no more than 2 percent of customer calls a week receive a busy signal, known as call blockage. Although the call blockage rate averaged 1.8 percent a week for the 2-month period, about 8 percent, or 11,000 calls, received a busy signal during the week ending January 20, 1996. During the last week of January 1996, OPM informed Association officials of its disappointment with the customer service being provided to enrollees using the mail order program and indicated that corrective measures should be taken. Medco responded to the unanticipated demand and associated service problems by moving quickly to increase processing capacity. For example, during the week ending January 20, 1996, Medco officials expanded operations at the company's Florida and New Jersey pharmacies from a 5-1/2-day schedule to 7 days a week, with operating hours expanded from 15 hours to 19 hours daily. Medco also reassigned pharmacists who normally performed other Medco jobs to confirm phone and fax prescription orders. Medco officials also brought pharmacists and support personnel from pharmacies across the country to one Tampa pharmacy to increase processing capacity. OPM and the Association agreed that Medco would send medications by overnight mail to customers who would not otherwise receive their prescriptions within 5 business days. Between the weeks ending January 6, 1996, and April 27, 1996, Medco sent approximately 160,000 prescription packages by overnight mail at a cost of almost $1 million. In February 1996, OPM also indicated that the Association should arrange for mail order customers who needed delayed medications to get up to a 21-day supply from PCS network retail pharmacies without paying the 20-percent copayment. This ad hoc arrangement required PCS to respond quickly to the needs of the Association and over 5,000 enrollees who used this service. The copayments for over 10,000 retail prescriptions dispensed to these enrollees cost the plan approximately $291,000. Although Medco continued to use extra means to deliver prescriptions to enrollees through the last week of April 1996, Association data show that the mail order program began to meet performance expectations for turning around prescriptions within 5 days the week ending March 16, 1996. Medco had already begun to consistently meet performance expectations for customer service calls the week ending February 10, 1996. The difficulties enrollees had with the mail order program during early 1996 were reflected in an Association's customer satisfaction survey of mail order customers. During the first quarter of 1996, about 81 percent of those surveyed indicated that they were satisfied with services. Enrollee responses indicated that they were most concerned about the time it took to fill prescriptions. About 75 percent responded that their prescriptions were filled promptly, down from quarterly averages of 94 percent in 1994 and 92 percent in 1995. NACDS and many chain and independent pharmacies foresee the benefit change shifting millions of dollars in prescription drug sales to the mail order program. Because the benefit change is recent, we could not determine how many federal enrollees affected by the change will continue to shift prescriptions to the mail order program. Therefore, determining the benefit change's effect on retail pharmacies' sales is difficult. Nevertheless, payments to retail pharmacies for prescriptions dispensed to enrollees affected by the benefit change decreased substantially from 1995 to 1996, according to our analysis of PCS payments to retail pharmacies. (See fig. 3.) Figure 3 shows that between January and May 1995, total prescription payments to retail pharmacies for prescriptions dispensed to enrollees affected by the benefit change were about $259.6 million, compared with about $164.9 million between January and May 1996--a decrease of about 36 percent. Retail pharmacies serving the largest percentages of the federal enrollees affected by the benefit change experienced similar percentage decreases in prescription payments, according to PCS data. Between 1995 and 1996, Walgreens, Rite Aid, CVS, Revco, and Wal-Mart had, on average, a 41-percent decrease in total retail payments for prescriptions dispensed to the enrollees with Medicare part B coverage and a 14-percent decrease in total payments for prescriptions dispensed to all plan enrollees. Total payments to all retail pharmacies for prescriptions dispensed to enrollees in the Association's federal employee health plan also decreased between 1995 and 1996. This total includes payments to enrollees affected by the benefit change. PCS data indicate that between January and May 1995, total payments were about $473.3 million, compared with about $439.8 million between January and May 1996--a decrease of about 7 percent. The Blue Cross and Blue Shield Association contracts with Medco and PCS include annual performance measures that focus on savings and customer service. The contracts provide financial incentives for exceeding certain performance measures and penalties for not meeting them. According to information from Association officials, in 1995, Medco and PCS met most of their savings and customer service measures for the Blue Cross and Blue Shield Service Benefit Plan. The Blue Cross and Blue Shield Association estimated that its two PBMs saved the plan about $505 million in 1995. Association officials indicated that these savings are used to support the pharmacy benefit program, as well as to contain enrollee premiums, deductibles, and copayments. Savings in 1995 resulted from seven categories of PBM services, according to Association estimates. These estimated savings were based on what the Association projected it would have paid for prescription drugs and related services had it not contracted with the PBMs. The Association developed this methodology, which represents one way to determine potential savings from PBM services. We plan to evaluate the soundness of this methodology and compare it with those developed by other federal health plans for our final report. Figure 4 shows the percentage of total savings each of seven service categories represents. Retail and mail order pharmacy discounts accounted for about $264 million in savings. For retail, the savings represent the discounts PCS achieved from negotiating with individual pharmacies the amount PCS would reimburse them for prescriptions. Mail order savings were derived from discounts that the Association negotiated with Medco. Maximum allowable cost (MAC) savings accounted for approximately $72 million in savings. MAC refers to the maximum price that retail pharmacies in PCS' network may be paid for certain generic drugs. Savings resulted from the difference between drugs' MAC prices and their usual and customary prices. Manufacturer rebates accounted for about $107 million in savings and represent the guaranteed discounts that PCS and Medco negotiated with drug manufacturers. The plan received 90 percent of the total rebates, and the PBMs retained 10 percent as an administrative fee and incentive to increase the amount of discounts. PCS did not meet its rebate guarantee in 1995 and as a result incurred a penalty. Concurrent and retrospective drug utilization review (DUR) accounted for about $10 million in savings that resulted from clinical activities the PBMs performed. Concurrent DUR is performed before dispensing a drug to prevent problems such as drug interactions and therapeutic duplications. Retrospective DUR is a program PCS conducts to encourage physicians and enrollees to use the most cost-effective drugs and regimens to optimize drug therapies. Medco's intervention program accounted for about $13.5 million in savings. The program encourages patients to use, and physicians to prescribe, less expensive brand-name drugs considered as safe and effective as other, more expensive brand-name drugs. The prior approval program accounted for about $36.5 million in savings. This program covers 13 drugs that require Association approval before dispensing and derived savings from prescriptions denied reimbursement or never filled. The coordination of benefits (COB) program accounted for about $2 million in savings. COB is an industrywide method used to avoid paying duplicate benefits to an individual covered by another insurer. The Association's contracts with its PBMs also specify performance measures for the quality of customer service provided to the federal plan and its enrollees. For example, as previously discussed, Medco's contract requires dispensing prescriptions and answering customer calls within specific time frames. Medco's contract also requires that its pharmacy dispense all of its prescriptions annually with less than a .005-percent error rate. In addition, PCS' contract has several guarantees for the accuracy and timeliness of prescription claims submitted by enrollees for reimbursement. In two instances, PCS did not meet claims timeliness guarantees and therefore paid the Association minor penalties. PCS' contract also guarantees that it provide plan enrollees convenient access to its network pharmacies. The guarantee states that a network pharmacy be located within 5 miles of 98 percent of the enrollees. PCS data indicate that this guarantee was met in 1995 and as of April 1996. Mr. Chairman, this concludes my prepared statement. I will be pleased to answer any questions. For more information on this testimony, please call John Hansen, Assistant Director, at (202) 512-7105. Other major contributors included Joel Hamilton, Jennifer Arns, and Mary Freeman. 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 Blue Cross and Blue Shield Association's change in prescription drug benefits covered under its federal employee health plan. GAO noted that: (1) the Association's payments for prescription drugs increased about 21 percent between 1988 and 1995; (2) to manage costs, the Association contracted with two pharmacy benefit managers (PBM) to provide retail prescription and mail order drug services; (3) to offset high prescription costs, the Association began requiring enrollees insured under the Standard Option Plan and covered by Medicare part B to pay 20 percent of their prescription costs at retail pharmacies; (4) the Association also encouraged enrollees to utilize the least expensive mail order option by offering prescriptions free of charge; (5) the demand for mail-order prescriptions surpassed contractor and Association expectations, causing delays in prescription orders and customer calls; (6) critics of the benefit change believe that millions of dollars in prescription drug sales will be shifted away from retail drug stores to the mail order program; and (7) the Association estimated that its two PBM saved $505 million in 1995.
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A long-standing problem in DOD space acquisitions is that program and unit costs tend to go up significantly from initial cost estimates, while in some cases the capability that was to be delivered goes down. Figure 1 compares original cost estimates and current cost estimates for the broader portfolio of major space acquisitions for fiscal years 2010 through 2015. The wider the gap between original and current estimates, the fewer dollars DOD has available to invest in new programs. As shown in the figure, cumulative estimated costs for the major space acquisition programs have increased by about $13.9 billion from initial estimates for fiscal years 2010 through 2015, almost a 286 percent increase. The declining investment in the later years is the result of mature programs that have planned lower out-year funding, cancellation of several development efforts, and the exclusion of space acquisition efforts for which total cost data were unavailable (such as new investments). When space system investments other than established acquisition programs of record--such as the Defense Weather Satellite System (DWSS) and Space Fence programs--are also considered, DOD's space acquisition investments remain significant through fiscal year 2016, as shown in figure 2. Although estimated costs for selected space acquisition programs decrease 21 percent between fiscal years 2010 and 2015, they start to increase in fiscal year 2016. And, according to current DOD estimates, costs for two programs-- Advanced Extremely High Frequency (AEHF) and Space Based Infrared System (SBIRS) High--are expected to significantly increase in fiscal years 2017 and 2018. The costs are associated with the procurement of additional blocks of satellites and are not included in the figure because they have not yet been reported or quantified. Figures 3 and 4 reflect differences in total program and unit costs for satellites from the time the programs officially began to their most recent cost estimates. As figure 4 shows, in several cases, DOD has increased the number of satellites. The figures reflect total program cost estimates developed in fiscal year 2010. Several space acquisition programs are years behind schedule. Figure 5 highlights the additional estimated months needed for programs to launch their first satellites. These additional months represent time not anticipated at the programs' start dates. Generally, the further schedules slip, the more DOD is at risk of not sustaining current capabilities. For example, delays in launching the first MUOS satellite have placed DOD's ultra high frequency communications capabilities at risk of falling below the required availability level. DOD had long-standing difficulties on nearly every space acquisition program, struggling for years with cost and schedule growth, technical or design problems, as well as oversight and management weaknesses. However, to its credit, it continues to make progress on several of its high- risk space programs, and is expecting to deliver significant advances in capability as a result. The Missile Defense Agency's (MDA) Space Tracking and Surveillance System (STSS) demonstration satellites were launched in September 2009. Additionally, DOD launched its first GPS IIF satellite in May 2010 and plans to launch the second IIF satellite in June 2011--later than planned, partially because of system-level problems identified during testing. It also launched the first AEHF satellite in August 2010--although it has not yet reached its final planned orbit because of an anomaly with the satellite's propulsion system--and launched the Space Based Space Surveillance (SBSS) Block 10 satellite in September 2010. DOD is scheduled to launch a fourth Wideband Global SATCOM (WGS) satellite broadening communications capability available to warfighters--in late 2011, and a fifth WGS satellite in early 2012. The Evolved Expendable Launch Vehicle (EELV) program had its 41st consecutive successful operational launch in May of this year. One program that appears to have recently overcome remaining technical problems is the SBIRS High satellite program. The first of six geosynchronous earth-orbiting (GEO) satellites (two highly elliptical orbit sensors have already been launched) was launched in May 2011 and is expected to continue the missile warning mission with sensors that are more capable than the satellites currently on orbit. Total cost for the SBIRS High program is currently estimated at over $18 billion for six GEO satellites, representing a program unit cost of over $3 billion, about 233 percent more than the original unit cost estimate. Additionally, the launch of the first GEO satellite represents a delay of approximately 9 years. The reasons for the delay include poor government oversight of the contractor, unanticipated technical complexities, and rework. The program office is working to rebaseline the SBIRS High contract cost and schedule estimates for the sixth time. Because of the problems on SBIRS High, in 2007, DOD began a follow-on system effort, which was known as Third Generation Infrared Surveillance (3GIRS), to run in parallel with the SBIRS High program. DOD canceled the 3GIRS effort in fiscal year 2011, but plans to continue providing funds under the SBIRS High program for one of the 3GIRS infrared demonstrations. While DOD is having success in readying some satellites for launch, other space acquisition programs face challenges that could further increase cost and delay delivery targets. The programs that may be susceptible to cost and schedule challenges include MUOS and the GPS IIIA program. Delays in the MUOS program have resulted in critical potential capability gaps for military and other government users. The GPS IIIA program was planned with an eye toward avoiding problems that plagued the GPS IIF program and it incorporated many of the best practices recommended by GAO, but the schedule leaves little room for potential problems and there is a risk that the ground system needed to operate the satellites will not be ready when the first satellite is launched. Additionally, the National Polar- orbiting Operational Environmental Satellite System (NPOESS) was restructured as a result of poor program performance and cost overruns, which caused schedule delays. These delays have resulted in a potential capability gap for weather and environmental monitoring. Furthermore, new space system acquisition efforts getting underway--including the Air Force's Joint Space Operations Center Mission System (JMS) and Space Fence, and MDA's Precision Tracking and Surveillance System (PTSS)-- face potential development challenges and risks, but it is too early to tell how significant they may be to meeting cost, schedule, and performance goals. Table 1 describes the status of these efforts in more detail. Over the past year, we have completed reviews of sustaining and upgrading GPS capabilities and commercializing space technologies under the Small Business Innovation Research program (SBIR), and we have ongoing reviews of (1) DOD space situational awareness (SSA) acquisition efforts, (2) parts quality for DOD, MDA, and the National Aeronautics and Space Administration (NASA), and (3) a new acquisition strategy being developed for the EELV program. These reviews, discussed further below, underscore the varied challenges that still face the DOD space community as it seeks to complete problematic legacy efforts and deliver modernized capabilities. Our reviews of GPS and space situational awareness, for instance, have highlighted the need for more focused coordination and leadership for space activities that touch a wide range of government, international, and industry stakeholders; while our review of the SBIR program highlighted the substantial barriers and challenges small business must overcome to gain entry into the government space arena. GPS. We found that the GPS IIIA schedule remains ambitious and could be affected by risks such as the program's dependence on a ground system that will not be completed until after the first IIIA launch. We found that the GPS constellation availability had improved, but in the longer term, a delay in the launch of the GPS IIIA satellites could still reduce the size of the constellation to fewer than 24 operational satellites--the number that the U.S. government commits to--which might not meet the needs of some GPS users. We also found that the multiyear delays in the development of GPS ground control systems were extensive. Although the Air Force had taken steps to enable quicker procurement of military GPS user equipment, there were significant challenges to its implementation. This has had a significant impact on DOD as all three GPS segments--space, ground control, and user equipment--must be in place to take advantage of new capabilities. Additionally, we found that DOD had taken some steps to better coordinate all GPS segments, including laying out criteria and establishing visibility over a spectrum of procurement efforts, but it did not go as far as we recommended in 2009 in terms of establishing a single authority responsible for ensuring that all GPS segments are synchronized to the maximum extent practicable. Such an authority is warranted given the extent of delays, problems with synchronizing all GPS segments, and importance of new capabilities to military operations. As a result, we reiterated the need to implement our prior recommendation. Small Business Innovation Research (SBIR). In response to a request from this subcommittee, we found that while DOD is working to commercialize space-related technologies under its SBIR program by transitioning these technologies into acquisition programs or the commercial sector, it has limited insight into the program's effectiveness. Specifically, DOD has invested about 11 percent of its fiscal years 2005-2009 research and development funds through its SBIR program to address space-related technology needs. Additionally, DOD is soliciting more space-related research proposals from small businesses. Further, DOD has implemented a variety of programs and initiatives to increase the commercialization of SBIR technologies and has identified instances where it has transitioned space-related technologies into acquisition programs or the commercial sector. However, DOD lacks complete commercialization data to determine the effectiveness of the program in transitioning space-related technologies into acquisition programs or the commercial sector. Of the nearly 500 space-related contracts awarded in fiscal years 2005 through 2009, DOD officials could not, for various reasons, identify the total number of technologies that transitioned into acquisition programs or the commercial sector. Further, there are challenges to executing the SBIR program that DOD officials acknowledge and are planning to address, such as the lack of overarching guidance for managing the DOD SBIR program. Under this review, most stakeholders we spoke with--DOD, prime contractors, and small business officials--generally agreed that small businesses participating in the DOD SBIR program face difficulties transitioning their space-related technologies into acquisition programs or the commercial sector. Although we did not assess the validity of the concerns cited, stakeholders we spoke with identified challenges inherent to developing space technologies; challenges because of the SBIR program's administration, timing, and funding issues; and other challenges related to participating in the DOD space system acquisitions environment. For example, some small-business officials said that working in the space community is challenging because the technologies often require more expensive materials and testing than other technologies. They also mentioned that delayed contract awards and slow contract disbursements have caused financial hardships. Additionally, several small businesses cited concerns with safeguarding their intellectual property. Space Situational Awareness (SSA). We have found that while DOD has significantly increased its investment and planned investment in SSA acquisition efforts in recent years to address growing SSA capability shortfalls, most efforts designed to meet these shortfalls have struggled with cost, schedule, and performance challenges and are rooted in systemic problems that most space system acquisition programs have encountered over the past decade. Consequently, in the past 5 fiscal years, DOD has not delivered significant new SSA capabilities as originally expected. Capabilities that were delivered served to sustain or modernize existing systems versus closing capability gaps. To its credit, last fall the Air Force launched a space- based sensor that is expected to appreciably enhance SSA. However, two critical acquisition efforts that are scheduled to begin development within the next 2 years--Space Fence and JMS--face development challenges and risks, such as the use of immature technologies and planning to deliver all capabilities in a single, large increment versus smaller and more manageable increments. It is essential that these acquisitions are placed on a solid footing at the start of development to help ensure that their capabilities are delivered to the warfighter as and when promised. DOD plans to begin delivering other new capabilities in the coming 5 years, but it is too early to determine the extent to which these additions will address capability shortfalls. We have also found that there are significant inherent challenges to executing and overseeing the SSA mission, largely because of the sheer number of governmentwide organizations and assets involved in the mission. This finding is similar to what we have reported from other space system acquisition reviews over the years. Additionally, while the recently issued National Space Policy assigns SSA responsibility to the Secretary of Defense, the Secretary does not necessarily have the corresponding authority to execute this responsibility. However, actions, such as development of a national SSA architecture, are being taken that could help facilitate management and oversight governmentwide. The National Space Policy, which recognizes the importance of SSA, directs other positive steps, such as the determination of roles, missions, and responsibilities to manage national security space capabilities and the development of options for new measures for improving SSA capabilities. Furthermore, the recently issued National Security Space Strategy could help guide the implementation of the new space policy. We expect our report based on this review to be issued in June 2011. Parts quality for DOD, MDA, and NASA. Quality is paramount to the success of DOD space systems because of their complexity, the environment they operate in, and the high degree of accuracy and precision needed for their operations. Yet in recent years, many programs have encountered difficulties with quality workmanship and parts. For example, DOD's AEHF protected communications satellite has yet to reach its intended orbit because of a blockage in a propellant line. Also, MDA's STSS program experienced a 15-month delay in the launch of demonstration satellites because of a faulty manufacturing process of a ground-to-spacecraft communication system part. Furthermore, NASA's Mars Science Laboratory program experienced a 1-year delay in the development of the descent and cruise stage propulsion systems because of a welding process error. We plan to issue a report on the results of a review that focuses specifically on parts quality issues in June 2011. We are examining the extent to which parts quality problems are affecting DOD, MDA, and NASA space and missile defense programs; the causes of these problems; and initiatives to detect and prevent parts quality problems. EELV acquisition strategy. DOD spends billions of dollars on launch services and infrastructure through two families of commercially owned and operated vehicles under the EELV program. This investment allows the nation to launch its national security satellites that provide the military and intelligence community with advanced space-based capabilities. DOD is preparing to embark on a new acquisition strategy for the EELV program. Given the costs and importance of space launch activities, it is vital that this strategy maximize cost efficiencies while still maintaining a high degree of mission assurance and a healthy industrial base. We are currently reviewing activities leading up to the strategy and plan to issue a report on the results of this review in June 2011. In particular, we are examining whether DOD has the knowledge it needs to develop a new EELV acquisition strategy and the extent to which there are important factors that could affect launch acquisitions. DOD continues to work to ensure that its space programs are more executable and produce a better return on investment. Many of the actions it has been taking address root causes of problems, though it will take time to determine whether these actions are successful and they need to be complemented by decisions on how best to lead, organize, and support space activities. Our past work has identified a number of causes of the cost growth and related problems, but several consistently stand out. First, on a broad scale, DOD has tended to start more weapon programs than it can afford, creating a competition for funding that encourages low cost estimating, optimistic scheduling, overpromising, suppressing bad news, and for space programs, forsaking the opportunity to identify and assess potentially more executable alternatives. Programs focus on advocacy at the expense of realism and sound management. Invariably, with too many programs in its portfolio, DOD is forced to continually shift funds to and from programs--particularly as programs experience problems that require additional time and money to address. Such shifts, in turn, have had costly, reverberating effects. Second, DOD has tended to start its space programs too early, that is, before it has the assurance that the capabilities it is pursuing can be achieved within available resources and time constraints. This tendency is caused largely by the funding process, since acquisition programs attract more dollars than efforts concentrating solely on proving technologies. Nevertheless, when DOD chooses to extend technology invention into acquisition, programs experience technical problems that require large amounts of time and money to fix. Moreover, when this approach is followed, cost estimators are not well positioned to develop accurate cost estimates because there are too many unknowns. Put more simply, there is no way to accurately estimate how long it would take to design, develop, and build a satellite system when critical technologies planned for that system are still in relatively early stages of discovery and invention. Third, programs have historically attempted to satisfy all requirements in a single step, regardless of the design challenges or the maturity of the technologies necessary to achieve the full capability. DOD has preferred to make fewer but heavier, larger, and more complex satellites that perform a multitude of missions rather than larger constellations of smaller, less complex satellites that gradually increase in sophistication. This has stretched technology challenges beyond current capabilities in some cases and vastly increased the complexities related to software. Programs also seek to maximize capability on individual satellites because it is expensive to launch them. Figure 6 illustrates the various factors that can break acquisitions. Many of these underlying issues affect the broader weapons portfolio as well, though we have reported that space programs are particularly affected by the wide disparity of users, including DOD, the intelligence community, other federal agencies, and in some cases, other countries, U.S. businesses, and citizens. Moreover, problematic implementation of an acquisition strategy in the 1990s, known as Total System Performance Responsibility, for space systems resulted in problems on a number of programs because it was implemented in a manner that enabled requirements creep and poor contractor performance--the effects of which space programs are finally overcoming. We have also reported on shortfalls in resources for testing new technologies, which, coupled with less expertise and fewer contractors available to lead development efforts, have magnified the challenge of developing complex and intricate space systems. Our work--which is largely based on best practices in the commercial sector--has recommended numerous actions that can be taken to address the problems we identified. Generally, we have recommended that DOD separate technology discovery from acquisition, follow an incremental path toward meeting user needs, match resources and requirements at program start, and use quantifiable data and demonstrable knowledge to make decisions to move to next phases. We have also identified practices related to cost estimating, program manager tenure, quality assurance, technology transition, and an array of other aspects of acquisition program management that could benefit space programs. These practices are highlighted in appendix I. Over the past several years, DOD has implemented or has been implementing a number of actions to reform how space and weapon systems are acquired, both through its own initiatives as well as those required by statute. Additionally, DOD is evaluating and proposing new actions to increase space system acquisition efficiency and effectiveness. Because many of these actions are relatively new, or not yet fully implemented, it is too early to tell whether they will be effective or effectively implemented. For space in particular, DOD is working to ensure that critical technologies are matured before large-scale acquisition programs begin, requirements are defined early in the process and are stable throughout, and system design remains stable. DOD also intends to follow incremental or evolutionary acquisition processes versus pursuing significant leaps in capabilities involving technology risk and has done so with the only new major satellite program undertaken by the Air Force in recent years--GPS IIIA. DOD is also providing more program and contractor oversight and putting in place military standards and specifications in its acquisitions. Additionally, DOD and the Air Force are working to streamline management and oversight of the national security space enterprise. For example, all Air Force space system acquisition responsibility has been aligned to the office that has been responsible for all other Air Force acquisition efforts, and the Defense Space Council--created last year--is reviewing, as one of its first agenda items, options for streamlining the many committees, boards, and councils involved in space issues. These and other actions that have been taken or are being taken that could improve space system acquisition outcomes are described in table 2. At the DOD-wide level, and as we reported last year, Congress and DOD have recently taken major steps toward reforming the defense acquisition system in ways that may increase the likelihood that weapon programs will succeed in meeting planned cost and schedule objectives. In particular, new DOD policy and legislative provisions place greater emphasis on front-end planning and establishing sound business cases for starting programs. For example, the provisions require programs to invest more time and resources to refine concepts through practices such as early systems engineering, strengthen cost estimating, develop technologies, build prototypes, hold early milestone reviews, and develop preliminary designs before starting system development. These provisions are intended to enable programs to refine a weapon system concept and make cost, schedule, and performance trade-offs before significant commitments are made. In addition, DOD policy requires establishment of configuration steering boards that meet annually to review program requirements changes as well as to make recommendations on proposed descoping options that could reduce program costs or moderate requirements. Fundamentally, these provisions should help (1) programs replace risk with knowledge and (2) set up more executable programs. Key DOD and legislative provisions compared with factors we identified in programs that have been successful in meeting cost and schedule baselines are summarized in table 3. Furthermore, the Ike Skelton National Defense Authorization Act for Fiscal Year 2011, signed into law on January 7, 2011, contains further direction aimed at improving acquisition outcomes, including, among other things, a requirement for the Secretary of Defense to issue guidance on the use of manufacturing readiness levels (including specific levels that should be achieved at key milestones and decision points), elevating the role of combatant commanders in DOD's requirements-setting process, and provisions for improving the acquisition workforce. While it is too soon to determine if Congress's and DOD's reform efforts will improve weapon program outcomes, DOD has taken steps to implement the provisions. For example, in December 2009, the department issued a new implementation policy, which identifies roles and responsibilities and institutionalizes many of the requirements of the Weapon Systems Acquisition Reform Act of 2009. DOD has also filled several key leadership positions created by the legislation, including the Directors for Cost Assessment and Program Evaluation, Developmental Test and Evaluation, Systems Engineering, and Performance Assessments and Root Cause Analyses. To increase oversight, the department embarked on a 5-year effort to increase the size of the acquisition workforce by up to 20,000 personnel by 2015. Furthermore, the department began applying the acquisition reform provisions to some new programs currently in the planning pipeline. For example, many of the pre- Milestone B programs we reviewed this year as part of our annual assessment of selected weapon programs planned to conduct preliminary design reviews before going to Milestone B, although fewer are taking other actions, such as developing prototypes, that could improve their chances of success. With respect to space system acquisitions, particularly GPS III--DOD's newest major space system acquisition--has embraced the knowledge-based concepts behind our previous recommendations as a means of preventing large cost overruns and schedule delays. Additionally, the Office of the Secretary of Defense and the Air Force are proposing new acquisition strategies for satellites and launch vehicles: In June of last year, and as part of the Secretary of Defense's Efficiencies Initiative, the Under Secretary of Defense for Acquisition, Technology and Logistics began an effort to restore affordability and productivity in defense spending. Major thrusts of this effort include targeting affordability and controlling cost growth, incentivizing productivity and innovation in industry, promoting real competition, improving tradecraft in services acquisition, and reducing nonproductive processes and bureaucracy. As part of this effort, the Office of the Secretary of Defense and the Air Force are proposing a new acquisition strategy for procuring satellites, called the Evolutionary Acquisition for Space Efficiency (EASE), to be implemented starting in fiscal year 2012. Primary elements of this strategy include block buys of two or more satellites (economic order quantities) using a multiyear procurement construct, use of fixed-price contracting, stable research and development investment, evolutionary development, and stable requirements. According to DOD, EASE is intended to help stabilize funding, staffing, and subtier suppliers; help ensure mission continuity; reduce the impacts associated with obsolescence and production breaks; and increase long-term affordability with cost savings of over 10 percent. DOD anticipates first applying the EASE strategy to procuring two AEHF satellites beginning in fiscal year 2012, followed by procurement of two SBIRS High satellites beginning in fiscal year 2013. According to the Air Force, it will consider applying the EASE strategy--once it is proven--to other space programs, such as GPS III. We have not yet conducted a review of the EASE strategy to assess the potential benefits, challenges, and risks of its implementation. Questions about this approach would include the following: What are the major risks incurred by the government in utilizing the EASE acquisition strategy? What level of risks (known unknowns and unknown unknowns) is being assumed in the estimates of savings to be accrued from the EASE strategy? How are evolutionary upgrades to capabilities to be pursued under EASE? How does the EASE acquisition strategy reconcile with the current federal and DOD acquisition policy, acquisition and financial management regulations, and law? The Air Force is developing a new acquisition strategy for its EELV program. Primarily, under the new strategy, the Air Force and National Reconnaissance Office are expected to initiate block buys of eight first stage booster cores--four for each EELV family, Atlas V and Delta IV--per year over 5 years to help stabilize the industrial base, maintain mission assurance, and avoid cost increases. As mentioned earlier, we have initiated a review of the development of the new strategy and plan to issue a report on our findings in June 2011. Given concerns raised through recent studies about visibility into costs and the industrial base supporting EELV, it is important that this strategy be supported with reliable and accurate data. The actions that the Office of the Secretary of Defense and the Air Force have been taking to address acquisition problems listed in tables 2 and 3 are good steps. However, more changes to processes, policies, and support may be needed--along with sustained leadership and attention--to help ensure that these reforms can take hold, including addressing the diffuse leadership for space programs. Diffuse leadership has had a direct impact on the space system acquisition process, primarily because it has made it difficult to hold any one person or organization accountable for balancing needs against wants, for resolving conflicts among the many organizations involved with space, and for ensuring that resources are dedicated where they need to be dedicated. This has hampered DOD's ability to synchronize delivery of space, ground, and user assets for space programs. For instance, many of the cost and schedule problems we identified on the GPS program were tied in part to diffuse leadership and organizational stovepipes throughout DOD, particularly with respect to DOD's ability coordinate delivery of space, ground, and user assets. Additionally, we have recently reported that DOD faces a situation where satellites with advances in capability will be residing for years in space without users being able to take full advantage of them because investments and planning for ground, user, and space components were not well coordinated. Specifically, we found that the primary cause for user terminals not being well synchronized with their associated space systems is that user terminal development programs are typically managed by different military acquisition organizations than those managing the satellites and ground control systems. Recent studies and reviews examining the leadership, organization, and management of national security space have found that there is no single authority responsible below the President and that authorities and responsibilities are spread across the department. In fact, the national security space enterprise comprises a wide range of government and nongovernment organizations responsible for providing and operating space-based capabilities serving both military and intelligence needs. While some changes to the leadership structure have recently been made--including revalidating the role of the Secretary of the Air Force as the DOD Executive Agent for Space, disestablishing the Office of the Assistant Secretary of Defense for Networks and Information Integration and the National Security Space Office, and aligning Air Force space system acquisition responsibility into a single Air Force acquisition office--and others are being studied, it is too early to tell how effective these changes will be in streamlining management and oversight of space system acquisitions. Additionally, while the recently issued National Space Policy assigns responsibilities for governmentwide space capabilities, such as those for SSA, it does not necessarily assign the corresponding authority to execute the responsibilities. Finally, adequate workforce capacity is essential for the front-end planning activities now required by acquisition reform initiatives for new weapon programs to be successful. However, studies have identified insufficient numbers of experienced space system acquisition personnel and inadequate continuity of personnel in project management positions as problems needing to be addressed in the space community. For example, a recent Secretary of the Air Force-directed Broad Area Review of space launch noted that while the Air Force Space and Missile Systems Center workforce had decreased by about 25 percent in the period from 1992 to 2010, the number of acquisition programs had increased by about 41 percent in the same time period. Additionally, our own studies have identified gaps in key technical positions, which we believed increased acquisition risks. For instance, in a 2008 review of the EELV program, we found that personnel shortages in the EELV program office occurred particularly in highly specialized areas. According to the EELV program office and Broad Area Review, this challenge persists. DOD is working to position itself to improve its space system acquisitions. After more than a decade of acquisition difficulties--which have created potential gaps in capability, diminished DOD's ability to invest in new space systems, and lessened DOD's credibility to deliver high-performing systems within budget and on time--DOD is starting to launch new generations of satellites that promise vast enhancements in capability. In 1 year, DOD has or expects to have launched newer generations of navigation, communications, SSA, and missile warning satellites. Moreover, given the nation's fiscal challenges, DOD's focus on fixing problems and implementing reforms rather than taking on new, complex, and potentially higher-risk efforts is promising. However, challenges to keeping space system acquisitions on track remain, including pursuing evolutionary acquisitions over revolutionary ones, managing requirements, providing effective coordination across the diverse organizations interested in space-based capabilities, and ensuring that technical and programmatic expertise are in place to support acquisitions. DOD's newest major space system acquisition efforts, such as GPS IIIA, DWSS, JMS, Space Fence, and the follow-on to the SBSS will be key tests of how well DOD's reforms and reorganizations have positioned it to manage these challenges. We look forward to working with DOD to help ensure that these and other challenges are addressed. Chairman Nelson, Ranking Member Sessions, 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 about this statement, please contact Cristina Chaplain at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Pubic Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Art Gallegos, Assistant Director; Kristine Hassinger; Arturo Holguin; Rich Horiuchi; Roxanna Sun; and Bob Swierczek. Prioritize investments so that projects can be fully funded and it is clear where projects stand in relation to the overall portfolio. Follow an evolutionary path toward meeting mission needs rather than attempting to satisfy all needs in a single step. Match requirements to resources--that is, time, money, technology, and people--before undertaking a new development effort. Research and define requirements before programs are started and limit changes after they are started. Ensure that cost estimates are complete, accurate, and updated regularly. Commit to fully fund projects before they begin. Ensure that critical technologies are proven to work as intended before programs are started. Assign more ambitious technology development efforts to research departments until they are ready to be added to future generations (increments) of a product. Use systems engineering to close gaps between resources and requirements before launching the development process. 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. Do not allow development to proceed until certain thresholds are met--for example, a high proportion of engineering drawings completed or production processes under statistical control. Empower program managers to make decisions on the direction of the program and to resolve problems and implement solutions. Hold program managers accountable for their choices. Require program managers to stay with a project to its end. Hold 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. Encourage program managers to share bad news, and encourage collaboration and communication. In preparing this testimony, we relied on our body of work in space programs, including previously issued GAO reports on assessments of individual space programs, common problems affecting space system acquisitions, and the Department of Defense's (DOD) acquisition policies. We relied on our best practices studies, which comment on the persistent problems affecting space system acquisitions, the actions DOD has been taking to address these problems, and what remains to be done, as well as Office of the Secretary of Defense and Air Force documents addressing these problems and actions. We also relied on work performed in support of our annual weapons system assessments, and analyzed DOD funding estimates to assess cost increases and investment trends for selected major space system acquisition programs. The GAO work used in preparing this statement was conducted 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. 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Despite decades of significant investment, most of the Department of Defense's (DOD) large space acquisition programs have collectively experienced billions of dollars in cost increases, stretched schedules, and increased technical risks. Significant schedule delays of as much as 9 years have resulted in potential capability gaps in missile warning, military communications, and weather monitoring. These problems persist, with other space acquisition programs still facing challenges in meeting their targets and aligning the delivery of assets with appropriate ground and user systems. To address cost increases, DOD reduced the number of satellites it would buy, reduced satellite capabilities, or terminated major space system acquisitions. Broad actions have also been taken to prevent their occurrence in new programs, including better management of the acquisition process and oversight of its contractors and resolution of technical and other obstacles to DOD's ability to deliver capability. This testimony will focus on the (1) status of space system acquisitions, (2) results of GAO's space-related reviews over the past year and the challenges they signify, (3) efforts DOD has taken to address causes of problems and increase credibility and success in its space system acquisitions as well as efforts currently underway, and (4) what remains to be done. Over the past two decades, DOD has had difficulties with nearly every space acquisition program, with years of cost and schedule growth, technical and design problems, and oversight and management weaknesses. However, to its credit, DOD continues to make progress on several of its programs--such as the Space Based Infrared System High and Advanced Extremely High Frequency programs--and is expecting to deliver significant advances in capability as a result. But other programs continue to be susceptible to cost and schedule challenges. For example, the Global Positioning System (GPS) IIIA program's total cost has increased by about 10 percent over its original estimate, and delays in the Mobile User Objective System continue the risk of a capability gap in ultra high frequency satellite communications. In 2010, GAO assessed DOD's efforts to (1) upgrade and sustain GPS capabilities and (2) commercialize or incorporate into its space acquisition program the space technologies developed by small businesses. These reviews underscore the varied challenges that still face the DOD space community as it seeks to complete problematic legacy efforts and deliver modernized capabilities--for instance, the need for more focused coordination and leadership for space activities--and highlight the substantial barriers and challenges that small businesses must overcome to gain entry into the government space arena. DOD continues to work to ensure that its space programs are more executable and produce a better return on investment. Many of the actions it has been taking address root causes of problems, though it will take time to determine whether these actions are successful. For example, DOD is working to ensure that critical technologies are matured before large-scale acquisition programs begin and requirements are defined early in the process and are stable throughout. Additionally, DOD and the Air Force are working to streamline management and oversight of the national security space enterprise. While DOD actions to date have been good, more changes to processes, policies, and support may be needed--along with sustained leadership and attention--to help ensure that these reforms can take hold, including addressing the diffuse leadership for space programs. While some changes to the leadership structure have recently been made and others are being studied, it is too early to tell how effective they will be in streamlining management and oversight of space system acquisitions. Finally, while space system acquisition workforce capacity is essential if new weapon programs are to be successful, DOD continues to face gaps in technical and programmatic expertise for space.
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As part of its ongoing business systems modernization program, and consistent with our past recommendation, DOD has created an inventory of its existing and new business system investments. As of October 2002, DOD reported that this inventory consisted of 1,731 systems and system acquisition projects across DOD's functional areas. In particular, DOD reported that it had 374 separate systems to support its civilian and military personnel function, 335 systems to perform finance and accounting functions, and 221 systems that support inventory management. Table 1 presents the composition of DOD business systems by functional area. As we have previously reported, this systems environment is not the result of a systematic and coordinated departmentwide strategy, but rather is the product of unrelated, stovepiped initiatives to support a set of business operations that are nonstandard and duplicative across DOD components. Consequently, DOD's amalgamation of systems is characterized by (1) multiple systems performing the same tasks; (2) the same data stored in multiple systems; (3) manual data entry and reentry into multiple systems; and (4) extensive data translations and interfaces, each of which increases costs and limits data integrity. Further, as we have reported, these systems do not produce reliable financial data to support managerial decisionmaking and ensure accountability. To the department's credit, it recognizes the need to eliminate as many systems as possible and integrate and standardize those that remain. In fact, three of the four Defense Finance and Accounting Service (DFAS) projects that are the subject of the report being released today were collectively intended to reduce or eliminate all or part of 17 different systems that perform similar functions. For example, the Defense Procurement Payment System (DPPS) was intended to consolidate eight contract and vendor pay systems; the Defense Departmental Reporting System (DDRS) is intended to reduce the number of departmental financial reporting systems from seven to one; and the Defense Standard Disbursing System (DSDS) is intended to eliminate four different disbursing systems. The fourth system, the DFAS Corporate Database/Corporate Warehouse (DCD/DCW), is intended to serve as the single DFAS data store, meaning it would contain all DOD financial information required by DFAS and be the central point for all shared data within DFAS. For fiscal year 2003, DOD has requested approximately $26 billion in IT funding to support a wide range of military operations and business functions. This $26 billion is spread across the military services and defense agencies--each receiving its own allocation of IT funding. The $26 billion supports three categories of IT--business systems, business systems infrastructure, and national security systems--the first two of which comprise the earlier cited 1,731 new and existing business systems projects. At last year's hearing, DOD was asked about the makeup of its $26 billion in IT funding, including what amounts relate to business systems and related infrastructure, at which time answers were unavailable. As we are providing in the report being released today and as shown in figure 1, approximately $18 billion--about $5.2 billion for business systems and $12.8 billion for business systems infrastructure--relates to the operation, maintenance, and modernization of the 1,731 business systems that DOD reported having in October 2002. Figure 2 provides the allocation of DOD's business systems modernization budget for fiscal year 2003 budget by component. However, recognizing the need to modernize and making funds available are not sufficient for improving DOD's current systems environment. Our research of successful modernization programs in public and private- sector organizations, as well as our reviews of these programs in various federal agencies, has identified a number of IT disciplines that are necessary for successful modernization. These disciplines include having and implementing (1) an enterprise architecture to guide and constrain systems investments; (2) an investment management process to ensure that systems are invested in incrementally, are aligned with the enterprise architecture, and are justified on the basis of cost, benefits, and risks; and (3) a project oversight process to ensure that project commitments are being met and that needed corrective action is taken. These institutionalized disciplines have been long missing at DOD, and their absence is a primary reason for the system environment described above. The future of DOD's business systems modernization is fraught with risk, in part because of longstanding and pervasive modernization management weaknesses. As we have reported, these weaknesses include (1) lack of an enterprise architecture; (2) inadequate institutional and project-level investment management processes; and (3) limited oversight of projects' delivery of promised system capabilities and benefits on time and within budget. To DOD's credit, it recognizes the need to address each of these weaknesses and has committed to doing so. Effectively managing a large and complex endeavor requires, among other things, a well-defined and enforced blueprint for operational and technological change, commonly referred to as an enterprise architecture. Developing, maintaining, and using architectures is a leading practice in engineering both individual systems and entire enterprises. Government- wide requirements for having and using architectures to guide and constrain IT investment decisionmaking are also addressed in federal law and guidance. Our experience has shown that attempting a major systems modernization program without a complete and enforceable enterprise architecture results in systems that are duplicative, are not well integrated, are unnecessarily costly to maintain and interface, do not ensure basic financial accountability, and do not effectively optimize mission performance. In May 2001, we reported that DOD had neither an enterprise architecture for its financial and financial-related business operations nor the management structure, processes, and controls in place to effectively develop and implement one. Further, we stated that DOD's plans to continue spending billions of dollars on new and modified systems independently from one another, and outside the context of a departmental modernization blueprint, would result in more systems that are duplicative, noninteroperable, and unnecessarily costly to maintain and interface; moreover, they would not address longstanding financial management problems. To assist the department, we provided a set of recommendations on how DOD should approach developing its enterprise architecture. In September 2002, the Secretary of Defense designated improving financial management operations (including such business areas as logistics, acquisition, and personnel management) as one of the department's top 10 priorities. In addition, the Secretary established a program to develop an enterprise architecture, and DOD plans to have the architecture developed by May 2003. Subsequently, the National Defense Authorization Act for Fiscal Year 2003 directed DOD to develop, by May 1, 2003, an enterprise architecture, including a transition plan for its implementation. The act also defined the scope and content of the enterprise architecture and directed us to submit to congressional defense committees an assessment of DOD's actions to develop the architecture and transition plan no later than 60 days after their approval. Finally, the act prohibited DOD from obligating more than $1 million on any financial systems improvement until the DOD comptroller makes a determination regarding the necessity or suitability of such an investment. In our February 2003 report on DOD enterprise architecture efforts, we stated our support for the Secretary's decision to develop the architecture and recognized that DOD's architecture plans were challenging and ambitious. However, we also stated that despite taking a number of positive steps toward its architecture goals, such as establishing a program office responsible for managing the enterprise architecture, the department had yet to implement several key recommendations and certain leading practices for developing and implementing architectures. For example, DOD had yet to (1) establish the requisite architecture development governance structure needed to ensure that ownership of and accountability for the architecture is vested with senior leaders across the department; (2) develop and implement a strategy to effectively communicate the purpose and scope, approach to, and roles and responsibilities of stakeholders in developing the enterprise architecture; and (3) fully define and implement an independent quality assurance process. We concluded that not implementing these recommendations and practices increased DOD's risk of developing an architecture that would be limited in scope, would be resisted by those responsible for implementing it, and would not support effective systems modernization. To assist the department, we made additional recommendations with which DOD agreed. We plan to continue reviewing DOD's efforts to develop and implement this architecture pursuant to our mandate under the fiscal year 2003 defense authorization act. The Clinger-Cohen Act, federal guidance, and recognized best practices provide a framework for organizations to follow to effectively manage their IT investments. Collectively, this framework addresses IT investment management at the institutional or corporate level, as well as the individual project or system level. The former involves having a single, corporate approach governing how the organization's portfolio of IT investments is selected, controlled, and evaluated across its various components, including assuring that each investment is aligned with the organization's enterprise architecture. The latter involves having a system/project-specific investment approach that provides for making investment decisions incrementally and ensuring that these decisions are economically justified on the basis of current and credible analyses. Corporate investment management approach: DOD has yet to establish and implement an effective departmentwide approach to managing its business systems investment portfolio. In May 2001, we reported that DOD did not have a departmentwide IT investment management process through which to assure that its enterprise architecture, once developed, could be effectively implemented. We therefore recommended that DOD establish a system investment selection and control process that treats compliance with the architecture as an explicit condition to meet at key decision points in the system's life cycle and that can be waived only if justified by compelling written analysis. Subsequently, in February 2003, we reported that DOD had not yet established the necessary departmental investment management structure and process controls needed to adequately align ongoing investments with its architectural goals and direction. Instead, the department continued to allow its component organizations to make their own parochial investment decisions, following different approaches and criteria. In particular, DOD had not established and applied common investment criteria to its ongoing IT system projects using a hierarchy of investment review and funding decisionmaking bodies, each composed of representatives from across the department. DOD also had not yet conducted a comprehensive review of its ongoing IT investments to ensure that they were consistent with its architecture development efforts. We concluded that until it takes these steps, DOD will likely continue to lack effective control over the billions of dollars it is currently spending on IT projects. To address this, we recommended that DOD create a departmentwide investment review board with the responsibility and authority to (1) select and control all DOD financial management investments and (2) ensure that its investment decisions treat compliance with the financial management enterprise architecture as an explicit condition for investment approval that can be waived only if justified by a compelling written analysis. DOD concurred with our recommendations and is taking steps to address them. Project/system-specific investment management: DOD has yet to ensure that its investments in all individual systems or projects are economically justified and that it is investing in each incrementally. In particular, none of the four DFAS projects addressed in the report being issued today had current and reliable economic justifications to demonstrate that they would produce value commensurate with the costs and risks being incurred. For example, we found that although DCD was initiated to contain all DOD financial data required by DFAS systems, planned DCD capabilities had since been drastically reduced. Despite this, DFAS planned to continue investing in DCD/DCW without having an economic justification showing whether its revised plans were cost effective. Moreover, DOD planned to continue investing in the three other projects even though none had current economic analyses that reflected material changes to costs, schedules, and/or expected benefits since the projects' inception. For example, the economic analysis for DSDS had not been updated to reflect material changes in the project, such as changing the date for full operational capability from February 2003 to December 2005--a schedule change of almost 3 years that affected delivery of promised benefits. Similarly, the DPPS economic analysis had not been updated to recognize an estimated cost increase of $274 million and schedule slip of almost 4 years. After recently reviewing this project's change in circumstances, the DOD Comptroller terminated DPPS after 7 years of effort and an investment of over $126 million, citing poor program performance and increasing costs. Table 2 highlights the four projects' estimated cost increases and schedule delays. Our work on other DOD projects has shown a similar absence of current and reliable economic justification for further system investment. For example, we reported that DOD's ongoing and planned investment in its Standard Procurement System (SPS) was based on an outdated and unreliable economic analysis, and even this flawed analysis did not show that the system was cost beneficial, as defined. As a result, we recommended that investment in future releases or major enhancements to the system be made conditional on the department's first demonstrating that the system was producing benefits that exceeded costs and that future investment decisions be made on the basis of complete and reliable economic justifications. DOD is currently in the process of addressing this recommendation. Beyond not having current and reliable economic analyses for its projects, DOD has yet to adopt an incremental approach to economically justifying and investing in all system projects. For example, we have reported that although DOD had divided its multiyear, billion-dollar SPS project into a series of incremental releases, it had not treated each of these increments as a separate investment decision. Such an incremental approach to system investment helps to prevent discovering too late that a given project is not cost beneficial. However, rather than adopt an incremental approach to SPS investment management, the department chose to treat investment in SPS as one, monolithic investment decision, justified by a single, all-or-nothing economic analysis. This approach to investing in large systems, like SPS, has proven ineffective in other federal agencies, resulting in huge sums being invested in systems that do not provide commensurate value, and thus has been abandoned by successful organizations. We also recently reported that while DOD's Composite Health Care System II had been structured into a series of seven increments (releases), the department had not treated the releases to date as separate investment decisions supported by incremental economic justification. In response to our recommendations, DOD committed to changing its strategy for future releases to include economically justifying each release before investing in and verifying each release's benefits and costs after deployment. The Clinger-Cohen Act of 1996 and federal guidance emphasize the need to ensure that IT projects are being implemented at acceptable costs and within reasonable and expected timeframes and that they are contributing to tangible, observable improvements in mission performance (that is, that projects are meeting the cost, schedule, and performance commitments upon which their approval was justified). They also emphasize the need to regularly determine each project's progress toward expectations and commitments and to take appropriate action to address deviations. Our work on specific DOD projects has shown that such oversight does not always occur, a multi-example case in point being the four DFAS accounting system projects that are the subject of our report being released today. For these four projects, oversight responsibility was shared by the DOD comptroller, DFAS, and the DOD chief information officer (CIO). However, these oversight authorities have not ensured, in each case, that the requisite analytical basis for making informed investment decisions was prepared. Moreover, they have not regularly monitored system progress toward expectations so that timely action could have been taken to correct deviations, even though each case had experienced significant cost increases and schedule delays (see table 2). Their respective oversight activities are summarized below: DOD Comptroller--Oversight responsibility for DFAS activities, including system investments, rests with the DOD Comptroller. However, DOD Comptroller officials were not only unaware of cost increases and schedule delays on these four projects, they also told us that they do not review DFAS system investments to ensure that they are meeting cost, schedule, and performance commitments because this is DFAS's responsibility. DFAS--This DOD agency has established an investment committee to, among other things, oversee its system investments. However, the committee could not provide us with any evidence demonstrating meaningful oversight of these four projects, nor could it provide us with any guidance describing the committee's role, responsibilities, and authorities, and how it oversees projects. DOD CIO--Oversight of the department's "major" IT projects, of which two of the four DFAS projects (DCD/DCW and DPPS) qualify, is the responsibility of DOD's CIO. However, this organization did not adequately fulfill this responsibility on either project because, according to DOD CIO officials, they have little practical authority in influencing component agency-funded IT projects. Thus, the bad news is that these three oversight authorities have jointly permitted approximately $316 million to be spent on the four accounting system projects without knowing if material changes to the projects' scopes, costs, benefits, and risks warranted continued investment. The good news is that the DOD Comptroller recently terminated one of the four (DPPS), thereby avoiding throwing good money after bad, and DOD has agreed to implement the recommendations contained in our report released today, which calls for DOD to demonstrate that the remaining three projects will produce benefits that exceed costs before further investing in each. Our work on other DOD projects has shown similar voids in oversight. For example, we reported that SPS's full implementation date slipped by 3 1/2 years, with further delays expected, and the system's life-cycle costs grew by 23 percent, from $3 billion to $3.7 billion. However, none of the oversight authorities responsible for this project, including the DOD CIO, had required that the economic analysis be updated to reflect these changes and thereby provide a basis for informed decisionmaking on the project's future. To address this issue, we recommended, among other things, that the lines of oversight responsibility and accountability of the project be clarified and that further investment in SPS be limited until such investment could be justified. DOD has taken steps to address some of our recommendations. For example, it has clarified organizational accountability and responsibility for the program. However, much remains to be done before the department will be able to make informed, data- driven decisions about whether further investment in the system is justified. We have made numerous recommendations to DOD that collectively provide a valuable roadmap for improvement as the department attempts to create the management infrastructure needed to effectively undertake a massive business systems modernization program. This collection of recommendations is not without precedent, as we have provided similar ones to other federal agencies, such as the Federal Aviation Administration, the Internal Revenue Service, and the former U.S. Customs Service, to aid them in building their respective capacities for managing modernization programs. In cases where these recommendations have been implemented properly, we have observed improved modernization management and accountability. Our framework for DOD provides for developing a well-defined and enforceable DOD-wide enterprise architecture to guide and constrain the department's business system investments, including specific recommendations for successfully accomplishing this, such as creating an enterprise architecture executive committee whose members are singularly and collectively responsible and accountable for delivery and approval of the architecture and a proactive enterprise architecture marketing and communication program to facilitate stakeholder understanding, buy-in, and commitment to the architecture. Our recommendations also provide for establishing a DOD-wide investment decisionmaking structure that consists of a hierarchy of investment boards that are responsible for ensuring that projects meet defined threshold criteria and for reviewing and deciding on projects' futures on the basis of a standard set of investment criteria, two of which are alignment with the enterprise architecture and return on investment. In addition, our recommendations include ensuring that return on investment is analytically supported by current and reliable economic analyses showing that benefits are commensurate with costs and risks, and that these analyses and associated investment decisions cover incremental parts of each system investment, rather than treating the system as one, all-or-nothing, monolithic pursuit. Further, our recommendations provide clear and explicit lines of accountability for project oversight and continuous monitoring and reporting of progress against commitments to ensure that promised system capabilities and benefits are being delivered on time and within budget.
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The Department of Defense's (DOD) management of its business systems modernization program has been an area of longstanding concern to Congress and one that GAO has designated as high risk since 1995. Because of this concern, GAO was requested to testify on (1) DOD's current inventory of existing and new business systems and the amount of funding devoted to this inventory; (2) DOD's modernization management capabilities, including weaknesses and DOD's efforts to address them; and (3) GAO's collective recommendations for correcting these weaknesses and minimizing DOD's exposure to risk until they are corrected. In developing this testimony, GAO drew from its previously issued reports on DOD's business systems modernization efforts, including one released today on four key Defense Finance and Accounting Service (DFAS) projects. As of October 2002, DOD reported that its business systems environment consisted of 1,731 systems and system acquisition projects spanning about 18 functional areas. This environment is the product of unrelated, stovepiped initiatives supporting nonstandard, duplicative business operations across DOD components. For fiscal year 2003, about $18 billion of DOD's IT funding relates to operating, maintaining, and modernizing these nonintegrated systems. To DOD's credit, it recognizes the need to modernize, eliminating as many of these systems as possible. The future of DOD's business systems modernization is fraught with risk because of longstanding and pervasive modernization weaknesses, three of which are discussed below. GAO's report on four DFAS systems highlights some of these weaknesses, and GAO's prior reports have identified the others. DOD has stated its commitment to addressing each and has efforts under way that are intended to do so. Lack of departmentwide enterprise architecture: DOD does not yet have an architecture, or blueprint, to guide and constrain its business system investments across the department. Nevertheless, DOD continues to spend billions of dollars on new and modified systems based the parochial needs and strategic direction of its component organizations. This will continue to result in systems that are duplicative, are not integrated, are unnecessarily costly to maintain and interface, and will not adequately address longstanding financial management problems. Lack of effective investment management: DOD does not yet have an effective approach to consistently selecting and controlling its investments as a portfolio of competing department options and within the context of an enterprise architecture. DOD is also not ensuring that it invests in each system incrementally and on the basis of reliable economic justification. For example, for the four DFAS projects, DOD spent millions of dollars without knowing whether the projects would produce value commensurate with costs and risks. Thus far, this has resulted in the termination of one of the projects after about $126 million and 7 years of effort was spent. Lack of effective oversight: DOD has not consistently overseen its system projects to ensure that they are delivering promised system capabilities and benefits on time and within budget. For example, for the four DFAS projects, oversight responsibility is shared by the DOD Comptroller, DFAS, and the DOD chief information officer. However, these oversight authorities have largely allowed the four to proceed unabated, even though each was experiencing significant cost increases, schedule delays, and/or capability and scope reductions and none were supported by adequate economic justification. As a result, DOD invested approximately $316 million in four projects that may not resolve the very financial management weaknesses that they were initiated to address.
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Our prior work highlights some of the challenges VA faces in formulating its budget: obtaining sufficient data for useful budget projections, making accurate calculations, and making realistic assumptions. Our 2006 report on VA's overall health care budget found that VA underestimated the cost of serving veterans returning from military operations in Afghanistan and Iraq, in part because estimates for fiscal year 2005 were based on data that largely predated the Iraq conflict. In fiscal year 2006, according to VA, the agency again underestimated the cost of serving these veterans because it did not have sufficient data due to challenges obtaining data needed to identify these veterans from the Department of Defense (DOD). According to VA officials, the agency subsequently began receiving the DOD data needed to identify these veterans on a monthly basis rather than quarterly. We also reported challenges VA faces in making accurate calculations during budget formulation. VA made computation errors when estimating the effect of its proposed fiscal year 2006 nursing home policy, and this also contributed to requests for supplemental funding. We found that VA underestimated workload--that is, the amount of care VA provides--and the costs of providing care in all three of its nursing home settings. VA officials said that the errors resulted from calculations being made in haste during the OMB appeal process, and that a more standardized approach to long-term care calculations could provide stronger quality assurance to help prevent future mistakes. In 2006, we recommended that VA strengthen its internal controls to better ensure the accuracy of calculations it uses in preparing budget requests. VA agreed with and implemented this recommendation for its fiscal year 2009 budget justification by having an independent actuarial firm validate the savings estimates from proposals to increase fees for certain types of health care coverage. Our 2006 report on VA's overall health care budget also illustrated that VA faces challenges making realistic assumptions about the budgetary impact of its proposed policies. VA made unrealistic assumptions about how quickly the department would realize savings from proposed changes in its nursing home policy. We reported the President's requests for additional funding for VA's medical programs for fiscal years 2005 and 2006 were in part due to these unrealistic assumptions. We recommended that VA improve its budget formulation processes by explaining in its budget justifications the relationship between the implementation of proposed policy changes and the expected timing of cost savings to be achieved. VA agreed and acted on this recommendation in its fiscal year 2009 budget justification. In January 2009, we found that VA's spending estimate in its fiscal year 2009 budget justification for noninstitutional long-term care services appeared unreliable, in part because this spending estimate was based on a workload projection that appeared to be unrealistically high in relation to recent VA experience. VA projected that its workload for noninstitutional long-term care would increase 38 percent from fiscal year 2008 to fiscal year 2009. VA made this projection even though from fiscal year 2006 to fiscal year 2007--the most recent year for which workload data are available--actual workload for these services decreased about 5 percent. In its fiscal year 2009 budget justification, VA did not provide information regarding its plans for how it would increase noninstitutional workload 38 percent from fiscal year 2008 to fiscal year 2009. We recommended that VA use workload projections in future budget justifications that are consistent with VA's recent experience with noninstitutional long-term care spending or report the rationale for using alternative projections. In its March 23, 2009, letter to GAO, VA stated it concurs with this recommendation and will implement our recommendation in future budget submissions. In January 2009, we also reported that VA may have underestimated its nursing home spending and noninstitutional long-term care spending for fiscal year 2009 because it used a cost assumption that appeared unrealistically low, given recent VA experience and economic forecasts of health care cost increases. For example, VA based its nursing home spending estimate on an assumption that the cost of providing a day of nursing home care would increase 2.5 percent from fiscal year 2008 to fiscal year 2009. However, from fiscal year 2006 to fiscal year 2007--the most recent year for which actual cost data are available--these costs increased approximately 5.5 percent. VA's 2.5 percent cost-increase estimate is also less than the 3.8 percent inflation rate for medical services that OMB provided in guidance to VA to help with its budget estimates. We recommended that in future budget justifications, VA use cost assumptions for estimating both nursing home and noninstitutional long- term care spending that are consistent with VA's recent experience or report the rationale for alternative cost assumptions. In its March 23, 2009, letter to GAO, VA stated it concurs with our recommendations and will implement these recommendations in future budget submissions. Consideration of any proposal to change the availability of the appropriations VA receives for health care should take into account the current structure of the federal budget, the congressional budget process--including budget enforcement--and the nature of the nation's fiscal challenge. The impact of any change on congressional flexibility and oversight also should be considered. In the federal budget, spending is divided into two main categories: (1) direct spending, or spending that flows directly from authorizing legislation--this spending is often referred to as "mandatory spending"-- and (2) discretionary spending, defined as spending that is provided in appropriations acts. It is in the annual appropriations process that the Congress considers, debates, and makes decisions about the competing claims for federal resources. Citizens look to the federal government for action in a wide range of areas. Congress is confronted every year with claims that have merit but which in total exceed the amount the Congress believes appropriate to spend. It is not an easy process--but it is an important exercise of its Constitutional power of the purse. Special treatment for spending in one area--either through separate spending caps or guaranteed minimums or exemption from budget enforcement rules--may serve to protect that area from competition with other areas for finite resources. The allocation of funds across federal activities is not the only thing Congress determines as part of the annual appropriations process. It also specifies the purposes for which funds may be used and the length of time for which funds are available. Further, annually enacted appropriations have long been a basic means of exerting and enforcing congressional policy. The review of agency funding requests often provides the context for the conduct of oversight. For example, in the annual review of the VA health care budget, increasing costs may prompt discussion about causes and possible responses--and lead to changes in the programs or in funding levels. VA health care offers illustrations of and insights into growing health care costs. This takes on special significance since--as we and others have reported--the nation's long-term fiscal challenge is driven largely by the rapid growth in health care costs. Both the Congress and the agencies have expressed frustration with the budget and appropriations process. Some members of Congress have said the process is too lengthy. The public often finds the debate confusing. Agencies find it burdensome and time consuming. And the frequent need for continuing resolutions (CR) has been a source of frustration both in the Congress and in agencies. Although there is frustration with the current process, changes should be considered carefully. The current process is, in part, the cumulative result of many changes made to address previous problems. This argues for spending time both defining what the problem(s) to be solved are and analyzing the impact of any proposed change(s). In considering issues surrounding the possibility of providing advance appropriations for VA health care--or any other program--it is important to recognize that not all funds provided through the existing appropriations process expire at the end of a single fiscal year. Congress routinely provides multi-year appropriations for accounts or projects within accounts when it deems it makes sense to do so. Multi-year funds are funds provided in one year that are available for obligation beyond the end of that fiscal year. So, for example, multi-year funds provided in the fiscal year 2010 appropriations act would be available in fiscal year 2010 and remain available for some specified number of future years. Unobligated balances from such multi-year funds may be carried over by the agency into the next fiscal year--regardless of whether the agency is operating under a continuing resolution or a new appropriations act. For example, in fiscal year 2009 about $3 billion of approximately $41 billion for VA health care programs was made available for two years. Congress also provides agencies--including VA--some authority to move funds between appropriations accounts. This transfer authority provides flexibility to respond to changing circumstances. Advance appropriations are different from multi-year appropriations. Whereas multi-year appropriations are available in the year in which they are provided, advance appropriations represent budget authority that becomes available one or more fiscal years after the fiscal year covered by the appropriations act in which they are provided. So, for example, advance appropriations provided in the fiscal year 2010 appropriations act would consist of funds that would first be available for obligation in fiscal year 2011 or later. In considering the proposal to provide advance appropriations, one issue is the impact on congressional flexibility and its ability to consider competing demands for limited federal funds. Although appropriations are made on an annual cycle, both the President and the Congress look beyond a single year in setting spending targets. The current administration's budget presents spending totals for ten fiscal years. The concurrent Budget Resolution--which represents Congress's overall fiscal plan--includes discretionary spending totals for the budget year and each of the four future years. The provision of advance appropriations would "use up" discretionary budget authority for the next year. In doing so it limits Congress's flexibility to respond to changing priorities and needs and reduces the amount available for other purposes in the next year. Another issue would be how and when the limits on such advance appropriations would be set. Currently the concurrent Budget Resolution both caps the total amount that can be provided through advance appropriations and identifies the agencies or programs which may be provided such funding. It does not specify how the total should be allocated among those agencies. A related question is what share of VA health care funding would be provided in advance appropriations. Is the intent to provide a full appropriation for both years in the single appropriations act? This would in effect enact the entire appropriation for both the budget year and the following fiscal year at the same time. If appropriations for VA health care were enacted in two-year increments, under what conditions would there be changes in funding in the second year? Would the presumption be that there would be no action in that second year except under unusual circumstances? Or is the presumption that there would be additional funds provided? These questions become critical if Congress decides to provide all or most of VA health care's funding in advance. Even if only a portion of VA health care funding is to be provided in advance appropriations, Congress will need to determine what that share should be and how it should be allocated across VA's medical accounts. While providing funds for 2 years in a single appropriations act provides certainty about some funds, the longer projection period increases the uncertainty of the data and projections used. Under the current annual appropriations cycle, agencies begin budget formulation at least 18 months before the relevant fiscal year begins. If VA is expected to submit its budget proposal for health care for both years at once, the lead time for the second year would be 30 months. This additional lead time increases the uncertainty of the estimates and could worsen the challenges VA faces when formulating its health care budget. Given the challenges VA faces in formulating its health care budget and the changing nature of health care, proposals to change the availability of the appropriations it receives deserve careful scrutiny. Providing advance appropriations will not mitigate or solve the problems noted above regarding data, calculations, or assumptions in developing VA's health care budget. Nor will it address any link between cost growth and program design. Congressional oversight will continue to be critical. No one would suggest that the current budget and appropriations process is perfect. However, it is important to recognize that no process will make the difficult choices and tradeoffs Congress faces easy. If VA is to receive advance appropriations for health care, the amount of discretionary spending available for Congress to allocate to other federal activities in that year will be reduced. In addition, providing advance appropriations for VA health care will not resolve the problems we have identified in VA's budget formulation. Mr. Chairman, this concludes our prepared remarks. We would be happy to answer any questions you or other members of the Committee may have. For more information regarding this testimony, please contact Randall B.Williamson at (202) 512-7114 or [email protected] or Susan J. Irving at (202) 512-8288 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contributors named above, Carol Henn and James C. Musselwhite, Assistant Directors; Katherine L. Amoroso, Helen Desaulniers, Felicia M. Lopez, Julie Matta, Lisa Motley, Sheila Rajabiun, Steve Robblee, and Timothy Walker made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Department of Veterans Affairs (VA) estimates it will provide health care to 5.8 million patients with appropriations of about $41 billion in fiscal year 2009. It provides a range of services, including primary care, outpatient and inpatient services, long-term care, and prescription drugs. VA formulates its health care budget by developing annual estimates of its likely spending for all its health care programs and services, and includes these estimates in its annual congressional budget justification. GAO was asked to discuss budgeting for VA health care. As agreed, this statement addresses (1) challenges VA faces in formulating its health care budget and (2) issues surrounding the possibility of providing advance appropriations for VA health care. This testimony is based on prior GAO work, including VA Health Care: Budget Formulation and Reporting on Budget Execution Need Improvement (GAO-06-958) (Sept. 2006); VA Health Care: Long-Term Care Strategic Planning and Budgeting Need Improvement (GAO-09-145) (Jan. 2009); and VA Health Care: Challenges in Budget Formulation and Execution (GAO-09-459T) (Mar. 2009); and on GAO reviews of budgets, budget resolutions, and related legislative documents. We discussed the contents of this statement with VA officials. GAO's prior work highlights some of the challenges VA faces in formulating its budget: obtaining sufficient data for useful budget projections, making accurate calculations, and making realistic assumptions. For example, GAO's 2006 report on VA's overall health care budget found that VA underestimated the cost of serving veterans returning from military operations in Iraq and Afghanistan. According to VA officials, the agency did not have sufficient data from the Department of Defense, but VA subsequently began receiving the needed data monthly rather than quarterly. In addition, VA made calculation errors when estimating the effect of its proposed fiscal year 2006 nursing home policy, and this contributed to requests for supplemental funding. GAO recommended that VA strengthen its internal controls to better ensure the accuracy of calculations used to prepare budget requests. VA agreed and, for its fiscal year 2009 budget justification, had an independent actuarial firm validate savings estimates from proposals to increase fees for certain types of health care coverage. In January 2009, GAO found that VA's assumptions about the cost of providing long-term care appeared unreliable given that assumed cost increases were lower than VA's recent spending experience and guidance provided by the Office of Management and Budget. GAO recommended that VA use assumptions consistent with recent experience or report the rationale for alternative cost assumptions. In a March 23, 2009, letter to GAO, VA stated that it concurred and would implement this recommendation for future budget submissions. The provision of advance appropriations would "use up" discretionary budget authority for the next year and so limit Congress's flexibility to respond to changing priorities and needs. While providing funds for 2 years in a single appropriations act provides certainty about some funds, the longer projection period increases the uncertainty of the data and projections used. If VA is expected to submit its budget proposal for health care for 2 years, the lead time for the second year would be 30 months. This additional lead time increases the uncertainty of the estimates and could worsen the challenges VA already faces when formulating its health care budget. Given the challenges VA faces in formulating its health care budget and the changing nature of health care, proposals to change the availability of the appropriations it receives deserve careful scrutiny. Providing advance appropriations will not mitigate or solve the problems we have reported regarding data, calculations, or assumptions in developing VA's health care budget. Nor will it address any link between cost growth and program design. Congressional oversight will continue to be critical.
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MDA's BMDS is being designed to counter ballistic missiles of all ranges--short, medium, intermediate, and intercontinental.ballistic missiles have different ranges, speeds, sizes, and performance characteristics, MDA is developing multiple systems that when integrated provide multiple opportunities to destroy ballistic missiles before they can reach their targets. The BMDS architecture includes space-based and airborne sensors as well as ground- and sea-based radars; ground- and sea-based interceptor missiles; and a command and control, battle management, and communications system to provide the warfighter with the necessary communication links to the sensors and interceptor missiles. Table 1 provides a brief description of 10 BMDS elements and supporting efforts currently under development by MDA. MDA experienced mixed results in executing its fiscal year 2011 development goals and BMDS tests. For the first time in 5 years, we are able to report that all of the targets used in fiscal year 2011 test events were delivered as planned and performed as expected. In addition, the Aegis BMD program's SM-3 Block IA missile was able to intercept an intermediate-range target for the first time. Also, the THAAD program successfully conducted its first operational flight test in October 2011. However, none of the programs we assessed were able to fully accomplish their asset delivery and capability goals for the year. See table 2 for how each of these programs met some of its goals during the fiscal year. Our report provides further detail on these selected accomplishments. Although some programs completed significant accomplishments during the fiscal year, there were also several critical test failures. These as well as a test anomaly and delays disrupted MDA's flight test plan and the acquisition strategies of several components. Overall, flight test failures and an anomaly forced MDA to suspend or slow production of three out of four interceptors currently being manufactured. The Aegis BMD SM-3 Block IA program conducted a successful intercept in April 2011, but there was an anomaly in a critical component of the interceptor during the test. This component is common with the Block IB missile. Program management officials stated that the SM-3 Block IA deliveries have been suspended while the failure reviews are being conducted. The Aegis BMD SM-3 Block IB program failed in its first intercept attempt in September 2011. The Aegis program has had to add an additional flight test and delay multiple other flight tests. Program management officials stated that the SM-3 Block IB production has been slowed while the failure reviews are being conducted. The GMD program has been disrupted by two recent test failures. As a result of a failed flight test in January 2010, MDA added a retest designated as Flight Test GMD-06a (FTG-06a). However, this retest also failed in December 2010 because of a failure in a key component of the kill vehicle. As a result of these failures, MDA has decided to halt flight testing and restructure its multiyear flight test program, halt production of the interceptors, and redirect resources to return-to-flight activities. Production issues forced MDA to slow production of the THAAD interceptors, the fourth missile being manufactured. To meet the 2002 presidential direction to initially rapidly field and update missile defense capabilities as well as a 2009 presidential announcement to deploy missile defenses in Europe, MDA has undertaken and continues to undertake highly concurrent acquisitions. While this approach enabled MDA to rapidly deploy an initial capability in 2005 by concurrently developing, manufacturing, and fielding BMDS assets, it also led to the initiation of large-scale acquisition efforts before critical technologies were fully understood and allowed programs to move forward into production without having tests completed to verify performance. After delivering its initial capability in 2005, MDA continued these high-risk practices that have resulted in problems requiring extensive retrofits, redesigns, delays, and cost increases. While MDA has incorporated some acquisition best practices in its newer programs, its acquisition strategies still include high or elevated levels of concurrency that result in increased acquisition risk--including performance shortfalls, cost growth, and schedule delays--for these newer programs. Concurrency is broadly defined as overlap between technology development and product development or between product development and production of a system. This overlap is intended to introduce systems rapidly, to fulfill an urgent need, to avoid technology obsolescence, and to maintain an efficient industrial development and production workforce. However, while some concurrency is understandable, committing to product development before requirements are understood and technologies mature as well as committing to production and fielding before development is complete is a high-risk strategy that often results in performance shortfalls, unexpected cost increases, schedule delays, and test problems. At the very least, a highly concurrent strategy forces decision makers to make key decisions without adequate information about the weapon's demonstrated operational effectiveness, reliability, logistic supportability, and readiness for production. Also, starting production before critical tests have been successfully completed has resulted in the purchase of systems that do not perform as intended. These premature commitments mean that a substantial commitment to production has been made before the results of testing are available to decision makers. Accordingly, they create pressure to avoid production breaks even when problems are discovered in testing. These premature purchases have affected the operational readiness of our forces and quite often have led to expensive modifications. In contrast, our work has found that successful programs that deliver promised capabilities for the estimated cost and schedule follow a systematic and disciplined knowledge-based approach, in which high levels of product knowledge are demonstrated at critical points in development.require an appropriate balance between schedule and risk and, in practice, programs can be executed successfully with some level of This approach recognizes that development programs concurrency. For example, it is appropriate to order long-lead production material in advance of the production decision, with the pre-requisite that developmental testing is substantially accomplished and the design confirmed to work as intended. This knowledge-based approach is not unduly concurrent. Rather, programs gather knowledge that demonstrates that their technologies are mature, designs are stable, and production processes are in control before transitioning between acquisition phases, which helps programs identify and resolve risks early. It is a process in which technology development and product development are treated differently and managed separately. Technology development must allow room for unexpected results and delays. Developing a product culminates in delivery and therefore gives great weight to design and production. If a program falls short in technology maturity, it is harder to achieve design stability and almost impossible to achieve production maturity. It is therefore key to separate technology from product development and product development from production-- and thus avoid concurrency. A knowledge-based approach delivers a product on time, within budget, and with the promised capabilities. See figure 1 for depictions of a concurrent schedule and a schedule that uses a knowledge-based approach. To meet the 2002 presidential direction to initially rapidly field and update missile defense capabilities as well as the 2009 presidential announcement to deploy missile defenses in Europe, MDA has undertaken and continues to undertake highly concurrent acquisitions. Such practices enabled MDA to quickly ramp up efforts in order to meet tight presidential deadlines, but they were high risk and resulted in problems that required extensive retrofits, redesigns, delays, and cost increases. Table 3 illustrates concurrency in past efforts and its associated effects. Among earlier MDA programs, concurrency was most pronounced in the GMD program, where the agency was pressed to deliver initial capabilities within a few years to meet the 2002 presidential directive. The consequences here have been significant, in terms of production delays and performance shortfalls, and are still affecting the agency. In recent years, MDA has taken positive steps to incorporate some acquisition best practices, such as increasing competition and partnering with laboratories to build prototypes. For example, MDA took actions in fiscal year 2011 to reduce acquisition risks and prevent future cost growth in its Aegis BMD SM-3 Block IIA program. The agency recognized that the program's schedule included elevated acquisition risks, so it appropriately added more time to the program by revising the schedule to relieve schedule compression between its subsystem and system-level design reviews. In addition, it incorporated lessons learned from other SM-3 variants into its development to further mitigate production unit costs. Moreover, for its PTSS program, MDA has simplified the design and requirements. However, table 4 shows that the agency's current acquisition strategies still include high or elevated levels of concurrency that set many of its newer programs up for increased acquisition risk, including performance shortfalls, cost growth, and schedule delays. In our April 2012 report, we made two recommendations to strengthen MDA's longer-term acquisition prospects. We recommended that the Secretary of Defense direct the Office of Acquisition Technology and Logistics to (1) review all of MDA's acquisitions for concurrency and determine whether the proper balance has been struck between the planned deployment dates and the concurrency risks taken to achieve those dates and (2) review and report to the Secretary of Defense the extent to which the directed capability delivery dates announced by the President in 2009 are contributing to concurrency in missile defense acquisitions and recommend schedule adjustments where significant benefits can be obtained by reducing concurrency. DOD concurred with both of these recommendations. In addition, we recommended specific steps to reduce concurrency in several of MDA's programs. DOD agreed with four of the five missile defense element-specific recommendations and partially agreed with our recommendation to report to the Office of the Secretary of Defense and to Congress the root cause of the SM-3 Block IB developmental flight test failure, path forward for future development, and the plans to bridge production from the SM-3 Block IA to the SM-3 Block IB before committing to additional purchases of the SM-3 Block IB. DOD commented that MDA will report this information to the Office of the Secretary of Defense and to Congress upon completion of the failure review in the third quarter of fiscal year 2012. However, DOD makes no reference to delaying additional purchases until the recommended actions are completed. We maintain our position that MDA should take the recommended actions before committing to additional purchases of the SM-3 Block IB. MDA parts quality issues have seriously impeded the development of the BMDS in recent years. For example, during a THAAD flight test in fiscal year 2010, the air-launched target failed to initiate after it was dropped from the aircraft and fell into the ocean. The test was aborted and a subsequent failure review board investigation identified as the immediate cause of the failure the rigging of cables to the missile in the aircraft and shortcomings in internal processes at the contractor as the underlying cause. This failure led to a delay of the planned test, restructuring of other planned tests, and hundreds of millions of dollars being spent to develop and acquire new medium-range air-launched targets. In another widely- reported example, the GMD element's first intercept test of its CE-II Ground-Based Interceptor failed and the ensuing investigation determined the root cause of the failure to be a quality control event. This failure also caused multiple flight tests to be rescheduled, delayed program milestones, and cost hundreds of millions of dollars for a retest. In view of the cost and importance of space and missile defense acquisitions, we were asked to examine parts quality problems affecting satellites and missile defense systems across DOD and the National Aeronautical and Space Administration. In June 2011, we reported that parts problems discovered after assembly or integration of the instrument or spacecraft had more significant consequences as they required lengthy failure analysis, disassembly, rework, and reassembly--sometimes resulting in a launch delay. For example, the Space Tracking and Surveillance System program, a space-based infrared sensor program with two demonstration satellites that launched in September 2009, discovered problems with defective electronic parts in the Space-Ground Link Subsystem during system-level testing and integration of the satellite. By the time the problem was discovered, the manufacturer no longer produced the part and an alternate contractor had to be found to manufacture and test replacement parts. According to officials, the problem cost about $7 million and was one of the factors that contributed to a 17-month launch delay of two demonstration satellites and delayed participation in the BMDS testing we reported on in March 2009. Our work highlighted a number of causal factors behind the parts quality problems being experienced at MDA and space agencies. present examples of the parts quality issues we found at MDA below, the June 2011 report also describes the parts quality issues we found with other space agencies. Poor workmanship. For example, poor soldering workmanship caused a power distribution unit to experience problems during vehicle-level testing on MDA's Targets and Countermeasures program. According to MDA officials, all units of the same design by the same manufacturer had to be X-ray inspected and reworked, involving extensive hardware disassembly. As a corrective action, soldering technicians were provided with training to improve their soldering operations and ability to perform better visual inspections after soldering. The use of undocumented and untested manufacturing processes. GAO-11-404. manufacturing materials, a portion of the material was not returned and was inadvertently used to fabricate manifolds for two complete CE-II Ground-Based Interceptors. The vehicles had already been processed and delivered to the prime contractor for integration when the problem was discovered. Prime contractor's failure to ensure that its subcontractors and suppliers met program requirements. The GMD program experienced a failure with an electronics part purchased from an unauthorized supplier. According to program officials, the prime contractor required subcontractors to only purchase parts from authorized suppliers; however, the subcontractor failed to execute the requirement and the prime contractor did not verify compliance. At the time of our June 2011 report, MDA had instituted policies to prevent and detect parts quality problems. The programs reviewed in the report--GMD, Aegis BMD, Space Tracking and Surveillance System, and Targets and Countermeasures--were initiated before these recent policies aimed at preventing and detecting parts quality problems took full effect. In addition to new policies focused on quality, MDA has developed a supplier road map database in an effort to gain greater visibility into the supply chain to more effectively manage supply chain risks. In addition, according to MDA officials, MDA has recently been auditing parts distributors in order to rank them for risk in terms of counterfeit parts. MDA also participates in a variety of collaborative initiatives to address quality, in particular, parts quality. These range from informal groups focused on identifying and sharing news about emerging problems as quickly as possible, to partnerships that conduct supplier assessments, to formal groups focused on identifying ways industry and the government can work together to prevent and mitigate problems. Moreover, since our report, MDA has added a new clause in one of its GMD contracts to provide contractor accountability for quality. We have not yet fully assessed the clause but it may allow the contracting officer to make an equitable reduction of performance incentive fee on two contract line items for certain types of quality problems. This new clause shows some leadership by MDA to hold contractors accountable for parts quality. But, we do not yet know what the impact of this clause will be on improving MDA's problems with parts quality. Our June 2011 report recommended greater coordination between government organizations responsible for major space and missile defense programs on parts quality issues and periodic reporting to Congress. DOD partially concurred with our recommendation for greater coordination but responded that it would work with the National Aeronautics and Space Administration to determine the optimal government-wide assessment and reporting implementation to include all quality issues, of which parts, materials, and processes would be one of the major focus areas. In addition, DOD proposed an annual reporting period to ensure planned, deliberate, and consistent assessments. We support DOD's willingness to address all quality issues and to include parts, materials, and processes as an important focus area in an annual report. DOD further stated that it had no objection to providing a report to Congress, if Congress wanted one. We believe that DOD should proactively provide its proposed annual reports to Congress on a routine basis, rather than waiting for any requests from Congress, which could be inconsistent from year to year. The parts quality issues will require sustained attention from both the executive and legislative branches to improve the quality of the systems in development, particularly because there are significant barriers to addressing quality problems, such as an increase in counterfeit electronic parts, a declining government share of the overall electronic parts market, and workforce gaps within the aerospace sector. In conclusion, as the MDA completes a decade of its work, it continues to make progress in delivering assets, completing intercept tests, and addressing some of the quality issues that have plagued it in the past. This year, there were significant accomplishments, such as the successful operational test for THAAD, but also setbacks, including failed tests and their aftermath. Such setbacks reflect inherent risks associated with the challenging nature of missile defense development, but they are also exacerbated by strategies that adopt high levels of concurrency that leave decision makers with less knowledge than needed to move programs forward. Given that initial capabilities are now in place and broader fiscal pressures require sound and more efficient management approaches, it is now time for DOD to reassess MDA's strategy of accelerating development and production to determine whether this approach needs to be rethought for current and future BMDS programs. Chairman Nelson, Ranking Member Sessions, and Members of the Subcommittee, this concludes my statement. I am happy to answer any questions you have. For future questions about this statement, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include David B. Best, Assistant Director; Meredith Allen Kimmett; Ivy Hubler; Steven Stern; Ann Rivlin; Kenneth E. Patton; Robert S. Swierczek; and Alyssa B. Weir. 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 order to meet its mission, MDA is developing a highly complex system of systems--ground-, sea-, and space-based sensors, interceptors, and battle management. Since its initiation in 2002, MDA has been given a significant amount of flexibility in executing the development and fielding of the ballistic missile defense system. This statement addresses progress MDA made in the past year, the challenges it still faces with concurrent acquisitions and how it is addressing parts quality issues. It is based on GAO's April 2012 report on missile defense and its June 2011 report on space and missile defense parts quality problems. In fiscal year 2011, the Missile Defense Agency (MDA) experienced mixed results in executing its fiscal year 2011 development goals and tests. For the first time in 5 years, GAO was able to report that the agency delivered all of the targets used in fiscal year 2011 test events with the targets performing as expected. In addition, the Aegis Ballistic Missile Defense program's Standard Missile-3 Block IA missile was able to intercept an intermediate-range target for the first time and the Terminal High Altitude Area Defense program successfully conducted its first operational flight test. However, none of the programs GAO assessed were able to fully accomplish their asset delivery and capability goals for the year. Flight test failures, a test anomaly, and delays disrupted MDA's flight test plan and the acquisition strategies of several components. Flight test failures forced MDA to suspend or slow production of three out of four interceptors currently being manufactured. Some of the difficulties in MDA's testing and production of assets can be attributed to its highly concurrent acquisition approach. Concurrency is broadly defined as the overlap between technology development and product development or between product development and production. High levels of concurrency were present in MDA's initial efforts and are present in current efforts. For example, MDA's flight test failures of a new variant of the Ground-based Midcourse Defense program's interceptors while production was underway delayed delivery to the warfighter, increased costs, and will require retrofit of fielded equipment. Flight test costs to confirm its capability has increased from $236 million to about $1 billion. MDA has taken positive steps to incorporate some acquisition best practices, such as increasing competition and partnering with laboratories to build prototypes. For example, MDA took actions in fiscal year 2011 to reduce acquisition risks and prevent future cost growth in its Aegis SM-3 Block IIA program. Nevertheless, as long as newer programs adopt acquisition approaches with elevated levels of concurrency, there is still considerable risk of future performance shortfalls that will require retrofits, cost overruns, and schedule delays. MDA is also taking the initiative to address parts quality issues through various means, including internal policies, collaborative initiatives with other agencies, and contracting strategies to hold its contractors more accountable. Quality issues have seriously impeded to the development of the missile defenses in recent years. For example, during a fiscal year 2010 Terminal High Altitude Area Defense flight test, the air-launched target failed to initiate after it was dropped from the aircraft and fell into the ocean. A failure review board identified shortcomings in internal processes at the contractor to be the cause of the failure. This failure led to a delay of the planned test, restructuring of other planned tests, and hundreds of millions of dollars being spent to develop and acquire new medium-range air-launched targets. Parts quality issues will require sustained attention from both the executive and legislative branches. MDA is exhibiting some leadership, but there are significant barriers to addressing quality problems, such as the increase in counterfeit electronic parts, a declining government share of the overall electronic parts market, and workforce gaps within the aerospace sector. GAO makes no new recommendations in this statement. In the April 2012 report, GAO made recommendations to strengthen MDA's longer-term acquisition prospects including a review of MDA's acquisitions for concurrency to determine whether the proper balance has been struck between planned deployment dates and concurrency risks to achieve those dates. The report includes additional recommendations on how individual program elements can reduce concurrency. DOD agreed with six of the seven recommendations and partially agreed with one. DOD generally concurred with the recommendations in the June 2011 report for greater coordination between government organizations responsible for major space and missile defense programs on parts quality issues and periodic reporting to Congress.
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Since 1987, State has recognized that the lack of adequate controls over visa processing is a material weakness that increases U.S. vulnerability to illegal immigration and diminishes the integrity of the U.S. visa. Specific problems have included (1) inadequate management controls, (2) lax security over visas, (3) unreliable equipment, and (4) unsupervised staff. State has acknowledged that it cannot eliminate all attempts to commit fraud, but it can make it more difficult for fraud to occur by improving the security features of the visa, expanding and improving automated systems, and strengthening staff supervision. State's Inspector General's 1993 investigation of the issuance of visas to an ineligible visa applicant, who was subsequently convicted of conspiracy to commit terrorist acts in the United States, highlighted the need for improved internal communications at the overseas posts. In an attempt to address this problem, State established embassy committees designed to promote closer cooperation with other agencies in identifying individuals ineligible for visas. Since 1990, State has reported that the passport process is a material weakness and vulnerable to fraud, including employee malfeasance. According to State, fraudulently obtained passports are being used to enter the country illegally and create false identities to facilitate criminal activities such as narcotics and weapons trafficking, smuggling children for use in pornography, and flight to avoid prosecution from criminal charges. In an attempt to address the problem, State is redeveloping and upgrading its systems to provide comprehensive accountability and improved internal controls. We visited nine overseas posts to ascertain the extent to which State has implemented controls over passport and visa operations: Canberra and Sydney, Australia; London, England; Guatemala City, Guatemala; Tokyo, Japan; Nairobi, Kenya; Seoul, Korea; Mexico City, Mexico; and Johannesburg, South Africa. In 1989, State began the machine-readable visa program as its primary initiative for eliminating fraudulent nonimmigrant visas. The machine-readable visa is considered a more secure document than its predecessor because the new visa is printed on synthetic material that is more secure than paper, is attached to the passport, and has a machine-readable zone with an encryption code. At the ports of entry, the Immigration and Naturalization Service and U.S. Customs Service can check names by scanning the machine-readable zone of the visa. The visas also include a digitized photograph of the traveler. State introduced the machine-readable visa system in 1989. The original due date for installation of the system was 1991, but installation was delayed for 15 months for additional review and analysis of the program. State set a new goal of 1995 to complete installation. However, State's Inspector General reported that State had not received sufficient funds to meet this goal. In 1994, after the World Trade Center bombing, the Congress directed State to install automated lookout systems at all visa-issuing posts by October 30, 1995. State also made a commitment to install the machine-readable visa system at all visa-issuing posts by the end of fiscal year 1996. The Congress authorized State to retain $107.5 million through fiscal year 1995 in machine-readable visa processing fees to fund these and other improvements. As of December 1995, State had installed its machine-readable visa system at 200 posts, and all of the posts had automated access to the Consular Lookout and Support System (CLASS) either through direct telecommunications lines to the CLASS database in Beltsville, Maryland, or via the distributed name check (DNC) system, a stand-alone personal computer system with the CLASS database on tape or compact disk. By the end of fiscal year 1996, all posts are expected to have the machine-readable visa system, be on line with CLASS, and have the DNC as a backup, according to the Bureau of Consular Affairs. State will continue to upgrade the system's software and hardware and pilot test a new version of the system. State spent a total of about $32 million on the installations in fiscal years 1994 and 1995 and plans to spend another $45 million through fiscal year 1998. Although most posts now have automated name-check capability and machine-readable visa systems, technical problems have limited their usefulness and availability. Posts often experience transmission problems with the telecommunications lines that support the system. U.S. embassies in Mexico City, Guatemala City, Sydney, Nairobi, and Seoul, which have direct access to CLASS, have experienced problems with the telecommunications lines and interruptions of CLASS. These disruptions have resulted in considerable delays in visa issuance and weakened visa controls. For example, during our visit to Mexico City we noted that consular staff were using the old microfiche system to check names during telecommunications disruptions rather than the DNC that was designed as backup. They used the microfiche system because using the DNC to check names was often a slow process. By using the microfiche system, the post ran the risk of approving a visa for an applicant who had been recently added to CLASS but had not yet been added to microfiche. State's Diplomatic Telecommunications Service Program Office works with the international telecommunications carriers to find solutions where possible. However, according to an official of that office, if the problem is in the telecommunications lines of the host country, little can be done except to improve the post's backup system. The Bureau of Consular Affairs has developed a new version of the software for the DNC to serve as a faster, more reliable backup when used with a new computer. The DNC software and new personal computers were sent to over 30 high-volume posts in 1995, according to a Bureau official. In the aftermath of the World Trade Center bombing, State directed all diplomatic and consular posts to form committees with representatives from consular, political, and other appropriate agencies to meet regularly to ensure that the names of suspected terrorists and others ineligible for a visa are identified and put into the lookout system. Of the nine posts we visited, all but Sydney and Johannesburg had terrorist lookout committees, and those two posts were represented by the lookout committees at their embassies in Canberra and Pretoria, respectively. Embassy officials at two of the nine posts we visited questioned the value of the committees, mainly because of the lack of cooperation from some agencies. Some agency representatives have been reluctant to provide to the consular sections the names of suspected terrorists, or others the U.S. government may want to keep out of the country, due to the sensitivity of the information and restrictions on sharing information. Officials from one of the law enforcement agencies contacted expressed concern that the information entered into CLASS could be traced to the originating agency and compromise its work. Only one of the agency officials we interviewed said that he had seen guidance from his agency on the extent to which this agency could share information. In addition, not all agencies are represented on these committees. For example, according to a consular official, the committee in Pretoria does not include representatives from the Federal Bureau of Investigation, the Customs Service, and the Drug Enforcement Agency. Consular officials have pointed out that the lookout committees are intended to augment rather than replace coordination activities at headquarters. Additionally, according to consular officials, they are (1) working closely with individual posts to resolve coordination problems, (2) maintaining close liaison with participating agencies at the headquarters level to ensure continued cooperation and commitment, and (3) soliciting increased participation from agencies whose contributions were limited in the past. State says that it has also taken steps to clarify terrorist reporting channels. The posts we visited did not routinely comply with State's own internal control procedures. These procedures are described fully in the Department's Management Control Handbook and summarized for consular officers in the Consular Management Handbook. One common shortcoming was the use of Foreign Service Nationals (FSN) to check names through CLASS without the direct supervision of a U.S. officer. Other shortcomings were the lack of security over controlled equipment and supplies and the failure to report and reconcile daily activities and follow cashiering procedures. According to the Consular Management Handbook, depending on the volume of visa fraud at a post, the embassy may assign the name check function to U.S. employees or assign a U.S. employee to monitor FSN staff doing name checks. Failure to check names could lead to issuance of visas to individuals who are ineligible. In June and July of 1993, the Inspector General testified that an individual convicted of conspiracy to commit terrorist acts in the United States was able to obtain a visa even after his name was added to the lookout system because consular staff failed to do the required name check. The Inspector General further testified that adequate controls were not in place to ensure that name checks were done. FSNs were responsible for checking names at five of the posts we visited. Of those posts, Johannesburg, Sydney, and Tokyo were not equipped with the machine-readable visa system. The consular officers at these posts relied on the FSNs to notify them when an applicant's name matched one in the CLASS database. FSNs in Johannesburg were not required to annotate the visa applications to show that the applicants' names had been checked. Thus, the consular officers lacked any assurance that the FSNs actually checked the names or advised the consular officers of all matches. Consular officers in Tokyo and Sydney said they periodically reviewed the visa applications and observed FSNs. One of the officials acknowledged that consular officers rely more heavily on FSNs than strict adherence to State Department guidance might suggest. However, the officials did not believe the reliance on FSNs was a problem because of the low risk of fraud at their posts. Installation of the machine-readable visa system should help rectify this situation. Unless an American officer overrides it, the system provides the results of the name check for the American officer's review. Moreover, Bureau officials believe improved procedures and software enhancements to take effect on April 30, 1996, will make unsupervised name checks impossible. Consular officers will be required to certify in writing that they have checked the automated lookout system and that there is no basis for excluding the applicant. Three of the nine posts we visited demonstrated a lack of physical security over visa equipment and supplies. Without adequate controls, funds, equipment, and supplies can be misappropriated or misused. For example, during our fieldwork at the consulate in Johannesburg, access to the nonimmigrant visa processing area was not physically restricted, and personnel from other sections of the embassy were observed traversing the consular section to reach other parts of the embassy. In addition, the safe containing visa supplies was left unsecured on several occasions, and refused visa applications were not stored in a locked storage case as required. Two of the posts we visited reported problems with using required reports to reconcile their daily activities. State's nonimmigrant visa reconciliation procedures require the posts to (1) maintain a log of visa numbers issued and spoiled, (2) inspect spoiled visas before entering them in the log, (3) ensure that each application was approved by an authorized officer, and (4) verify that each number in the visa number series is accounted for. The failure to follow these procedures provide obvious opportunities for fraud. Consular officials in Seoul said they could not use the reports generated by the nonimmigrant visa processing system to reconcile the number of visas issued to the number of used foils. The consular officials believed this was because the system was designed for posts that accept, adjudicate, and issue visas on the same day, and posts as large as Seoul could not produce visas in one day. As a result, they said that they had developed their own system of accounting for visa foils. We also observed reconciliation problems in Sydney. Three of the posts we visited also failed to comply with established cashiering procedures such as reconciling services rendered with collections received. Routine reconciliations are an essential tool in detecting employee malfeasance. In Nairobi, neither the accountable officer nor the budget and fiscal officer reconciled collections with services. They said they were unaware of the requirement. In Johannesburg, the accountable officer was reconciling fees collected with services rendered, but was not conducting periodic unannounced cash audits as required in the Consular Management Handbook. The accountable officer for passport operations at the U.S. Embassy in Mexico City also had not conducted periodic cash audits. Automation upgrades and enhancements are the cornerstone of State's strategy to reduce the vulnerability of passport systems to fraud. Planned efforts involve (1) installing a computer network to connect all domestic passport agencies and serve as a platform to allow State to verify the multiple issuance of passports, (2) enhancing its travel document issuance system so that the passport photo can be printed digitally, and (3) completing the upgrade of its travel document issuance system at all passport agencies. State had planned to have most of the improvements completed by December 1995. However, only one major improvement, installation of a wide-area network, had been completed by that date. The other improvements, in addition to being dependent on the wide-area network for telecommunications, are also dependent on the completion of the upgrades to the passport production system. State's current goal is for full completion of these enhancements and upgrades by the end of 1996. State indicated that completion of these upgrades was dependent upon the availability of funds. State installed the wide-area network to connect the passport agencies with each other as the telecommunications platform for the photo digitization and the multiple issuance verification initiatives. The Multiple Issuance Verification system is expected to allow Passport Office employees to detect individuals applying at more that one office for multiple passports using the same identity--which State describes as one of the most prevalent forms of passport fraud. Without such a system, there is no way for one office to know before issuance what applications are being processed by any other office. State is also developing a system to print a digitized passport photograph. According to State, a digitized photograph will make it easier to detect a substitution--another prevalent form of passport fraud. State spent about $4.1 million for these improvements in fiscal year 1995 and plans to spend an additional $22 million through fiscal year 1998. State is using revenues from the machine-readable visa processing fees to fund these improvements. State has not completed the upgrade from the 1980 to the 1990 version of its Travel Document Issuance System, which is used to enter data, process, and track the actual production of passports. Systems in 9 of the 14 passport facilities have been upgraded. According to the Consular Bureau, the upgrade replaces an outdated minicomputer-based system with a more modern personal computer-based system, providing the interface needed to take advantage of the wide-area network and other new technologies. The conversion costs about $700,000 to $800,000 per office. Because of the high cost of the upgrade, the conversion had been proceeding at the rate of one passport agency per year. The Bureau used appropriated funds. Conversion from the 1980 version to the 1990 version of the system is a prerequisite to implementing photo digitization and the Multiple Issuance Verification System. Therefore, the Consular Bureau plans to use machine-readable visa funds to pay for the conversion of the remaining five passport facilities. At those offices, the upgrades will be coupled with the installation of the photo digitization and the multiple issuance enhancements, which the Bureau believes will reduce costs. According to a Bureau official, depending on the availability of the funds, the Bureau plans to have all systems upgraded and enhanced by the end of calendar year 1996. However, the Bureau official acknowledged that this was an ambitious goal. He said variables such as the outcome of systems tests and the possibility that three of the passport offices may move could result in delays. Table 1 shows selected activities and corresponding milestone dates. In commenting orally on a draft of this report, State Department officials generally agreed with the report's presentation; however, they asserted that many of the generic problems listed in the report are the result of inadequate staffing and resources. They also noted that some points needed clarification or correction. We have incorporated these changes where appropriate. We conducted our review in Washington, D.C.; Canberra and Sydney, Australia; London, England; Guatemala City, Guatemala; Tokyo, Japan; Nairobi, Kenya; Seoul, Korea; Mexico City, Mexico; and Johannesburg, South Africa. We selected these posts to obtain a cross-section of large and small posts, posts with the machine-readable system, posts with the old visa-issuing system, and posts undergoing changes in their consular workloads. We obtained past State Department Inspector General reports, annual Financial Management Integrity Act reports, and other documents describing visa and passport operations; reviewed agency plans for correcting the previously identified weaknesses; and discussed the status of the corrections with Bureau of Consular Affairs officials. We observed operations at the Washington Passport Agency in Washington, D.C., and at the overseas posts we visited we observed visa and passport operations, examined passport and visa applications, and tested selected internal control procedures. We conducted our review intermittently from May 1994 to March 1996 in accordance with generally accepted government auditing standards. Copies of the report are being sent to the Secretary of State, the Director of the Office of Management and Budget, and interested congressional committees. We will also provide copies to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Other major contributors are listed in appendix I. Diana M. Glod Jose M. Pena, III Michael D. Rohrback Cherie M. Starck La Verne G. Tharpes Steven K. Westley Michael C. Zola 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 plan to make its visa and passport operations more efficient and less vulnerable to fraud, focusing on: (1) the status of the plan's key initiatives; and (2) compliance with internal management controls by consular staff at selected posts overseas. GAO found that: (1) State's efforts to overcome the material weaknesses in visa and passport processing have had mixed results; (2) after initial delays, State has made steady progress in installing its machine-readable system (the primary initiative for eliminating visa fraud) and provided all visa-issuing posts with automated access to its global database containing names of individuals ineligible for a visa; (3) operational problems have diminished the effectiveness of these efforts including technical problems that have limited the availability and usefulness of the visa improvements, limited usefulness of embassy lookout committees because of the reluctance of some agencies to share information and the lack of representation of key agencies, and lack of compliance with management control procedures designed to decrease the vulnerability of consular operations to fraud; (4) State is behind schedule in its modernization and enhancement efforts to reduce passport fraud; (5) State originally planned to have installed a new wide-area network, developed a system to print a digitized passport photograph, and completed installation of a system to verify multiple issuance of passports by December 1995, however, only the installation of the wide-area network, upon which the other two projects depend, has been completed; (6) full implementation also depends on the completion of the modernization of the passport production system which State indicates is dependent on the availability of funding; and (7) State's current goal is for full implementation by the end of calendar year 1996.
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Aliens applying for permanent residency and naturalization are required to submit completed fingerprint cards with their applications. INS is to send each fingerprint card to the FBI to determine if an alien has a criminal history. Aliens with criminal history records may be denied benefits depending on the severity of the offenses. During fiscal year 1993, the FBI ran 866,313 fingerprint checks at a cost to INS of $14.7 million. In addition to the aliens' fingerprints, the fingerprint cards are to contain background information on the alien, such as name and date of birth. Aliens applying for permanent residency or naturalization are to be scheduled for hearings after they submit their applications. According to INS officials, the hearing dates are to be set to allow adequate time for the FBI to complete criminal history checks and to return the results (for aliens with arrest records) to INS. According to INS officials, aliens can have their fingerprints taken at several locations including, private businesses, the offices of voluntary organizations, police departments, and some INS district offices. INS officials said that prior to the time of the enactment of the Immigration Reform and Control Act of 1986, all INS offices provided fingerprinting services for aliens requesting benefits. However, according to INS officials, most INS offices have discontinued fingerprinting services for a number of reasons, including a lack of staff. After INS accepts aliens' applications, clerks in INS' district offices are to separate the fingerprint cards from the applications and mail the cards to the FBI. According to the FBI, it checks the fingerprint cards to determine if data on the alien's name, gender, date of birth, and the originating INS district office have been completed. If any of the information is missing, the FBI rejects the card and returns it to the originating INS office, if known, with an explanation for the rejection. If the background information on the fingerprint card is complete, the FBI checks the fingerprints against its criminal record history database, which contains the names of over 30 million people. If a match is found, the criminal history record is attached to the fingerprint card and mailed to the INS district office that requested the check. At the request of INS, the FBI does not notify INS if no criminal history record was found. The FBI rejects fingerprint cards if one or more of the prints are illegible and returns the rejected cards to INS offices with an explanation for their rejection. Even if the fingerprints are illegible, the FBI will run a name check comparing the aliens' name, including background information, to the names in its criminal history database. If no positive identification is found, the rejected fingerprint card is returned to the INS requesting district office. INS officials are to submit a new fingerprint card to the FBI if the original fingerprint card is rejected. According to the FBI, it takes about 10 to 14 days to complete a name and fingerprint check for INS (from its receipt of the fingerprint card to the mailing of the results to INS). According to INS officials, INS offices usually receive rejected fingerprint cards or criminal history reports in the mail room. The cards are then taken to the Examinations Branch or Records Department, where they are to be placed in the aliens' files. Criminal history reports are to be placed in the aliens' files before their hearings with INS examiners. INS offices are to allow at least 60 days from the date an alien submits an application until the scheduled hearing date to allow the FBI adequate time to complete a criminal records check, return any adverse results, and allow INS to place those results in the alien's file. In commenting on a draft of this report, INS officials provided some perspective on the significance of failure to check aliens' fingerprints. According to INS, the ideal situation would be to check the fingerprints of every applicant. Any fingerprint not checked potentially belongs to a criminal or terrorist. However, INS stated that the actual probability that a properly obtained and checked set of fingerprints will result in an alien's application being denied and the alien being deported is very remote. INS pointed out that only 5.4 percent of fingerprint checks result in the FBI having a record on the alien and only a small portion of the 5.4 percent result in an alien's application being denied. While INS recognized that even a relatively small number of aliens should not inappropriately receive benefits, it did not want to give the false impression that a criminal or terrorist receives a benefit every time a fingerprint check is not properly conducted. The February 1994 OIG report stated that INS did not verify that fingerprints submitted by applicants for naturalization and permanent residency actually belonged to aliens who submitted them. The OIG report also pointed out that INS examiners had approved applications because they assumed that applicants had no criminal history records. According to the OIG report, this occurred because the FBI criminal history records were not in the aliens' files when INS examiners adjudicated the cases. The OIG report also found that INS frequently did not submit new sets of fingerprints to the FBI when the original sets of prints were illegible. The OIG recommended that INS (1) institute procedures to verify that fingerprints submitted to INS by all applicants belong to the applicants and (2) instruct district directors to ensure that fingerprint cards are mailed promptly and criminal history reports are placed in the aliens' files before final adjudication. INS concurred with the OIG findings and recommendations. In May 1994, INS formed a working group to address problems identified by the OIG. The group is composed of representatives from various INS service components and advisers from the FBI and OIG. To achieve our objectives, we (1) discussed the fingerprinting process with INS officials at INS headquarters in Washington, D.C., and INS' Baltimore, Chicago, and Philadelphia District Offices and (2) reviewed INS records regarding changes to its fingerprinting process. We also observed fingerprinting procedures at these district offices. We selected the Baltimore and Chicago District Offices because they were included in the OIG report, and, therefore, we could evaluate INS' responses. To provide perspective on the problems the OIG identified, we selected a district office not included in the OIG review. We selected the Philadelphia District Office because of its proximity to Washington, D.C. Specifically, we evaluated INS' actions and plans in response to the problems identified in the OIG report, including the timely mailing of fingerprint cards to the FBI, the timely filing of FBI criminal history reports, and the procedures used to follow up on fingerprint cards rejected by the FBI. Further, we discussed the future impact of automated fingerprinting identification systems with INS and FBI officials. We discussed FBI processing procedures for alien fingerprints submitted by INS with FBI officials in Washington, D.C. We relied on information in the OIG report and did not verify data provided by INS and the FBI. We conducted our review from July 1994 to October 1994 in accordance with generally accepted government auditing standards. We obtained oral comments on a draft of this report from INS and the FBI. Their comments are discussed in the agency comments section of this report. INS' fingerprinting working group has recommended that INS implement a certification program that would increase control over fingerprint providers. INS headquarters is finalizing a new regulation to establish and implement the certification program. INS expects the regulation to be published by March 1995. According to INS, after a 6-month transition period following publication of the regulation, INS will accept only fingerprints taken by organizations it has certified. Under the proposed certification program, all organizations, except police departments and the U.S. military, who want to provide fingerprint services to aliens will have to apply for INS certification. Fingerprint providers will have to pay an application fee (currently estimated at $370). Under the certification process, INS will require that employees, volunteers, directors, and owners of the organizations providing fingerprint services undergo fingerprint checks to determine if they have criminal histories. Depending on the results of the fingerprint checks, an applicant may not be certified. If an application is accepted, INS will certify the provider for 3 years. INS plans to require certified fingerprint providers to inspect aliens' photo identification and have aliens sign their fingerprint cards at the time the fingerprints are taken. The proposed regulation also will require fingerprint providers to be trained in fingerprinting procedures by INS. All approved organizations are to be given a stamp that is yet to be developed by INS. The stamp is to serve as a method for notifying INS that prints were taken by an approved provider. The stamp is also to allow INS to identify problematic providers--such as producers of large numbers of illegible prints. INS plans to monitor fingerprint providers using INS district employees to spot-check local certified providers to ensure that INS procedures are being followed. Under the current draft of the regulation, INS will have the authority to revoke fingerprinting privileges if the agency discovers that a provider is not following INS guidelines. INS plans to use the fees from organizations applying for certification to pay for the monitoring program. According to the draft regulation, INS will monitor one-third of all fingerprint providers each year. INS considered other alternatives to the certification program. The working group rejected the option of having the district offices do the fingerprinting because of resource shortages and the potential for overcrowding in the district offices. Other options included using contractors, police departments, and voluntary groups. The use of contractors was rejected because of potential difficulty in managing nationwide or regional contracts. Using police departments for fingerprinting was not considered feasible because many police departments do not provide fingerprinting services to the public, including aliens. Also, according to INS, some police departments were believed to have a higher rate of rejections than other providers. INS decided not to depend on voluntary groups because there are not enough voluntary groups to do all the fingerprinting. However, these groups may apply for certification. INS said that its long-term solution to the fingerprinting processing problems will be the use of electronic fingerprinting. In this regard, the FBI is developing an Integrated Automated Fingerprint Identification System (IAFIS) that will allow the electronic submission and processing of fingerprints. IAFIS is expected to dramatically reduce turnaround time for fingerprint processing. IAFIS is not expected to be fully operational before mid-1998. INS anticipates the use of IAFIS but will have to purchase hardware to enable the system to transmit information electronically to the FBI. According to INS, it is actively pursuing the use of its own automated fingerprint identification systems to reduce fingerprint fraud and processing time. Also, INS is closely coordinating its efforts with the FBI to ensure compatibility and reduced rejection rates. The OIG review of four INS district offices found problems with timely mailing of fingerprint cards to the FBI and timely filing of returned criminal history reports from the FBI. Our review indicated that these problems existed in varying degrees in the three districts we visited. Also, we found that INS examiners assumed a fingerprint check had been completed if a criminal history record was not found in the district office. In the Chicago District Office, the OIG found that fingerprint cards were allowed to accumulate for 2 to 3 weeks before they were mailed to the FBI. As part of its review, the OIG only examined the files of aliens who had arrest records to determine if INS was properly filing FBI arrest reports in aliens' files. The OIG used an FBI list of aliens who had criminal history records to identify which alien files to review. The OIG found that 29 percent of the 271 files it reviewed in 4 district offices lacked arrest reports. In the Chicago District the OIG found that 78 percent of the alien files it reviewed did not contain the criminal history reports at the time the cases were adjudicated. In a March 1994 memorandum to all district directors, INS headquarters directed them to ensure that alien fingerprints are sent to the FBI daily. INS also instructed district directors to ensure that criminal history records received from the FBI are placed in the alien files immediately. Although INS headquarters instructed its districts to ensure both timely mailing of fingerprints and timely filing of criminal history reports, headquarters had not monitored the districts to ensure that its policies were being properly followed. An INS official said that in the past it was necessary for headquarters to follow up on its directives to ensure that the policies were being followed. The Baltimore and Chicago District Offices made some changes to improve timely mailing of fingerprint cards. For example, Baltimore district officials said that they recently began separating fingerprint cards from naturalization applications and putting those cards in the mail on the same day that the applications were received. Chicago and Philadelphia district officials said that their fingerprint cards may not have been mailed for 1 or 2 weeks. Chicago District Office officials said they planned to rearrange the routing of applications to expedite mailing of fingerprint cards to the FBI. In August 1994, the Baltimore District Office began a prototype program in which aliens applying for permanent residency are to send their applications directly to INS' Eastern Service Center in St. Albans, VT. The Baltimore District conducts the hearings, and the INS service center processes the fingerprint cards. Criminal history reports are sent to the Baltimore office before the aliens' hearings. According to a Baltimore district official, although the program is new all indications are that it has resulted in criminal history reports arriving before hearings. In the three districts we visited, rejected fingerprint cards and criminal history records were received in the mail rooms and transferred to the Examinations Office for filing. However, district officials and examiners at these three districts said that criminal history reports were not always placed in aliens' files before their hearings. The criminal history report filing systems varied at the three district offices. Chicago district officials said they were reorganizing the filing system, working toward a goal of filing all criminal history reports directly in aliens' files. However, at the time of our review, Chicago was using two filing systems. Criminal history reports were either filed directly in alien files or placed in a central file. As a result, Chicago examiners had to review both the alien's file and the centralized file of criminal history reports before an alien's hearing to determine if the alien had a criminal history record. Baltimore and Philadelphia District Office officials said that criminal history reports were typically filed directly in the aliens' files within 3 working days after they were received so they would be available to the examiners during the aliens' interviews. Examiners at all three districts indicated that they had incidents in which a criminal history record was not available when the examiner conducted a hearing and granted the benefit to the alien. If examiners become aware of an alien's criminal history record after the initial hearing, the alien may be interviewed again depending on the severity of the offense. This can occur after INS has granted the alien benefits. If the results of the fingerprint checks warrant, INS may rescind the previously granted benefit. The examiners said that the fingerprint checks are important and noted that about half of the time the information provided by the FBI criminal history report is the only information they have about an alien's criminal activity. Examiners do not have any means to determine the status of an FBI fingerprint check because, at INS' request, the FBI does not return the results of all fingerprint checks. INS receives results only if an arrest record is found. At the time of the alien's hearing, if INS examiners do not find a criminal history report in an alien's file and it is 60 days after the application date, the examiners assume that a fingerprint check has been completed and that the alien does not have a criminal history record. According to an INS official, they do not receive negative responses from the FBI because the district offices do not have enough staff to file FBI responses for all aliens. According to the FBI, they could provide INS with the results of all records checks in other formats (e.g., electronically), including those for whom it did not find criminal history records. During fiscal year 1993, the FBI rejected and returned to INS 91,827 fingerprint cards, or 11 percent of all INS submissions, because one or more of the prints were illegible. The OIG determined that INS district offices frequently did not submit new fingerprint cards for those aliens whose fingerprint cards were rejected. Since INS failed to submit new fingerprint cards, in a number of cases applications were adjudicated on the basis of criminal history name checks but without the results of the FBI fingerprint checks. In April 1994, INS headquarters instructed district directors to ensure that new fingerprint cards are submitted if the initial card is rejected. However, according to INS officials at the three districts we visited, these district offices rarely submitted new fingerprint cards if the initial card was rejected. INS' decision to implement a certification program for fingerprint providers with the proposed procedures for ensuring fingerprint integrity, if properly implemented, should address the OIG's first recommendation. The program should help ensure that the fingerprints aliens submit with applications are their own. Further, INS plans to periodically monitor the providers, which should help to maintain the integrity of the fingerprint process. INS headquarters had directed its district offices to timely submit fingerprint cards to the FBI and file FBI criminal history reports in aliens' files. However, there are problems to varying degrees in the Chicago and Philadelphia Districts. Also, officials at the three district offices said they rarely submitted new fingerprint cards if the initial cards were rejected by the FBI. According to the OIG report and INS officials, some aliens' applications had been approved because the examiners did not receive, and therefore were not aware of, aliens' criminal history records. They said that if the examiners had been aware of the information contained on the criminal history records the applications could have been denied. INS had told the district offices to correct the problems but had not monitored the districts' efforts to follow those instructions. Without some form of monitoring, INS cannot be certain that the district offices will correct the problems. At INS' request, the FBI returned information to districts only if an alien had a criminal history record or if the fingerprints were rejected. As a result, INS was not notified if a fingerprint check was successfully completed and no criminal record was found. If no information was in the aliens' files or in a central location, examiners assumed that the aliens did not have criminal history records. As noted earlier, this assumption can be incorrect. We recommend that the Attorney General direct the Commissioner of INS to monitor progress to ensure that districts comply with INS' headquarters directives to submit fingerprint cards to the FBI on a timely basis, file FBI arrest reports in aliens' files immediately, and submit new fingerprint cards to replace those that are rejected by the FBI and obtain the results from the FBI of all its record and fingerprint checks, including those aliens who do not have criminal history records and make the results available to the examiners before the aliens' hearings. On November 9, 1994, we obtained oral comments on a draft of this report separately from INS and FBI officials. We met with INS representatives, including the Acting Associate Commissioner for Examinations, who is responsible for INS' adjudication of applications which requires aliens to be fingerprinted. We also met with FBI officials, including the Deputy Assistant Director of the Criminal Justice Information Services Division, who responds to INS' requests for criminal records checks of aliens. They agreed with our findings, conclusions, and recommendations and provided clarifications and technical corrections, which we included in the report. We are providing copies of this report to the Attorney General; Commissioner of INS; Director, Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. Major contributors to this report are James M. Blume, Assistant Director; Mark A. Tremba, Evaluator-in-Charge; and Jay Jennings, Assignment Manager. If you need any additional information or have any further questions, please contact me on (202) 512-8777. Laurie E. Ekstrand Associate Director, Administration of Justice Issues 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 the Immigration and Naturalization Service's (INS) fingerprinting procedures for aliens applying for immigration and naturalization benefits, focusing on: (1) INS efforts to ensure that the fingerprints aliens submit are their own; (2) options INS considered to improve the fingerprinting process; (3) the future impact of automated fingerprinting identification systems; (4) INS efforts to ensure timely mailing of fingerprint cards to the Federal Bureau of Investigation (FBI) and timely filing of FBI criminal history reports; and (5) INS actions to follow up on fingerprint cards rejected because of illegibility or incomplete information. GAO found that: (1) INS plans to implement a certification and training program in 1995 for fingerprint providers and establish fingerprinting procedures to improve control over the fingerprinting process; (2) INS plans to monitor fingerprint providers at least every 3 years to ensure that they follow established procedures; (3) INS has decided not to have district offices do the fingerprinting due to a lack of resources and potential overcrowding at the offices; (4) INS has also rejected the option of having contractors, police departments, and volunteer groups do the fingerprinting; (5) INS plans to use a FBI-developed automated fingerprint identification system to electronically transmit information and reduce processing time; (6) INS has instructed district directors to correct problems with the mailing of fingerprint cards to FBI, filing FBI criminal history reports, and resubmission of rejected fingerprint cards, but it has not monitored the districts' progress in correcting these problems; (7) INS examiners sometimes approve an alien's application without a criminal history check because they assume one has been done even if it is not in the alien's file; and (8) INS examiners sometimes cannot determine if FBI fingerprint checks have been completed because FBI only returns reports when criminal histories are found.
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While the term "disaster assistance" brings to mind the aid provided to communities and individuals after a disaster has struck, the scope of federal disaster assistance is broader. Disaster assistance involves aid provided both before and after disasters and it involves many federal agencies besides FEMA, including the U.S. Army Corps of Engineers (the Corps), the Small Business Administration (SBA), and the Departments of Agriculture, Transportation, the Interior, Commerce, and Housing and Urban Development. Moreover, these and other agencies may provide assistance under a number of different statutory authorities. Because of the numerous agencies and programs involved in providing disaster assistance, controlling federal disaster assistance costs is a difficult challenge. FEMA is an independent agency charged with helping states and localities address natural disasters. Under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act), FEMA provides financial and technical assistance to communities and individuals. In its role as coordinator of federal assistance, FEMA may request that other federal agencies provide a specific type of assistance. FEMA's "blueprint" for the federal response to disasters, the Federal Response Plan, is a cooperative agreement signed by 26 federal agencies and the American Red Cross. Under the Comprehensive Emergency Management concept--a concept that assumes all disasters, regardless of their size, require the same basic government strategies--disaster management is viewed as consisting of four phases, of which the first two occur before a disaster strikes. Preparedness activities are designed to help communities and governments prepare for dealing with natural disasters; included are the development of response plans, establishing the location and identity of needed resources, planning for the evacuation of residents, and training for emergency officials. Mitigation activities are undertaken to reduce the losses from disasters or prevent losses from occurring; examples include constructing dams and flood control projects, retrofitting structures to withstand earthquakes, and developing land-use plans and zoning ordinances to discourage development of hazardous areas. Response activities are accomplished during or immediately following a disaster; examples include providing temporary shelter, food, and medical supplies and meeting other urgent needs of victims. Recovery activities are those that help individuals and communities rebuild following a disaster; for example, the repair or reconstruction of public facilities such as roads, water distribution systems, government buildings, and parks. Traditionally, the role of the federal government has been to supplement the emergency management efforts of state and local governments, voluntary organizations, and private citizens; federal policy generally assumes that states (and units of local government) maintain primary responsibility. The Stafford Act contains several statements explicitly acknowledging the primary role of states. Under the act, postdisaster assistance may be provided only if the President, at the request of a state governor, declares that an emergency or disaster exists and that federal resources are required to supplement state and local resources. For a number of reasons, including a sequence of unusually large and costly disasters, federal disaster assistance costs have increased in recent years. Much of the spending is overseen by FEMA--obligations from FEMA's Disaster Relief Fund totaled about $3.6 billion in fiscal year 1996 and about $4.3 billion in fiscal year 1997--but many other federal agencies are involved as well. In our work for the Senate Task Force, we compiled financial data from many federal agencies concerning their disaster assistance programs and activities--which encompass all phases of emergency management--for fiscal years 1977 through 1993. (Fiscal year 1993 was the latest complete fiscal year at the time we did our work.) However, with limited exceptions, we have not done work over the past few years that would have provided us with similar data for fiscal years 1994 forward, and thus we do not know how overall costs, or their distribution among emergency management phases, may have changed. According to data compiled for the Senate Task Force, postdisaster recovery accounted for by far the largest portion of federal disaster assistance (in constant 1993 dollars)--about $87 billion, almost three-quarters of the $119.7 billion total federal disaster assistance from fiscal years 1977 through 1993. Of the $87 billion, about $55.3 billion consisted of various disaster recovery loans made primarily by SBA and USDA; because some portion of the loans will be repaid, the entire loan amount is not necessarily a federal cost. Of the remaining $31.7 billion, FEMA accounted for about one-third--$10.2 billion. Other significant amounts of disaster assistance provided were the nearly $4.1 billion obligated by the Department of Transportation for repairs to federal-aid highways and the $16 billion obligated by USDA to compensate farmers for production losses from disasters. Disaster mitigation accounted for the second-largest category of federal disaster assistance obligations--about $27 billion, or 22 percent. As we noted in our statement for this Subcommittee in late January, FEMA provides mitigation assistance under several programs and authorities and has taken a strategic approach to mitigation. However, the large majority--about $25 billion--of federal mitigation obligations during fiscal years 1977 through 1993 was made by the Corps of Engineers for the design, construction, operation, and maintenance of flood control and coastal erosion control facilities. Other federal disaster mitigation efforts include (1) establishing floodplain management and building standards required by FEMA's National Flood Insurance Program and (2) conducting earthquake research and related activities under the National Earthquake Hazards Reduction program, jointly administered by FEMA, the U.S. Geological Survey, the National Institute of Standards and Technology, and the National Science Foundation. The remainder of total federal disaster assistance reported to the Senate Task Force was obligated for immediate responses to disasters (about $3.4 billion) and for preparedness activities (about $2.3 billion). In both cases, FEMA accounted for the majority of the costs. The occurrence of large disaster assistance costs in the 1990's has been attributed to a number of factors. Since 1989, the United States has experienced a sequence of unusually large and costly disasters, including Hurricane Hugo, the Loma Prieta earthquake, Hurricane Andrew, Hurricane Iniki, the 1993 Midwest floods, and the Northridge earthquake. The close occurrence of such costly disasters in the United States is unprecedented. Furthermore, increases in population and development, especially in hazard-prone areas, increase the potential losses associated with these disaster events. For example, FEMA expects that by the year 2010 the number of people living in the most hurricane-prone counties (36 million in 1995) will double. For several of these large disasters, the federal government has borne a larger-than-usual share of the costs. The Stafford Act provides that many disaster relief costs are to be shared by the federal government with the affected states and localities. For example, the federal share of funding is at least 75 percent for public assistance projects (to repair or replace disaster-damaged public and nonprofit facilities). Following several more recent disasters, the President has raised the federal share for some of these costs; for example, to 90 percent for the Northridge earthquake and to 100 percent for Hurricane Andrew. There has also been an upward trend in the annual number of presidential disaster declarations. The Stafford Act authorizes the President to issue major disaster or emergency declarations and specifies the types of assistance the President may direct federal agencies to provide. For fiscal years 1984 through 1988, the average number of such declarations was 26 per year, whereas, for the periods from fiscal years 1989 through 1993 and from fiscal years 1994 through 1997, the average number was nearly 42 and 49 per year, respectively. Additionally, more facilities have become eligible for disaster assistance. Over the years, the Congress has generally increased eligibility through legislation that expanded the categories of assistance and/or specified persons or organizations eligible to receive assistance. For example, 1988 legislation expanded the categories of private nonprofit organizations that are eligible for FEMA's public assistance program. FEMA can influence program costs by establishing and enforcing procedures and criteria for assistance within the eligibility parameters established in statutes. FEMA's Inspector General reported in 1995 that the agency's administrative decisions on eligibility for disaster assistance--such as the threshold for determining whether to repair or replace a damaged public facility--may have expanded federal disaster assistance costs. We have recommended that FEMA improve program guidance and eligibility criteria in part to help control these costs. According to the Senate Task Force report, federal budgeting procedures for disaster assistance may have influenced amounts appropriated for disaster assistance. This is because disaster relief appropriations have often been designated as "emergency" spending. If the Congress and the President agree to designate appropriations as emergencies, the appropriations are excluded from the strict budget disciplines that apply to other spending--specifically, the discretionary spending limits under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Enforcement Act of 1990. As noted in the task force report, funds for natural disasters and other emergencies will undoubtedly be needed from time to time in amounts that are impossible to predict and thus difficult to budget for. On the other hand, one criticism of the procedures for emergency spending is that the assistance provided is more "generous" than would be the case if it had to compete with other spending priorities. Approaches for lowering federal disaster assistance costs include (1) establishing more explicit and/or stringent criteria for providing federal disaster assistance, (2) emphasizing hazard mitigation through various incentives, and (3) relying more on insurance. Within these approaches, specific proposals--made by various entities, including the National Research Council, National Performance Review, and FEMA's Inspector General--vary. The extent to which the implementation of these approaches would lower the costs of federal disaster assistance is unknown. One approach to lower disaster assistance costs is to establish more explicit and/or stringent criteria for providing federal disaster assistance. Currently, much assistance is contingent on the President's declaration of an emergency or major disaster under the Stafford Act, 42 U.S.C. 5170, which provides that requests for declarations (and therefore federal assistance) "shall be based on a finding that the disaster is of such severity and magnitude that effective response is beyond the capabilities of the State and the affected local governments and that federal assistance is necessary." State governors request such declarations; FEMA gathers and analyzes facts and makes a recommendation to the President. However, the Stafford Act does not prescribe specific criteria to guide FEMA's recommendation or the President's decision. FEMA considers a number of factors, such as the number of homes destroyed or sustaining major damage, but there is no formula for applying them quantitatively. The flexibility and generally subjective nature of FEMA's criteria have raised questions about the consistency and clarity of the disaster declaration process. FEMA's Inspector General reported in 1994 that (1) neither a governor's findings nor FEMA's analysis of capability is supported by standard factual data or related to published criteria and (2) FEMA's process does not ensure equity in disaster declarations because it does not always review requests for declarations in the context of previous declarations. In response to specific congressional concerns about the process, we have reviewed and reported on the potential effects of two factors--political party affiliation and the nature of the affected area. In 1989, we reported that, for disaster declaration requests made in fiscal year 1988 and a portion of fiscal year 1989, we found no indication that political party affiliation affected the President's decisions. In 1995, we reported that FEMA's disaster declaration policies and procedures do not differ with respect to whether the affected area is considered rural or urban. More explicit criteria for disaster declarations could provide a number of potential benefits. A 1993 report conducted by the National Performance Review concluded that "clear criteria need to be developed for disaster declarations to help conserve federal resources." Additionally, we previously reported that disclosing the process for evaluating requests would help state and local governments decide whether they had a valid request to make, enable them to provide more complete and uniform information, and minimize doubts as to whether their requests were treated fairly and equitably. A second approach to reduce costs is to emphasize hazard mitigation through incentives. Mitigation consists of taking measures to prevent future losses or to reduce the losses that might otherwise occur from disasters. For example, building codes that incorporate seismic design provisions can reduce earthquake damage. In hearings before the U.S. Senate, the Director of the California Office of Emergency Services testified that structures designed and built to seismic design provisions of the state's Uniform Building Code withstood the forces of the Loma Prieta earthquake with little or no damage while structures built to lesser code provisions suffered extensive damage. Additionally, floodplain management and building standards required by the National Flood Insurance Program may reduce future costs from flooding. For example, FEMA estimates that the building standards that apply to floodplain structures annually prevent more than $500 million in flood losses. At a September 1993 congressional hearing, the FEMA Director said that structures built after communities join the program suffer 83 percent less damage than those built before the standards were in place. There are a number of approaches that can provide federal incentives to encourage hazard mitigation. Our March 1995 testimony discussed recommendations by FEMA, the National Research Council, and the National Performance Review promoting the use of federal incentives to encourage hazard mitigation. For example, specific initiatives for improving earthquake mitigation included linking mitigation actions with the receipt of federal disaster and other assistance and providing federal income tax credits for investments to improve the performance of existing facilities. Furthermore, to the extent that the availability of federal relief inhibits mitigation, amending postdisaster federal financial assistance could help prompt cost-effective mitigation. The National Performance Review, for example, recommended providing relatively more disaster assistance to states that had adopted mitigation measures than to states that had not. These or other proposals would require analysis to determine their relative costs and effectiveness. FEMA's September 1997 strategic plan, entitled "Partnership for a Safer Future," states that the agency is concentrating its activities on reducing disaster costs through mitigation because "no other approach is as effective over the long term." The agency's hazard mitigation efforts include grants and training for state and local governments; funding for mitigating damage to public facilities and purchasing and converting flood-prone properties to open space; federal flood insurance; and programs targeted at reducing the loss of life and property from earthquakes and fires. However, as we noted in our previous testimony for the Subcommittee, quantifying the effects of mitigation efforts can be difficult. Specifically, determining the extent to which cost-effective mitigation projects will result in federal dollar savings is uncertain, as it depends on the actual incidence of future disaster events and the extent to which the federal government would bear the resulting losses. A third approach to reduce disaster assistance costs is to rely more on insurance. Insurance provides a way of "prefunding" disaster recovery because premiums provide a source of funds for compensating the victims of disaster losses. Like other forms of disaster relief, insurance spreads the burden of the losses borne by the disaster victims over a large number of individuals, potentially reducing the effect of the disaster on the victims without substantially increasing the burden borne by those who are otherwise unaffected. Some studies of disaster assistance programs have concluded that providing assistance through insurance can be more efficient and more equitable than providing it through other means. As early as 1980, we reported that the combination of insurance and mitigation measures can be a better means of fairly and efficiently providing federal disaster assistance than other forms of federal disaster assistance, such as loans and grants. Over the years the Congress has considered all-risk insurance programs, under which homeowners would purchase a single, comprehensive natural hazard policy and would be able to file claims for damage to their property whenever the damage was caused by any type of natural hazard. Such an insurance program--whether operated by the private insurance industry, the government, or both--would have to be structured and priced carefully to avoid increasing federal liabilities. In previous testimony, we expressed concerns about the ability of proposed primary insurance and reinsurance programs to fairly and efficiently spread insurance risks among policyholders, insurance companies, and the government. In summary, Mr. Chairman, the growth in the size and number of federally declared disasters in recent years is unprecedented and there is the potential for continuing increases in disaster assistance costs. We look forward to working with the Subcommittee as you consider the various proposals to help contain these costs. This concludes my prepared remarks. We will be pleased to respond to any questions that you or other Members of the Subcommittee might have. Disaster Assistance: Information on Federal Disaster Mitigation Efforts (GAO/T-RCED-98-67, Jan. 28, 1998). Disaster Assistance: Guidance Needed for FEMA's "Fast Track" Housing Assistance Process (GAO/RCED-98-1, Oct. 17, 1997). Disaster Assistance: Improvements Needed in Determining Eligibility for Public Assistance (GAO/RCED-96-113, May 23, 1996). Natural Disaster Insurance: Federal Government's Interests Insufficiently Protected Given Its Potential Financial Exposure (GAO/T-GGD-96-41, Dec. 5, 1995). Disaster Assistance: Information on Declarations for Urban and Rural Areas (GAO/RCED-95-242, Sept. 14, 1995). Disaster Assistance: Information on Expenditures and Proposals to Improve Effectiveness and Reduce Future Costs (GAO/T-RCED-95-140, Mar. 16, 1995). GAO Work on Disaster Assistance (GAO/RCED-94-293R, Aug. 31, 1994). Federal Disaster Insurance: Goals Are Good, But Insurance Programs Would Expose The Federal Government to Large Potential Losses (GAO/T-GGD-94-153, May 26, 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 several approaches for lowering the costs of federal disaster assistance, focusing on: (1) the components and magnitude of federal disaster assistance costs; and (2) approaches that could potentially lower those costs in the future. GAO noted that: (1) federal disaster assistance costs billions of dollars annually; (2) according to data compiled for the Senate Bipartisan Task Force on Funding Disaster Relief, federal agencies obligated about $119.7 billion (in constant 1993 dollars) for disaster assistance during fiscal years (FY) 1977 through 1993, the majority of which was for post-disaster assistance; (3) the Federal Emergency Management Agency accounted for about 22 percent of this amount, with the remainder spread across many federal agencies, including the Small Business Administration, the Army Corps of Engineers, and the Department of Agriculture; (4) the federal government provided assistance for an average of nearly 37 disasters or emergencies annually from FY 1977 through FY 1997; (5) the growth in disaster assistance costs in the 1990s has been attributed to a number of factors, including: (a) a sequence of unusually large and costly disasters, for which the federal government has occasionally borne a larger-than-usual share of the costs; (b) a general increase per year in the number of presidential disaster declarations; and (c) a gradual expansion of eligibility for assistance, through legislation and administrative decisions; (6) approaches for lowering federal disaster assistance costs include: (a) establishing more explicit or stringent criteria for providing federal disaster assistance; (b) emphasizing hazard mitigation through various incentives, and (c) relying more on insurance; (7) within these approaches, specific proposals vary; and (8) the extent to which implementation of these proposals would lower the costs of federal disaster assistance is unknown.
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Under the SAFE Port Act, DNDO is required, among other functions, to develop, in coordination with other federal agencies, an enhanced Global Nuclear Detection Architecture. DNDO serves as the primary entity in the United States to develop programs and initiatives related to the Global Nuclear Detection Architecture, identify any gaps in it, and improve radiological and nuclear detection capabilities. DNDO also assists DHS agencies with implementing the domestic portion of the Global Nuclear Detection Architecture, including deployment of radiation detection equipment at ports of entry along the U.S. border. Accordingly, DNDO acquires and deploys RPMs and provides for associated scientific and technical expertise, with assistance from the Department of Energy's national laboratories, including PNNL and Los Alamos National Laboratory. CBP operates the RPMs and maintains them after their first year of deployment. As of August 2016, CBP operates approximately 1,300 RPMs, which can detect radiation but cannot identify the type of material causing an alarm, as well as almost 2,700 handheld radiation detectors, which can identify the sources of radiation. RPMs are the primary means by which CBP scans cargo and vehicles at U.S. ports of entry for nuclear and radiological material. Before leaving a port of entry, most cargo containers and vehicles first travel through an RPM. (See fig. 1.) If an alarm is triggered, the cargo container or vehicle is directed to a secondary inspection area for further inspection and clearance by a CBP officer using a handheld radiation detector that can identify the source of the radiation. (See fig. 2.) RPM alarms can result from naturally occurring radioactive materials (NORM), which are often emitted from certain consumer and trade goods, such as ceramics, fertilizers, and granite tile. RPM alarms from NORM are termed "nuisance" alarms by DHS and require CBP officers to spend time determining that the source of the alarm is NORM and not nuclear or radiological threat materials before the cargo container or vehicle can leave the port. Although fewer than 2 percent of cargo containers have historically set off an RPM alarm, according to DHS, with more than 20 million cargo containers and more than 100 million vehicles passing through the nation's ports annually, nuisance alarms account for hundreds of thousands of alarms per year. To reduce nuisance alarms and decrease the need for secondary scanning by CBP officers, in 2014 and 2015, CBP developed and deployed a new set of RPM alarm threshold settings, with support from DNDO and scientists at PNNL. This upgrade, which is referred to as revised operational settings, is implemented during calibration. It optimizes RPM effectiveness by tuning the threshold settings of individual RPMs to account for local background radiation and common NORM passing through the RPMs. These new threshold settings result in a similar sensitivity to materials that pose a threat but significantly reduce nuisance alarms from NORM. According to CBP, as of the end of fiscal year 2015, DNDO and CBP had upgraded RPMs at 28 seaports and 15 land border crossings, which has reduced nuisance alarms by more than 75 percent, on average, at these sites. Before fiscal year 2015, DHS had acquired 1,706 RPMs, including 384 from Ludlum Measurements, Inc. (Ludlum) and 1,322 from Leidos Holdings, Inc. (Leidos). The Ludlum RPMs were the first to be acquired and were deployed beginning in fiscal year 2003, and the Leidos RPMs were first acquired and deployed in fiscal year 2004. (See table 1.) Ludlum and Leidos RPMs have comparable designs--both use specialized detection panels made of plastic as well as helium-filled tubes--and provide similar technical capacity to detect nuclear and radiological materials. However, because of limitations in the design of the plastic panels in the Ludlum RPMs that DHS acquired, these RPMs cannot be upgraded with the revised operational settings and thus do not have the threat discrimination capabilities equal to the upgraded Leidos RPMs. Threat discrimination refers to the ability of the RPM to distinguish between radiation emitted from NORM and radiation emitted from radioactive materials that could be used in a nuclear device or a dirty bomb. As of August 5, 2016, DHS had 1,386 RPMs deployed--including 277 Ludlum RPMs and 1,109 Leidos RPMs--with the remaining RPMs in storage. Of the deployed RPMs, 885 were at northern and southern border crossings; 320 were at seaports; and 181 were at airports, ferry terminals, or other facilities. (See table 2.) According to DHS officials, the actual number of deployed RPMs varies on a day-to-day basis in response to port reconfigurations and expansions and because DHS periodically decommissions RPMs that are infrequently used. As of August 2016, 100 percent of cargo containers and vehicles entering land border crossings and nearly 100 percent of cargo containers passing through seaports are scanned by RPMs, according to DNDO. However, as we found in 2012, significant technological and logistical challenges exist for scanning cargo at airports and international rail ports of entry, and as of August 2016, some cargo containers that enter through these pathways are not being scanned by RPMs. Scanning of air cargo is primarily carried out with handheld radiation detectors, and scanning of international rail cargo is mainly conducted with such detectors and radiographic imaging systems. Radiographic imaging systems use gamma rays or X-rays to produce an image of cargo to detect anomalies, such as high-density material or hidden cargo, but they do not detect radioactivity. DHS's assessment of its RPM fleet shifted over time, and as a result DHS has changed the focus of its RPM replacement strategy. More specifically, in fiscal years 2014 and 2015, DHS began planning to replace the full fleet based on a conservatively estimated 13-year service life. However, recent DNDO studies indicate the fleet can remain operational until at least 2030, with proactive maintenance and sufficient availability of spare parts, so DHS has refocused its strategy on selective replacements to improve efficiency. Before the RPMs began to reach the end of their estimated service life, DNDO commissioned a field study assessing how well the RPM systems were aging and a separate study specifically assessing the aging of the RPM's key component--the plastic detection panels. These studies were published in 2011 and both concluded that the original 10-year RPM service life estimate should be updated. One of the studies concluded that the plastic detection panels could last up to 20 years--with 13 years as a conservative estimate of the panels' life spans. The other study concluded that the panels would last between 15 and 20 years and that the RPMs could be sustained for an extended period with routine inspections, maintenance, and repairs as needed. According to DNDO officials, after these studies were published, DNDO began using a 13- year service life estimate for RPM life-cycle planning and budgeting purposes. Echoing one of the studies, a DNDO management official told us that the 13-year RPM service life was considered a conservative estimate that resulted in an acceptable level of risk to the program. The official further stated that although the 13-year estimate contained a great deal of uncertainty, DHS was trying to ensure that the necessary steps would be taken to keep the fleet fully functional. DNDO used the 13-year service life estimate for its RPM program planning and budget justifications throughout fiscal years 2014 and 2015, including in the following cases: DNDO's RPM Program Management Plan for fiscal years 2014 through 2019, published in January 2014, stated that more than 500 of the then-deployed RPMs would reach the end of their service lives by 2019 and would require either refurbishment or replacement. The plan outlined DNDO's efforts to extend the service life of the RPMs while working on a strategy for RPM replacement. DHS's budget justification for fiscal year 2015 referred to RPMs exceeding the end of their estimated service lives as part of a discussion of RPM program needs. DHS's June 2014 Global Nuclear Detection Architecture Strategic Plan of Investments highlighted a need for significant funding increases to replace RPMs as they reached the end of their estimated service lives. The plan projected significant decreases in RPM scanning coverage--the percentage of vehicles or cargo containers scanned--beginning in fiscal year 2016 based on the service life estimate, anticipated port expansions and reconfigurations, and projected budget levels. Specifically, the plan projected that RPM scanning coverage at seaports would fall from 100 percent in fiscal year 2014 to 69 percent in fiscal year 2019. For land border crossings, it projected a decrease from 98 percent scanning coverage to 39 percent over the same period. In its February 2015 update to its RPM Program Management Plan, DHS again emphasized the need for RPM replacements because RPMs would begin reaching the end of their estimated 13-year service lives. In addition, the plan stated that projected budget levels through fiscal year 2019 were sufficient for the program to begin to replace the RPMs reaching the end of their service life. The plan also highlighted the importance of efforts to extend RPM service life to retain the ability to perform required scanning. DHS's budget justification for fiscal year 2016 referred to the 13-year RPM service life as it called for increased funding for replacements based on service life concerns. The budget justification stated that funding increases would address sustainability of aging RPMs and ensure compliance with the SAFE Port Act as DHS formulates a long-term strategy for the replacement of RPMs at the end of their life cycle. Furthermore, in October 2015, a senior DNDO official told us that DNDO was using 13 years as a conservative estimate for RPM service life. Fiscal year 2016 House and Senate appropriations committee reports discussed the need for RPM replacement, and specifically referenced RPM aging issues. The Consolidated Appropriations Act, 2016 increased funding for acquisition and deployment of radiological detection systems, including RPMs, to $113 million from $73 million in the previous year. This money can be used through fiscal year 2018. According to DHS data, as of August 2016, DHS's RPM fleet remains almost 100 percent operational, even as almost 20 percent of the RPMs have reached the end of their original estimated 13-year service life and another 40 percent are within 2 years of that date. DNDO and PNNL officials we interviewed told us that, based on more recent studies and analysis, they believe the RPM fleet can last at least 20 years longer if it is properly maintained and spare parts remain available. Specifically, a January 2015 study by CBP's Data Analysis Center that examined 8 years of RPM performance data concluded that the fleet is in acceptable condition and will operate effectively for several years. The study also noted that the functionality of the plastic detector panels does not degrade significantly over time. A May 2015 DHS study--carried out expressly to determine the best alternatives for replacing RPMs as they began to reach the end of their service lives--concluded that, assuming proper maintenance and parts availability continues, the concept of RPM life span is not useful, in part because there has been no measurable operational degradation of the RPM fleet. The study noted that CBP intends to continue to maintain RPMs at nearly 100 percent operability, resulting in no loss of functionality as they age. The study found no reason to believe that parts would become obsolete or unavailable, and noted that, under RPM maintenance contracts, parts are replaced or repaired as soon as they are observed to have failed. The study concluded that the RPMs could operate until 2030 at current levels of functionality, and stated that any decision to replace the systems should be predicated on the need for improved functionality rather than because of concerns over aging. Underlying this conclusion was an assumption that maintenance costs would not increase appreciably over the period evaluated. DNDO officials we interviewed explained that CBP has maintenance contracts with the RPM vendors that ensure the fleet can remain nearly 100 percent operational for many years. Furthermore, CBP and PNNL track maintenance data for trends in component failure rates that might indicate problems with the fleet or any significant maintenance cost increases, and officials told us that no troubling trends exist. In March 2016, Leidos confirmed to CBP in writing that it is capable of and committed to supplying parts for its RPMs until at least 2021 and expects to be able to do so through 2026. In addition, officials told us that they have not faced any barriers to replacing RPM components to date. For instance, CBP has replaced more than 1,100 computer interface boards and more than 1,200 vehicle presence sensors since 2007. CBP officials that we interviewed indicated that they have no reason to believe that parts will not remain available as long as the RPMs are still in use. Based on the new conclusions about RPM service life, in 2016 DNDO changed the focus of its strategy from replacing the RPM fleet because of aging to selective replacement of RPMs at specific sites to gain operational efficiencies, as discussed later in this report. This change is reflected in DHS's budget justification for fiscal year 2017 in which DHS focused its funding request on the need to replace some upgraded Leidos RPMs to gain further operational efficiencies. Consistent with the stated planning assumptions, DNDO has not used funds received in fiscal year 2016 for RPM acquisitions. DHS plans to replace legacy RPMs at selected ports of entry with RPMs that have greater threat discrimination capabilities to gain operational efficiencies and reduce labor needs while continuing to meet detection requirements. Specifically, from fiscal year 2016 through fiscal year 2018, DHS is planning to replace more than 120 Ludlum RPMs at northern U.S. land border crossings with upgraded Leidos RPMs from existing inventory. The Ludlum RPMs are among the oldest in the fleet, with most acquired in fiscal years 2002 and 2003. Replacing them with upgraded Leidos RPMs would allow for improved threat discrimination--an RPM's ability to distinguish between radiation emitted from NORM and radiation emitted from materials that pose a threat--which, according to DHS officials we interviewed, is expected to minimize CBP officer time spent responding to nuisance alarms. DHS therefore expects to be able to redirect some CBP officers to other critical law enforcement duties, such as interdiction of smuggled currency, illicit drugs, or other contraband, at border crossings where upgraded Leidos RPMs are installed. CBP officials told us in May 2016 that DHS will study the operations at each land border crossing before deciding on RPM replacement to ensure the benefits outweigh the costs. DNDO and CBP replaced Ludlum RPMs with upgraded Leidos RPMs at two sites--one seaport and one land border crossing--in fiscal year 2015. In total, 22 Ludlum RPMs were replaced with 20 upgraded Leidos RPMs. DNDO did not carry out a cost- benefit analysis before these RPM replacements. CBP officials explained that one site was the last remaining seaport where Ludlum systems were deployed. These officials explained that the second site resulted from a public-private partnership agreement initiated by a port authority to address operational concerns in which the private entity paid for the majority of labor costs associated with the replacement. DNDO provided us with documentation of a cost-benefit analysis for a third site, a land border crossing where CBP is considering replacing Ludlum RPMs with upgraded Leidos RPMs, and indicated that DNDO is in the final stages of completing an analysis addressing the remaining northern land border crossings. GAO Recommended That the Department of Homeland Security (DHS) Examine Use of Optimization Techniques to Maximize Radiation Portal Monitor (RPM) Potential In 2009, we examined DHS's Domestic Nuclear Detection Office's (DNDO) development and testing of a new type of RPM and, among other things, found that DNDO had not completed efforts to fine-tune the current fleet of RPMs to provide greater sensitivity to threat materials. We recommended that DNDO do so before spending billions of dollars acquiring new RPMs. (See GAO-09-655.) Beginning in 2014, DHS's U.S. Customs and Border Protection (CBP) took action to upgrade some of its RPMs by optimizing RPM threshold settings. CBP estimates that the upgraded RPMs prevent more than 200,000 alarms from naturally occurring radioactive materials per year at the sites where the upgrades have been implemented, allowing for 88 CBP officers to be redirected to other high-priority mission areas, according to CBP officials. In addition, 70 percent of the sites where the upgrades were implemented reported safety improvements, according to an agency survey. These improvements were attributed to such things as reduced congestion and better traffic flow. During fiscal years 2018 through 2020, DHS is planning to replace upgraded Leidos RPMs at selected high-volume ports of entry with between 150 and 250 enhanced, commercially available RPMs that have even greater ability to discriminate between NORM and materials that pose a threat. According to DNDO and CBP officials, the improved threat discrimination offered by these new, enhanced RPMs will further reduce nuisance alarms and may enable high-volume ports of entry to implement remote RPM operations. Under remote operations, RPM scanning lanes would be monitored from a centralized location at each port using video cameras and traffic control devices, with CBP officers dispatched to inspection areas only in response to an RPM alarm. The staff formerly stationed at each RPM scanning site would be reassigned to other mission needs within a port of entry. CBP officials told us that, although CBP has yet to make a final determination, implementing remote operations would require a reduction of nuisance alarms to about one or two alarms per lane per day on average. Currently, upgraded Leidos RPMs--which have reduced nuisance alarms by more than 75 percent, on average, across the sites with the upgrades--provide alarm levels under one per day at many sites, according to CBP data. However, the data indicate that some high- volume ports of entry have lanes with higher nuisance alarm rates. According to a DHS analysis, the new, enhanced RPMs will provide nuisance alarm levels up to 99 percent lower than the legacy RPMs without upgrades, which is expected to be low enough to implement remote operations at these high-volume sites. (See fig. 3.) According to DNDO and CBP officials, RPM acquisition decisions will be informed by several factors, including available budget levels, performance of the upgraded Leidos RPMs, performance of new, enhanced RPMs as they are deployed, and the status of port expansions and reconfigurations. DNDO and CBP have conducted, or are planning, studies of nuisance alarm rates at sites with upgraded Leidos RPMs and new, enhanced RPMs. For example, DNDO and CBP collaborated on a preliminary study of nuisance alarm rates at ports of entry where upgraded Leidos RPMs are operating. Officials told us that further studies are necessary before DNDO and CBP determine how many of these sites will need new, enhanced RPMs to achieve nuisance alarm rates low enough to implement remote operations. According to CBP officials, CBP is also planning to test remote operations using new, enhanced RPMs. Specifically, according to officials, CBP has begun planning a pilot project at a seaport in Savannah, Georgia, to demonstrate the feasibility of remote operations using a test lane outfitted with a new, enhanced RPM. In addition to RPMs deployed as replacements, DHS estimates that, over the next several years, it will need to deploy approximately 200 RPMs because of port expansions and reconfigurations across the country. According to DHS officials, some of these will be Leidos RPMs out of existing inventory and some will be newly acquired, enhanced RPMs, depending on the scanning requirements at each individual site and the availability of the Leidos RPMs in inventory. According to DHS data, the agency had 143 upgraded Leidos RPMs in its inventory as of September 30, 2015, as well as approximately 85 low-use or no-use RPMs (75 Leidos and 10 Ludlum) expected to be available. DHS inventory data indicate that this existing RPM inventory would be adequate to support the planned replacements at the northern land border and the added RPM deployments for port expansions and reconfigurations through the end of fiscal year 2017. According to DNDO, starting in fiscal year 2018, when DHS plans to begin acquiring the enhanced RPMs, the upgraded Leidos RPMs that the new, enhanced RPMs replace will be used for the northern land border replacements and the anticipated port expansions and reconfigurations. According to DNDO officials, DNDO is following the DHS acquisition directive as it plans for acquisition of the enhanced RPMs. This document directs DNDO to follow a four-phase acquisition life-cycle framework. The directive's implementing instruction outlines a series of "acquisition decision events" that include certain milestones. For example, prior to approval of an acquisition, DNDO must, among other things, develop a mission need statement outlining the capability need or gap that the an analysis of alternatives that explores the alternatives for addressing the identified need; a life-cycle cost estimate for the assets being acquired; and a test and evaluation master plan outlining how the program will ensure that the acquisition will deliver the capabilities needed by the program. As of August 2016, DNDO has completed an analysis of alternatives for the planned RPM acquisition, and officials told us that other required documentation is in process or waiting for management approval. Officials stated that DNDO plans to issue a request for proposals to industry before the end of the current calendar year and that the initial acquisition of the enhanced RPMs is planned for fiscal year 2018. DNDO and CBP have also recognized that the enhanced RPMs may be suitable for scanning of international rail crossings. DNDO has identified the lack of RPM scanning of international rail crossings as a concern for at least a decade and as a Global Nuclear Detection Architecture capability gap since 2014. In 2007, Congress directed the Secretary of Homeland Security to develop a system to detect both undeclared passengers and contraband, with a primary focus on the detection of nuclear and radiological materials entering the United States by railroad. In 2012, DNDO carried out an analysis of alternatives to identify solutions for international rail RPM scanning. Agency officials have cited technological and logistical challenges as key factors preventing RPM scanning of rail cars crossing the border. Specifically, according to DHS officials, international rail traffic represents one of the most difficult challenges for radiation detection systems, in part because of the length of the trains (up to 2 miles), the distance required to stop moving trains, and the difficulties in separating individual cars for further examination. In addition, the gamma ray or X-ray scans used to detect rail cargo anomalies, such as high-density material or hidden cargo, can interfere with RPM scanning if the two are in close proximity, which can cause nuisance alarms from the RPMs. In June 2015, CBP conducted a successful cargo-scanning demonstration project at an international rail port of entry using systems that integrate X-rays and enhanced RPM scanning technologies. This demonstration project showed the feasibility of adding RPM scanning to international rail crossings. DNDO and CBP are jointly planning an acquisition of these integrated systems and plan to deploy them at international rail crossings beginning as early as fiscal year 2018. We provided a draft of this report to DHS for review and comment. DHS provided technical comments that 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 of this report to the appropriate congressional committees, the Secretary of Homeland Security, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff 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. Key contributors to this report are listed in appendix I. Shelby S. Oakley, (202) 512-3841 or [email protected]. In addition to the contact named above, Ned Woodward (Assistant Director), Rodney Bacigalupo, Antoinette Capaccio, Michael Krafve, Cynthia Norris, Steven Putansu, and Kevin Tarmann made key contributions to this report.
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Preventing terrorists from smuggling nuclear or radiological materials to carry out an attack in the United States is a top national priority. Terrorists could use these materials to make an improvised nuclear device that could cause hundreds of thousands of deaths and devastate buildings and other infrastructure. DHS's fleet of almost 1,400 RPMs helps secure the nation's borders by scanning incoming cargo and vehicles for radiological and nuclear materials. DHS began deploying RPMs to seaports and border crossings in fiscal year 2003. As RPMs began to approach the end of their expected 13-year service lives, DHS raised concerns over the sustainability of the fleet, the ability to maintain current scanning coverage, and the need for fleet recapitalization. GAO was asked to report on the sustainability of the RPM fleet. This report provides information on (1) DHS's assessment of the condition of its RPM fleet and how, if at all, that assessment has changed over time; and (2) DHS's plans for meeting detection requirements in the future. GAO reviewed agency documentation, analyzed data on RPM age and condition, and reviewed budget justifications. GAO interviewed DHS officials and officials from a national laboratory on the current status of the RPM fleet and DHS's plans for future RPM acquisitions. GAO is not making recommendations in this report. DHS provided technical comments on a draft of this report. These comments are incorporated as appropriate in the final report. The Department of Homeland Security's (DHS) assessment of its fleet of radiation portal monitors (RPM)--large, stationary radiation detectors through which vehicles and cargo containers pass at ports of entry--shifted over time and, as a result, DHS has changed the focus of its RPM replacement strategy. During fiscal years 2014 and 2015, as some RPMs began to reach the end of their estimated 13-year service life, DHS began planning for replacing the entire fleet of almost 1,400 RPMs. However, as of September 2016, the fleet remains nearly 100 percent operational and recent studies indicate that the fleet can remain operational until at least 2030 so long as proactive maintenance is carried out and RPM spare parts remain available. As a result, in 2016, DHS changed the focus of its RPM replacement strategy to selective replacement of RPMs--using existing RPMs that have been upgraded with new alarm threshold settings or purchasing enhanced, commercially available RPMs--to gain operational efficiencies and reduce labor requirements at some ports. During fiscal years 2016 through 2018, DHS plans to replace approximately 120 RPMs along the northern U.S. border with upgraded RPMs and, during fiscal years 2018 through 2020, plans to replace between 150 and 250 RPMs at select high-volume ports with enhanced, commercially available RPMs. Specifically, DHS plans to replace some legacy RPMs--those that cannot be upgraded with the new alarm thresholds--at northern U.S. land border crossings with RPMs from existing inventory that have been upgraded. This upgrade enables improved threat discrimination and minimizes "nuisance" alarms created by naturally occurring radioactive materials (NORM) in commonly shipped cargo such as ceramics, fertilizers, and granite tile. Improved discrimination between NORM and threat material will create efficiencies for the movement of cargo through ports and minimize time that DHS's Customs and Border Protection (CBP) officers spend adjudicating the nuisance alarms. DHS is also planning limited replacement of upgraded RPMs at select high-volume ports with enhanced, commercially available RPMs that offer nuisance alarm levels significantly lower than even the upgraded RPMs. Currently, upgraded RPMs at some high-volume ports do not reduce nuisance alarm rates enough to implement remote RPM operations--which allows CBP officers to carry out other duties at the ports when not responding to an RPM alarm--because of the high number of vehicles and cargo containers passing through the ports daily.
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Afghanistan is a unique country with different development, security, and infrastructure issues and needs than Iraq. As a result, CERP efforts in Afghanistan are frequently focused on development and construction whereas in Iraq the focus of CERP is reconstruction of neglected or damaged infrastructure. The program has evolved over time in terms of the cost and complexity of projects, and the number of projects costing more than $500,000 in Afghanistan has reportedly increased from 9 in fiscal year 2004 to 129 in fiscal year 2008. As the program has matured, projects have become more complex, evolving from building small-scale projects such as wells that cost several thousand dollars to a boys' dormitory construction project that cost several hundred thousand dollars to building roads that cost several million dollars. For example, of the $486 million that DOD obligated on CERP projects in fiscal year 2008, about $281 million was for transportation, which was largely for roads. CJTF-101 guidance identifies the individuals authorized to approve CERP projects based on the estimated cost of the project (see table 1). As shown in the table, 90 percent of the CERP projects executed in Afghanistan in fiscal year 2008 cost $200,000 or less. Management and execution of the CERP program is the responsibility of officials at CJTF-101 headquarters, the brigades and the PRTs. CJTF-101 personnel include the CERP manager who has the primary day-to-day responsibility for the program, a staff attorney responsible for reviewing all projects with a value of $200,000 or more, and a resource manager responsible for, among other things, maintaining CERP training records and tracking CERP obligations and expenditures. In addition, CJTF-101 guidance assigns responsibilities to the various staff sections such as engineering, medical, and contracting when specific projects require it. For example, the command engineering section is tasked with reviewing construction projects over $200,000, including reviewing plans for construction and project quality-assurance plans, and with participating in the CERP review boards. Similarly, the command's surgeon general is responsible for coordinating all plans for construction, refurbishment, or equipping of health facilities with the Afghanistan Minister of Health and evaluating all project nominations over $200,000 that relate directly to healthcare or the healthcare field. Brigade commanders are responsible for the overall execution of CERP in their areas of responsibilities and are tasked with a number of responsibilities including identifying and approving CERP projects, appointing project purchasing officers, and paying agents and ensuring that proper management, reporting, and fiscal controls are established to account for CERP funds. In addition, the brigade commander is responsible for ensuring that project purchasing officers and paying agents receive training and ensuring that all personnel comply with CERP guidance. Additional personnel in the brigade are tasked with specific day- to-day management of the CERP program for the brigade commander. Table 2 details the activities of key individuals tasked with executing and managing CERP at the brigade level. In addition to those tasked with day-to-day responsibility, others at the brigade have a role in the CERP process. For example, the brigade attorney is responsible for reviewing project nominations to ensure that they are legally sufficient and in compliance with CERP guidelines, and the brigade engineer is tasked with providing engineering expertise, including reviewing projects and assisting with oversight. DOD is statutorily required to provide Congress with quarterly reports on the source, allocation and use of CERP funds. The reports are compiled based on information about the projects that is entered by unit officials into the Combined Information Data Network Exchange, a classified DOD database that not only captures operations and intelligence information, but also tracks information on CERP projects such as project status, project start and completion date, and dollars committed, obligated, and disbursed. This database is the third database that DOD has used since 2006 to track CERP projects in Afghanistan. According to a military official, some historical data on past projects were lost during the transfer of this information from previous database systems. CERP information is now available in an unclassified format to members of PRTs and others who have access to a network that can be used to share sensitive but unclassified information. U. S. efforts to enhance Afghanistan's development is costly and requires some complex projects, underscoring the need to effectively manage and oversee the CERP program, including effectively managing and overseeing contracting as well as contractor efforts. During our review, we identified problems with the availability of personnel to manage and oversee CERP, as well as the sufficiency of training on CERP. Although DOD has used CERP funds to construct roads, schools, and other projects that commanders believe have provided benefits to the Afghan people, DOD faces significant challenges in providing adequate management and oversight of CERP because of an insufficient number of trained personnel to execute and manage the program. We have frequently reported on several long-standing problems facing DOD as it uses contractors in contingency operations including inadequate numbers of trained management and oversight personnel. Our previous work has shown that high-performing organizations routinely use current, valid, and reliable data to make informed decisions about current and future workforce needs, including data on the appropriate number of employees, key competencies, and skill mix needed for mission accomplishment, and appropriate deployment of staff across the organization. DOD has not conducted a workforce assessment of CERP to identify how many military personnel are needed to effectively and efficiently execute and oversee the program. Rather, commanders determine how many personnel will manage and execute CERP. Personnel at all levels, including headquarters and unit personnel that we interviewed after they returned from Afghanistan or were in Afghanistan in November 2008, expressed a need for more personnel to perform CERP program management and oversight functions. Due to a lack of personnel, key duties such as performing headquarters staff assistance visits to help units to improve contracting procedures and site visits to monitor project status and contractor performance were either not performed or not consistently performed. At the headquarters level, at the time of our review, CJTF-101 had designated one person to manage the day-to-day operations of CERP. Among many other tasks outlined in the CJTF-101 CERP guidance, the CJTF-101 CERP manager was responsible for conducting training for PPOs and PAs, providing oversight of all projects, ensuring proper coordination for all projects with the government of Afghanistan, validating performance metrics, ensuring that all project information is updated monthly in the command's electronic database and conducting staff assistance visits semiannually or as requested by brigades. Staff assistance visits are conducted to assist units by identifying any additional training or guidance that may be required to ensure consistency in program execution. According to documents we reviewed, staff assistance visits conducted in the past have uncovered problems with project documentation, adhering to project guidelines, and project tracking, among others. The CJTF-101 CERP manager we interviewed during our visit to Afghanistan stated that he spent most of his time managing the headquarters review process of projects costing more than $200,000 and was unable to carry out his full spectrum of responsibilities, including conducting staff assistance visits. After our November 2008 visit to Afghanistan, CJTF-101 added additional personnel to manage CERP on a full-time basis. Headquarters and brigade level personnel responsible for CERP also expressed a need for additional personnel at brigades to perform essential functions from program management to project execution. For example: CJTF-101 guidance assigns a number of responsibilities for executing CERP, including project monitoring and oversight, to military personnel; however, according to unit officials we spoke with, tasks such as completing project oversight and collecting metrics on completed projects are often not accomplished due to a lack of personnel. In a July 2008 memorandum to CENTCOM, the CJTF-101 commanding general noted that in some provinces, units have repositioned or are unable to do quality- assurance and quality-control checks due to competing missions and security risks. Furthermore, according to military officials from units that had deployed to Afghanistan, project oversight is frequently not provided because units lack the personnel needed to conduct site visits and ensure compliance with CERP contracts. For example, according to one CERP manager we spoke with, his unit was not able to provide oversight of 20 of the 27 CERP projects because it was often difficult to put together a team to conduct site visits due to competing demands for forces. Similarly, the competing demands for forces made it difficult for units to visit completed projects and determine the effectiveness of the projects as required by CERP guidance. CJTF-101 guidance also requires units to consult subject-matter experts, such as engineers, when required. However, military officials stated that there is a lack of subject-matter experts to consult on some projects. For example, military personnel stated that agriculture experts are needed to assist on agriculture projects. Moreover, more public health officials are needed. A commander from one task force stated that his soldiers were not qualified to monitor and assess clinics because they did not have the proper training. Furthermore, several officials we spoke with, including officials at the CJTF-101 headquarters, noted that they needed additional civil/military affairs personnel to do project assessments both before projects are selected to determine which projects would be most appropriate and after projects are completed to measure the effectiveness of those projects. We recently reported that the lack of subject-matter experts puts DOD at risk of being unable to identify and correct poor contractor performance, which could affect the cost, completion, and sustainability of CERP projects. According to DOD policy, members of the Department of Defense shall receive, to the maximum extent possible, timely and effective, individual, collective, and staff training, conducted in a safe manner, to enable performance to standard during operations. CERP familiarization wever, training may be provided to Army personnel before deployment; ho according to several Army officials, units frequently do not know who will be responsible for managing the CERP program until after they arrive in Afghanistan so task-specific training is generally not included in predeployment training. Others, such as PPOs, receive training after they arrived in Afghanistan. However, personnel assigned to manage and execute CERP had little or no training on their duties and responsibilities, and personnel we spoke with in Afghanistan and those who had recently returned from Afghanistan believed they needed more quality training in order to perform their missions effectively. For example: One of the attorneys responsible for reviewing and approving CERP projects received no CERP training before deploying. Unsure of how to interpret the guidance, the attorney sought clarification from higher headquarters, which delayed project approval. Personnel from a U.S. Marine Corps unit that deployed to Afghanistan reported that they received no training on CERP prior to deployment and believed that such training would have been helpful to ensure that projects they selected would provide long-term benefits to the population in their area of operation. Army training on CERP consisted of briefing slides that focused on the authorized and unauthorized uses of CERP but did not discuss how to complete specific CERP responsibilities such as project selection, developing a statement of work, selecting the appropriate contract type, or providing the appropriate types and levels of contract oversight. Additionally, according to officials from brigades we spoke with in Afghanistan, they received little or no training on their CERP responsibilities after arriving in-theater. Military officials from PRTs also noted that they received little training on CERP prior to deploying to Afghanistan and felt that additional training was needed so that they could more easily perform their CERP duties. In some cases, personnel told us that working with their predecessors during unit rotations provided them with sufficient training. However not all personnel have that opportunity. Our reports as well as recent reports from others have highlighted the difficulties associated with contracting in contingency operations particularly for those personnel with little contracting experience. DOD's Financial Management Regulation allows contracting officers to delegate the authority to PPOs to obligate funds for CERP contracts for projects valued at less than $500,000. Additionally, PPOs are involved in other activities such as writing the statement of work for each project, ensuring that the project is completed to contract specifications, and completing contract close out. During our visit to Afghanistan, we observed PPO training provided by the principal assistant responsible for contracting in Afghanistan. The training consisted of a 1-hour briefing, which included a detailed discussion of CERP guidance but did not provide detailed information on the duties of the PPO. For example, according to CJTF-101 guidance, contracts are to be supported by accurate cost estimates; however, the PPO briefing does not provide training on how to develop these estimates. All of the contracting officers we spoke with believe that the training brief provided is insufficient and noted that unlike PPOs, who have less training but more authority under CERP, warranted contracting officers have at least 1 year of experience and are required to take a significant amount of classroom training before they are allowed to award any contracts. Moreover, some PPOs we spoke with stated that they needed more training. Military officials at both the brigade and CJTF-101 level told us that inadequate training has led to some common mistakes in CERP contracts and CERP project files. For example, officials from PRTs, brigades, and the CJTF-101 level noted that statements of work often are missing key contract clauses or include clauses that are not appropriate and require revision. A training document provided by the principal assistant responsible for contracting identified several important clauses that are commonly omitted by PPOs including termination clauses, progress schedule clauses, and supervision and quality control clauses. As we have reported in the past, poorly written contracts and statements of work can increase the department's cost risk and could result in the department paying for projects that do not meet project goals or objectives. Additionally, several officials at CJTF-101 with responsibilities for CERP also noted that project packages sent to the headquarters for review were often incomplete or incorrect, thereby, slowing down the CERP project approval process and increasing the workload of the CERP staff at both the headquarters and unit level. For example, the CJTF-101 official responsible for reviewing all projects valued at $200,000 or more noted that most of the project packets he reviewed had to be returned to the brigades because the packets lacked key documents, signatures, or other required information. Finally, the lack of training affects the quality of the oversight provided and can increase the risk of fraud. To illustrate, the Principal Deputy Inspector General Department of Defense testified in February 2009, that contingency contracting, specifically the Commander's Emergency Response Program, is highly vulnerable to fraud and corruption due to a lack of oversight. He went on to state "it would appear that even a small amount of contract training provided through command channels and some basic ground-level oversight that does not impinge on the CERP's objective would lower the risk in this susceptible area." DOD and USAID participate in various mechanisms to facilitate coordination, but lack information that would provide greater visibility on all U.S. government development projects in Afghanistan. Teams have been formed in Afghanistan that integrate U.S. government civilians and military personnel to enhance coordination among U.S. agencies executing development projects in Afghanistan. For example, for projects involving roads, DOD and USAID officials have set up working groups to coordinate road construction and both agencies agreed that coordination on roads was generally occurring. Additionally, a USAID member is part of the PRT and sits regularly with military colleagues to coordinate and plan programming, according to USAID officials. Those same officials stated that this has resulted in joint programming and unity of effort, marrying CERP and USAID resources. Military officials we spoke with from several brigades also stated that coordination with the PRTs was good. Further, a USAID representative is located at the CJTF-101 headquarters and acts as a liaison to help coordinate projects costing $200,000 or more. Also, in November 2008, the Integrated Civilian-Military Action Group which consists of representatives from the Department of State, USAID, and U.S. Forces-Afghanistan was established at the U.S. Embassy in Kabul, to help unify U.S. efforts in Afghanistan through coordinated planning and execution, according to a document provided by USAID. The role of the Integrated Civilian-Military Action Group, which is expected to meet every 3 weeks, is to establish priorities and identify roles and responsibilities for both long-term and short-term development. Any decisions made by this group are then presented to the Executive Working Group-a group of senior military, State Department, and USAID officials-for approval. According to USAID officials, the Executive Working Group is empowered by the participating organizations to engage in coordinated planning and execution, provide guidance that synchronizes civilian and military efforts, convene interagency groups as appropriate, monitor and assess implementation and impact of integrated efforts, and recommend course changes to achieve U.S. government goals in support of the Government of the Islamic Republic of Afghanistan and of achieving stability in Afghanistan. Despite these interagency teams, military and USAID officials lack a common database that would promote information sharing and facilitate greater visibility of all development projects in Afghanistan. At the time of our review, development projects in Afghanistan were not tracked in a single database that was accessible by all parties conducting development in the country. For example, the military uses a classified database-- Combined Information Data Network Exchange--to track CERP projects and other information. In early 2009, USAID officials were granted access to an unclassified portion of this database, providing them with information on the military's CERP projects including project title, project location, project description, and name of the unit executing the project, among other information. On the other hand, USAID officials use a database called GEOBASE to track their development projects, and there are a myriad of other databases used to track individual development efforts. USAID officials stated that they did not believe military officials had access to GEOBASE. However, in our 2008 review of Afghanistan road projects, we reported that there was a DOD requirement to provide CERP project information to USAID via the GEOBASE system to provide a common operating picture of reconstruction projects for U.S. funded efforts. We found that this was not being done for the CERP-funded road projects and recommended that DOD do so, to which DOD concurred. At the time of our review, the requirement to input CERP project information into that database was not included in the most recent version of the CJTF-101 standard operating procedure. In a memorandum to CENTCOM, the commanding general of CJTF-101 noted that data on various development projects in Afghanistan are maintained in a wide range of formats making CERP data the only reliable data for the PRTs. In January 2009, USAID initiated a project to develop a unified database to capture reliable and verified data for all development projects in Afghanistan and make it accessible to all agencies engaging in development activities in the country. The goal for the database is to create visibility of development projects for all entities executing projects in Afghanistan in a single place. However, plans are preliminary and a number of questions remain including how the database will be populated and how the database development will be funded. USAID officials told us that they have been coordinating with CJTF-101 civil affairs officials about the development of the database and plan to hold a meeting in April 2009 to discuss recommendations for its development and to obtain input about the database from other U.S. government agencies. While USAID officials have conducted some assessments for the development of the centralized database, as of yet no specific milestones have been established for when that database will be complete. Without clear goals and a method to judge the progress of this initiative it is unclear how long this project might take or if it will ever be completed. The expected surge in troops and expected increase in funding for Afghanistan heightens the need for an adequate number of trained personnel to execute and oversee CERP. With about $1 billion worth of CERP funds already spent to develop Afghanistan, it is crucial that individuals administering and executing the program are properly trained to manage all aspects of the program including management and oversight of the contractors used. If effective oversight is not conducted, DOD is at risk of being unable to verify the quality of contractor performance, track project status, or ensure that the program is being conducted in a manner consistent with guidance. Without such assurances, DOD runs the risk of wasting taxpayer dollars, squandering opportunities to positively influence the Afghan population and diminishing the effectiveness of a key program in the battle against extremist groups including the Taliban. Although coordination mechanisms are in place to help increase visibility, eliminate project redundancy, and maximize the return on U.S. investments, the U.S. government lacks an easily accessible mechanism to identify previous and ongoing development projects. Without a mechanism to improve the visibility of individual development projects, the U.S. government may not be in a position to fully leverage the resources available to develop Afghanistan and risks duplicating efforts and wasting taxpayer dollars. We recommend that the Secretary of Defense direct the commander of U.S. Central Command to evaluate workforce requirements and ensure adequate staff to administer establish training requirements for CERP personnel administering the program, to include specific information on how to complete their duties and responsibilities . We further recommend that the Secretary of Defense and Administrator of USAID; collaborate to create a centralized project-development database for use by U.S. government agencies in Afghanistan, including establishing specific milestones for its development and implementation. In written comments to a draft of this report, DOD partially concurred with two of our recommendations and concurred with one. These comments are reprinted in appendix II. DOD partially concurred with our recommendation to require U.S. Central Command to evaluate workforce requirements and ensure adequate staff to administer the Commander's Emergency Response Program (CERP). DOD acknowledged the need to ensure adequate staff to administer CERP and noted that since our visit, U.S. Forces-Afghanistan had added personnel to manage the program on a full-time basis. Because of the actions already being taken, DOD believed that no further action is warranted at this time, but stated it would monitor the situation and respond as required. Although steps have been taken to improve management and oversight of CERP in Afghanistan, we still believe that CENTCOM should conduct a workforce assessment to identify the number of personnel needed to effectively manage and oversee the program. As we described in the report, in the absence of such an assessment, commanders determine how many personnel will manage and execute CERP. As commanders rotate in and out of Afghanistan, the number of people they assign to administer and oversee CERP could vary. Therefore, to ensure consistency, we continue to believe that CENTCOM, rather than individual commanders, should assess and determine the workforce needs for the program. DOD partially concurred with our recommendation to establish training requirements for CERP personnel administering the program to include specific information on how to complete their duties and responsibilities. DOD acknowledged the need for training for CERP personnel administering the program and stated that since our visit, U.S. Forces- Afghanistan has begun work on implementing instructions to enhance selection processes and training programs for personnel administering the program and handling funding. Based on these efforts, DOD believed that no further action is warranted at this time but said it would monitor the situation and respond as required. However, the efforts outlined by DOD appear to be focused on training after personnel arrive in Afghanistan. Because our work also identified limitations in training prior to deployment, we believe that additional action is required, on the part of CENTCOM, to fully implement our recommendation. DOD concurred with our recommendation to collaborate with USAID to create a centralized project-development database for use by U.S. government agencies in Afghanistan, including establishing specific milestones for its development and implementation. USAID officials were given an opportunity to comment on the draft report. However, officials stated that they had no comments on the draft. We are sending copies of this report to other interested congressional committees and the Secretary of Defense and Administrator of USAID. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-9619 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 III. To determine the extent to which the Department of Defense (DOD) has the capacity to provide adequate management and oversight of the CERP in Afghanistan, we reviewed guidance from DOD, Combined Joint Task Force-101 (CJTF-101), and Combined Joint Task Force-82 (CJTF-82) to identify roles and responsibilities of CERP personnel, how personnel are assigned to the CERP, the nature and extent of the workload related to managing and executing the CERP, and the training curriculum provided to familiarize personnel with the CERP. We traveled to Afghanistan and interviewed officials at higher command, including those responsible for the overall management of CERP at CJTF-101, as well as commanders, staff judge advocates, project purchasing officers, engineers, and CERP managers about how they administered, monitored, and provided oversight to the program, what training they received, and how personnel assigned to administer and manage the program were chosen. We also interviewed personnel at all levels to obtain their perspective on their ability to execute their assigned workload and sufficiency of training they received prior to deployment and upon arrival in Afghanistan and attended a training session that was provided to Project Purchasing Officers (PPO). Additionally, we interviewed officials at the Office of the Secretary of Defense (Comptroller) and the Office of the Assistant Secretary of the Army (Financial Management and Comptroller), as well as Marine Corps and Army units that had returned from Afghanistan about the type of management and oversight that exists for CERP and the quality of that oversight. We selected these units (1) based on Afghanistan deployment and redeployment dates; (2) to ensure that we obtained information from officials at the division, brigade, and Provincial Reconstruction Team (PRT) levels who had direct experience with CERP; and (3) because unit officials had not yet been transferred to other locations within the United States or abroad. In order to determine the extent to which commanders coordinate CERP projects with USAID, we reviewed and analyzed DOD, CJTF-101, and CJTF-82 guidance to determine what coordination, if any, was required. We also interviewed military officials at the headquarters, brigade, and PRT levels that had redeployed from Afghanistan between July 2008 and April 2009 to determine the extent of their coordination with USAID officials. We also met with USAID officials in Washington, D.C., as well as traveled to Afghanistan and interviewed officials at the CJTF-101 headquarters, brigade, PRT, as well as, USAID about their coordination efforts. We spoke with military officials about the database they use to track CERP projects-Combined Information Data Network Exchange (CIDNE)--and learned that some historical data on past projects was lost during the transfer of information from a previous database to CIDNE. However, the information is in the project files and had already been included in the quarterly reports to Congress. Therefore, we analyzed the reported obligations in the quarterly CERP reports to Congress for fiscal year 2004 to fiscal year 2008 and interviewed officials about information contained in the reports. Based on interviews with officials, we determined that these data are sufficiently reliable for the purpose of this report. United States Agency for International Development, Washington, D.C. United States Agency for International Development, Kabul, Afghanistan Department of State, Washington, D.C. We conducted this performance audit from July 2008 to April 2009 in accordance with generally accepted government accounting standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Carole Coffey, Assistant Director; Susan Ditto, Rodney Fair, Karen Nicole Harms, Ron La Due Lake, Marcus Oliver, and Sonja Ware made key contributions to this report. Defense Management: Actions Needed to Overcome Long-standing Challenges with Weapon Systems Acquisition and Service Contract Management. GAO-09-362T. Washington, D.C: February 12, 2009. Iraq and Afghanistan: Availability of Forces, Equipment, and Infrastructure Should Be Considered in Developing U.S. Strategy and Plans. GAO-09-380T. Washington, D.C: February 11, 2009. Provincial Reconstruction Teams in Afghanistan and Iraq. GAO-09-86R. Washington, D.C.: October 1, 2008. Military Operations: DOD Needs to Address Contract Oversight and Quality Assurance Issues for Contracts Used to Support Contingency Operations. GAO-08-1087. Washington, D.C.: September 26, 2008. Afghanistan Reconstruction: Progress Made in Constructing Roads, but Assessments for Determining Impact and a Sustainable Maintenance Program Are Needed. GAO-08-689. Washington, D.C.: July 8, 2008. Securing, Stabilizing, and Rebuilding Iraq: Progress Report: Some Gains Made, Updated Strategy Needed. GAO-08-1021T. Washington, D.C: July 23, 2008. Military Operations: Actions Needed to Better Guide Project Selection for Commander's Emergency Response Program and Improve Oversight in Iraq. GAO-08-736R. Washington, D.C.: June 23, 2008. Stabilizing and Rebuilding Iraq: Actions Needed to Address Inadequate Accountability over U.S. Efforts and Investments. GAO-08-568T. Washington, D.C.: March 11, 2008. Defense Logistics: The Army Needs to Implement Effective Management and Oversight Plan for the Equipment Maintenance Contract in Kuwait. GAO-08-316R. Washington, D.C.: January 22, 2008. Stabilization and Reconstruction: Actions Needed to Improve Governmentwide Planning and Capabilities for Future Operations. GAO-08-228T. Washington, D.C.: October 30, 2007. Securing, Stabilizing, and Reconstructing Afghanistan. GAO-07-801SP. Washington, D.C.: May 24, 2007. Military Operations: The Department of Defense's Use of Solatia and Condolence Payments in Iraq and Afghanistan. GAO-07-699. Washington, D.C: May 23, 2007. Military Operations: High-Level DOD Action Needed to Address Long- standing Problems with Management and Oversight of Contractors Supporting Deployed Forces. GAO-07-145. Washington, D.C: December 18, 2006. Rebuilding Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S. Goals. GAO-06-788. Washington, D.C.: July 2006. Afghanistan Reconstruction: Despite Some Progress, Deteriorating Security and Other Obstacles Continue to Threaten Achievement of U.S. Goals. GAO-05-742. Washington, D.C.: July 28, 2005. Afghanistan Reconstruction: Deteriorating Security and Limited Resources Have Impeded Progress; Improvements in U.S. Strategy Needed. GAO-04-403. Washington, D.C.: June 2, 2004.
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U.S. government agencies, including the Department of Defense (DOD) and the United States Agency for International Development (USAID) have spent billions of dollars to develop Afghanistan. From fiscal years 2004 to 2008, DOD has reported obligations of about $1 billion for its Commander's Emergency Response Program (CERP), which enables commanders to respond to urgent humanitarian and reconstruction needs. As troop levels increase, DOD officials expect the program to expand. Under the authority of the Comptroller General, GAO assessed DOD's (1) capacity to manage and oversee the CERP in Afghanistan and (2) coordination of projects with USAID. Accordingly, GAO interviewed DOD and USAID officials, and examined program documents to identify workload, staffing, training, and coordination requirements. In Afghanistan, GAO interviewed key military personnel on the sufficiency of training, and their ability to execute assigned duties. Although DOD has used CERP to fund projects that it believes significantly benefit the Afghan people, it faces significant challenges in providing adequate management and oversight because of an insufficient number of trained personnel. GAO has frequently reported that inadequate numbers of management and oversight personnel hinders DOD's use of contractors in contingency operations. GAO's work also shows that high-performing organizations use data to make informed decisions about current and future workforce needs. DOD has not conducted an overall workforce assessment to identify how many personnel are needed to effectively execute CERP. Rather, individual commanders determine how many personnel will manage and execute CERP. Personnel at all levels, including headquarters and unit personnel that GAO interviewed after they returned from Afghanistan or who were in Afghanistan in November 2008, expressed a need for more personnel to perform CERP program management and oversight functions. Due to a lack of personnel, key duties such as performing headquarters staff assistance visits to help units improve contracting procedures and visiting sites to monitor project status and contractor performance were either not performed or inconsistently performed. Per DOD policy, DOD personnel should receive timely and effective training to enable performance to standard during operations. However, key CERP personnel at headquarters, units, and provincial reconstruction teams received little or no training prior to deployment which commanders believed made it more difficult to properly execute and oversee the program. Also, most personnel responsible for awarding and overseeing CERP contracts valued at $500,000 or less received little or no training prior to deployment and, once deployed, received a 1-hour briefing, which did not provide detailed information on the individual's duties. As a result, frequent mistakes occurred, such as the omission of key clauses from contracts, which slowed the project approval process. As GAO has reported in the past, poorly written contracts and statements of work can increase DOD's cost risk and could result in payment for projects that do not meet project goals or objectives. While mechanisms exist to facilitate coordination, DOD and USAID lack information that would provide greater visibility on all U.S. government development projects. DOD and USAID generally coordinate projects at the headquarters and unit level as well as through military-led provincial reconstruction teams which include USAID representatives. In addition, in November 2008, USAID, DOD and the Department of State began participating in an interagency group composed of senior U.S. government civilians and DOD personnel in Afghanistan to enhance planning and coordination of development plans and related projects. However, complete project information is lacking, because DOD and USAID use different databases. USAID has been tasked to develop a common database and is coordinating with DOD to do so, but development is in the early stages and goals and milestones have not been established. Without clear goals and milestones, it is unclear how progress will be measured or when it will be completed
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Several Interior agencies are responsible for carrying out the Secretary's Indian trust responsibilities. These agencies include the Bureau of Indian Affairs (BIA) and its Office of Trust Responsibilities (OTR), which is responsible for resource management and land and lease ownership information; BIA's 12 Area Offices and 85 Agency Offices; the Bureau of Land Management (BLM) and its lease inspection and enforcement functions; and the Minerals Management Service's (MMS) Royalty Management Program, which collects and accounts for oil and gas royalties on Indian leases. In addition, an Office of the Special Trustee for American Indians was established by the American Indian Trust Fund Management Reform Act of 1994. This office, implemented by Secretarial Order in February 1996, has oversight responsibility over Indian trust fund and asset management programs in BIA, BLM, and MMS. The Order transferred BIA's Office of Trust Funds Management (OTFM) to the Office of the Special Trustee for American Indians and gave the Special Trustee responsibility for the financial trust services performed at BIA's Area and Agency Offices. At the end of fiscal year 1995, OTFM reported that Indian trust fund accounts totaled about $2.6 billion, including approximately $2.1 billion for about 1,500 tribal accounts and about $453 million for nearly 390,000 Individual Indian Money (IIM) accounts. The balances in the trust fund accounts have accumulated primarily from payments of claims; oil, gas, and coal royalties; land use agreements; and investment income. Fiscal year 1995 reported receipts to the trust accounts from these sources totaled about $1.9 billion, and disbursements from the trust accounts to tribes and individual Indians totaled about $1.7 billion. OTFM uses two primary systems to account for the Indian trust funds--an interim, core general ledger and investment system and BIA's Integrated Resources Management System (IRMS). OTR's realty office uses the Land Records Information System (LRIS) to record official Indian land and beneficial ownership information. BLM maintains a separate system for recording mineral lease and production information and MMS maintains separate royalty accounting and production information systems. Our assessment of BIA's trust fund reconciliation and reporting to tribes is detailed in our May 1996 report, which covered our efforts to monitor BIA's reconciliation project over the past 5 and one-half years. As you requested, we also assessed Interior's trust fund management improvement initiatives. In order to do this, we contacted the Special Trustee for American Indians, OTFM officials, and OTR's Land Records Officer for information on the status of their management improvement plans and initiatives. We also contacted tribal representatives for their views. We focused on Interior agency actions to address recommendations in our previous reports and testimonies and obtained information on new initiatives. BIA recently completed its tribal trust fund reconciliation project which involved a massive effort to locate supporting documentation and reconstruct historical trust fund transactions so that account balances could be validated. BIA provided a report package to each tribe on its reconciliation results in January, 1996. Interior's prototype summary reconciliation report to tribes shows that BIA's reconciliation contractor verified 218,531 of tribes' noninvestment receipt and disbursement transactions that were recorded in the trust fund general ledger. However, despite over 5 years of effort and about $21 million in contracting fees, due to missing records, a total of $2.4 billion for 32,901 receipt and disbursement transactions recorded in the general ledger could not be traced to supporting documentation and only 10 percent of the leases selected for reconciliation could be verified. In addition, BIA's reconciliation report package did not disclose known limitations in the scope and methodology used for the reconciliation process. For example, BIA did not disclose or discuss the procedures included in the reconciliation contract which were not performed or could not be completed. Also, BIA did not explain substantial changes in scope or procedures contained in contract modifications and issue papers, such as accounts and time periods that were not covered and alternative source documents used. Further, BIA did not disclose that the universe of leases was unknown or the extent to which substitutions were made to the lease sample originally selected for reconciliation. In order for the tribes to conclude on whether the reconciliation represents as full and complete an accounting as possible, it was important that BIA explain the limitations in reconciliation scope and methodology and the procedures specified under the original contract that were not performed or were not completed. At a February 1996 meeting in Albuquerque, New Mexico, where BIA and its reconciliation contractor summarized the reconciliation results, tribes raised questions about the adequacy and reliability of the reconciliation results. The American Indian Trust Fund Management Reform Act of 1994 required that the Secretary of the Interior report to the House Committee on Resources and the Senate Committee on Indian Affairs by May 31, 1996, including a description of the methodology used in reconciling trust fund accounts and the tribes' conclusions as to whether the reconciliation represents as full and complete an accounting of their funds as possible. During BIA's February 1996 meeting with tribes to discuss the reconciliation reports and results, several tribes stated that they would need significant time to review their reconciliation reports and the supporting documents. OTFM planned five regional meetings between March 1996 and July 1996 to serve as workshops to assist individual tribes in reviewing their reconciliation results. Because BIA has not yet held all of the scheduled meetings to discuss account holder issues and comments and many account holders have not communicated their acceptance or dispute of their reconciled account balances, the Secretary has provided an interim report on account holders' communications through April 30, 1996. The Secretary plans to submit a final report on account holder attestations of their acceptance or dispute of their reconciled account balances by November 15, 1996. According to the Secretary's May 31, 1996, report 3 tribes, including 2 tribes for which additional pilot reconciliation procedures were performed, have disputed their reconciled account balances; 2 tribes with nominal balances have accepted their reconciled account 275 tribes, including 3 tribes that had additional pilot reconciliation procedures performed, have not yet decided whether to accept or dispute their account balances. Tribal representatives have told us that they are still reviewing their reconciliation report packages and that they have a number of questions and concerns about the results. If Interior is not able to reach agreement with tribes on the reconciliation results, a legislated settlement process would prove useful in resolving disputes about account balances. Our March 1995 testimony suggested that the Congress consider establishing a legislated settlement process. Our September 1995 report provided draft settlement legislation for discussion purposes. The draft legislation would provide for a mediation process and, if mediation does not resolve disputes, a binding arbitration process. The proposed process draws on advice provided us by the Federal Mediation and Conciliation Service and the rules of the American Arbitration Association. Both of these organizations have extensive experience in the use of third party facilitators to provide alternative dispute resolution. The proposed process offers a number of benefits, including flexibility in presentation of evidence and, because the decision of the arbitrators would be binding and could not be appealed, a final resolution of the dispute. In addition, arbitration has generally been found to be less costly than litigation. BIA's reconciliation project attempted to discover any discrepancies between its accounting information and historical transactions that occurred prior to fiscal year 1993. While it is important for the Congress to consider legislating a settlement process to resolve discrepancies in account balances, unless the deficiencies in Interior's trust fund management that allowed those discrepancies to occur are corrected, such discrepancies could continue to occur, possibly leading to a need for future reconciliation and settlement efforts. Since 1991, our testimonies and reports on BIA's efforts to reconcile trust fund accounts have recommended a number of corrective actions to help ensure that trust fund accounts are accurately maintained in the future. While OTFM and OTR have undertaken a number of corrective actions, progress has been slow, results have been limited, and further actions are needed. OTFM, Interior, and OTR have initiated several trust fund management improvements during the past 3 years. These include acquiring a cadre of experienced trust fund financial management staff; issuing trust fund IIM accounting procedures to BIA field offices, developing records management procedures manuals, and issuing a trust fund loss policy; implementing an interim, core general ledger and investment accounting system and performing daily cash reconciliations; studying IIM and subsidiary system issues; reinstating annual trust fund financial statement audits; and initiating improvements to the Land Records Information System. Our 1991 testimonies and June 1992 report identified a lack of trained and experienced trust fund financial management staff. Previous studies and audits by Interior's Inspector General and public accounting firms also identified this problem. Our June 1992 report recommended that BIA prepare an organization and staffing analysis to determine appropriate roles, responsibilities, authorities, and training and supervisory needs as a basis for sound trust fund management. In response to our recommendation, in 1992, OTFM contracted for a staffing and workload analysis and developed an organization plan to address critical trust fund management functions. The appropriations committees approved OTFM's 1994 reorganization plan. As of October 1995, OTFM had made significant progress in hiring qualified financial management and systems staff. However, during fiscal year 1996, 27 BIA personnel displaced by BIA's reduction-in-force were reassigned to OTFM. This represents about one-third of OTFM's on board staff. Some of these reassigned staff displaced OTFM staff, while others filled vacant positions that would otherwise have been filled through specialized hiring. As a result, OTFM will face the challenge of providing additional supervision and training for these reassigned staff while continuing to work with BIA's Area and Agency Office trust accountants to monitor corrective actions and plan for additional improvements. Our April 1991 testimony identified a lack of consistent, written policies and procedures for trust fund management. We recommended that BIA develop policies and procedures to ensure that trust fund balances remain accurate once the accounts are reconciled. Our April 1994 testimonyreiterated this recommendation and further recommended that BIA initiate efforts to develop complete and consistent written trust fund management policies and procedures and place a priority on their issuance. BIA has not yet developed a comprehensive set of policies and procedures for trust fund management. However, OTFM developed two volumes of trust fund IIM accounting procedures for use by BIA's Area and Agency Office trust fund accountants and provided them to BIA's Area and Agency Offices during 1995. Also, during 1995, OTFM developed two records management manuals, which address file improvements and records disposition. Missing records were the primary reason that many trust fund accounts could not be reconciled during BIA's recent reconciliation effort. In addition, OTFM is developing a records management implementation plan, including an automated records inventory system. In January 1992 and again in January 1994, we reported that BIA's trust fund loss policy did not address the need for systems and procedures to prevent and detect losses, nor did it instruct BIA staff on how to resolve losses if they occurred. The policy did not address what constitutes sufficient documentation to establish the existence of a loss, and its definition of loss did not include interest that was earned but not credited to the appropriate account. Our January 1994 report suggested a number of improvements, such as articulating steps to detect, prevent, and resolve losses. OTFM addressed our suggestions and issued a revised trust fund loss policy in 1995. However, while OTFM has made progress in developing policies and procedures, OTFM officials told us that BIA's Area and Agency Office trust accountants have not consistently implemented these policies and procedures. In addition to developing selected policies and procedures, OTFM officials told us that they began performing monthly reconciliations of the trust fund general ledger to Treasury records in fiscal year 1993 and that they work with BIA Area and Agency Offices to ensure that unreconciled amounts are properly resolved. OTFM officials also told us that they have had limited resources to monitor Agency Office reconciliation performance and assist BIA Agency Office personnel in resolving reconciliation discrepancies. While we have not reviewed this reconciliation process, it is expected that it would be reviewed in connection with recently reinstated trust fund financial statement audits. In addition, an OTFM official told us that a lack of resources has impeded OTFM's performance of its quality assurance function, which was established to perform internal reviews to help ensure the quality of trust fund management across BIA offices. For example, according to the OTFM official, until recently, funds were not available to travel to Area and Agency Offices to determine whether the accounting desk procedures and trust fund loss policy have been properly implemented. Our June 1992 report recommended that BIA review its current systems as a basis for determining whether systems modifications will most efficiently bring about needed improvements or whether alternatives should be considered, including cross-servicing arrangements, contracting for automated data processing services, or new systems design and development. In response to our recommendation, OTFM explored commercially available off-the-shelf trust accounting systems and contracted for an interim, core general ledger and investment accounting system. OTFM made a number of other improvements related to implementing the interim, core trust accounting system. For example, OTFM obtained Office of the Comptroller of the Currency assistance to develop core general ledger and investment accounting system operating procedures; initiated direct deposit of collections to BIA Treasury accounts through the Automated Clearing House; initiated automated payment processing, including electronic certification, to facilitate direct deposit of receipts to tribal accounts; conducted a user survey and developed a systems user guide; established a help desk to assist system users by providing information on the new system, including a remote communication package for tribal dial-in capability; and provided system access to Area and Agency Offices and tribal personnel. While the new system has eliminated the need for manual reconciliations between the general ledger and investment system and facilitates reporting and account statement preparation, tribes and Indian groups have told us that the new account statements do not provide sufficient detail for them to understand their account activity. For example, they said that because principal and interest are combined in the account statements, it is difficult to determine interest earnings. They told us that the account statements also lack information on investment yields, duration to maturity, and adequate benchmarking. For tribes that have authority to spend interest earnings, but not principal amounts, this lack of detail presents accountability problems. Representatives of some tribes told us that they either have or plan to acquire systems to fill this information gap. OTFM is planning system enhancements to separately identify principal and interest earnings. However, additional enhancements would be needed to address investment management information needs. In January 1996, the Special Trustee formed a working group consisting of tribal representatives and members of allottee associations, which represent individual Indians; BIA and Office of the Special Trustee field office staff; and OTFM staff to address IIM and subsidiary accounting issues. In addition, OTFM has scheduled four consultation meetings with tribes and individual Indians between June and August 1996 to determine how best to provide customer services to IIM account holders. These groups will also consider ways to reduce the number of small, inactive IIM accounts. According to the Special Trustee, about 225,000 IIM accounts have balances of less than $10. In 1995, OTFM initiated a contract to resume audits of the trust fund financial statements. OTFM had not had a trust fund financial statement audit since 1990, pending completion of the trust fund account reconciliation project. The fiscal year 1995 audit is covering the trust fund Statement of Assets and Trust Fund Balances, and the fiscal year 1996 audit will cover the same statement and a Statement of Changes in Trust Fund Balances. In 1993, BIA's Office of Trust Responsibility (OTR) initiated improvements to its Land Records Information System (LRIS). These improvements were to automate the chain-of-title function and result in more timely land ownership determinations. In September 1994, we reported that OTR had 2-year backlogs in ownership determinations and recordkeeping which could have a significant impact on the accuracy of trust fund accounting data. We recommended that BIA provide additional resources to reduce these backlogs, through temporary hiring or contracting, until the LRIS improvements could be completed. However, according to OTR's Land Records Officer, the additional resources were not made available as a result of fiscal year 1995 and 1996 budget cuts. Instead, BIA eliminated 6 Land Title and Records Office positions in fiscal year 1995 and an additional 30 positions in BIA's fiscal year 1996 reduction-in-force. As a result, OTR's five Land Title and Records Offices and its four Title Service Offices now have a combined staff of 90 full-time equivalent (FTE) positions--compared with 126 staff on September 30, 1994--to work on the backlog in title ownership determinations and recordkeeping while also handling current ownership determination requests. While current OTR backlogs are somewhat less than in 1994, BIA's Land Records Officer estimates that over 104 staff years of effort would be needed to eliminate the current backlog. However, because LRIS improvements are on hold, these backlogs are likely to grow. While BIA and OTFM have begun actions to address many of our past recommendations for management improvements, progress has been limited and additional improvements are needed to ensure that trust funds are accurately maintained in the future and the needs of the beneficiaries are well-served. For example, BIA's IRMS subsidiary and IIM system may contain unverified and potentially incorrect information on land and lease ownership that some BIA offices may be using to distribute trust fund receipts to account holders. According to a BIA official, some of BIA's Agency Office staff update IRMS ownership files based on unverified information they have developed because LRIS information is significantly out-of-date. Our September 1994 report stated that without administrative review and final determination and certification of ownerships, there is no assurance that the ownership information in BIA's accounting system is accurate. Our report also stated that eliminating redundant systems would help to ensure that only official, certified data are used to distribute trust fund revenue to account holders. Although Interior formed a study team to develop an IIM subsidiary system plan, the team's August 1995 report did not include a detailed systems plan. Further, BIA and OTFM have not yet performed an adequate user needs assessment; explored the costs and benefits of systems options and alternatives; or developed a systems architecture as a framework for integrating trust fund accounting, land and lease ownership, and other trust fund and asset management systems. However, even if OTR resolves its ownership determination and recordkeeping backlogs and OTFM acquires reliable IIM and subsidiary accounting systems, IIM accounting will continue to be problematic due to fractionated ownerships. Under current practices, fractionated ownerships, which result from inheritances, will continue to complicate ownership determinations, accounting, and reconciliation efforts because of the increasing number of ownership determinations and trust fund accounts that will be needed. Our April 1994 testimony stated that BIA lacked an accounts receivable system. Interior officials told us that developing an accounts receivable system would be problematic because BIA does not have a master lease file as a basis for determining its accounts receivable. As a result, BIA does not know the total number of leases that it is responsible for managing or whether it is collecting revenues from all active leases. BIA has not yet begun to plan for or develop a master lease file. In addition, BIA and OTFM have not developed a comprehensive set of trust fund management policies and procedures. Comprehensive written policies and procedures, if consistently implemented, would help to ensure proper trust fund accounting practices. Also, to encourage consistent implementation of policies and procedures, quality assurance reviews and audits are an important tool. In 1994, OTFM developed a plan to contract for investment custodian and advisor services. These initiatives were planned for implementation in fiscal year 1995. However, OTFM has delayed its contract solicitation for investment custodian services until the end of June 1996 and has only recently begun to develop a contract solicitation for investment advisors. OTFM officials told us that a lack of resources has caused them to delay contracting for these services. Since 1991, our testimonies and reports have called for Interior to develop a comprehensive strategic plan to guide trust fund management improvements across Interior agencies. We have criticized Interior's past planning efforts as piecemeal corrective action plans which fell short of identifying the departmentwide improvements needed to ensure sound trust fund management. Our June 1992 and September 1994 reports and our April 1994 testimony recommended that Interior's strategic plan address needed improvements across Interior agencies, including BIA, BLM, and MMS. We endorsed the American Indian Trust Fund Management Reform Act of 1994, which established a Special Trustee for American Indians reporting directly to the Secretary of the Interior. The act made the Special Trustee responsible for overseeing Indian trust fund management across these Interior agencies and required the Special Trustee to develop a comprehensive strategic plan for trust fund management. The Senate confirmed the appointment of the Special Trustee for American Indians in September 1995. In February 1996, the Special Trustee reported that the $447,000 provided for his office for fiscal year 1996 is insufficient to finance the development of a comprehensive strategic plan for trust fund financial management. Despite the funding limitations, using contractor assistance, the Special Trustee has prepared an initial assessment and strategic planning concept paper. However, the concept paper focuses on one potential system solution for addressing critical OTFM and BIA financial management information requirements and does not address other alternatives. It also does not address programs across Interior agencies or all needed improvements. In addition, the concept paper does not explain the rationale for many of the assumptions that support the detail for the $147 million estimate to implement the specified improvements. In contrast to the concept paper, a comprehensive strategic plan would reflect the requirements of the Department, BIA, BLM, MMS, OTFM, and other Interior agency Indian trust programs. It would also address the relationships of the strategic plans for each of these entities, including information resource management, policies and procedures, and automated systems. In addition, a comprehensive strategic plan would address various trust fund related systems options and alternatives and their associated costs and benefits. For example, the concept paper proposes acquiring new trust fund general ledger and subsidiary accounting systems but, unlike a strategic plan, it does not analyze the costs, benefits, advantages, and disadvantages of enhancing OTFM's current core general ledger and investment system or contracting for services instead of acquiring new systems. Further, since 1993, OTR has been planning for LRIS upgrades, including automated chain-of-title, which would facilitate ownership determinations and recordkeeping. Because it is planned that LRIS will provide a BIA link to Interior's core Automated Land Records Management System (ALMRS), a comprehensive strategic plan would need to consider the merits of LRIS in determining how trust ownership and accounting information needs can best be addressed. ALMRS is being developed by BLM at an estimated cost of $450 million. Because ALMRS and LRIS were costly to develop and they contain interrelated data, a comprehensive strategic plan would also need to consider the advantages and disadvantages of linking LRIS to the trust fund accounting system, as compared with acquiring a new land records and ownership system, in determining the best way to manage Indian trust funds and assets. The Special Trustee and OTFM Director told us that they currently lack the resources to adequately plan for and acquire needed trust fund system improvements. However, without accurate, up-to-date ownership and subsidiary accounting information, trust fund account statements will continue to be unreliable. The Special Trustee told us that due to limited resources and the need for timely solutions, he is considering ways to use changes in policies and procedures to deal with some trust fund management problems. Many of the problems identified in his concept paper are not strictly systems problems, and they do not necessarily require systems solutions. We agree that certain changes should be considered that would not require systems solutions. For example, centralizing management functions could help resolve the problems of inconsistent ownership determinations and inconsistent accounting practices. The centralization of some functions, such as handling trust fund collections through lock box payments to banks, could also result in management efficiencies. Similarly, ownership determination and recordkeeping backlogs might be better addressed by centralizing the five Land Title and Records Offices and using contractor assistance or temporary employees until system improvements are in place. Even with centralization of some functions, customer information and services could continue to be provided locally for customer convenience. Although OTFM made a massive attempt to reconcile tribal accounts, missing records and systems limitations made a full reconciliation impossible. Also, cost considerations and the potential for missing records made individual Indian account reconciliations impractical. A legislated settlement process could be used to resolve questions about tribal account balances. Three major factors--lack of comprehensive planning, lack of management commitment across the organization, and limited resources--have impeded Interior's progress in correcting long-standing trust fund management problems. When the trust fund reconciliation project was initiated, it was envisioned that by the time it was completed, adequate organizational structures, staffing, systems, and policies and procedures would be in place to ensure that trust fund accounts were accurately maintained in the future. However, piecemeal planning and corrective actions continue, and Interior still lacks a departmentwide strategic plan to correct trust fund management problems. In addition, while it is critical that all parts of the organization are committed to supporting and implementing trust fund management improvement initiatives, some BIA field offices are continuing to follow improper and inconsistent accounting practices. Given the continuing difficulty in managing a trust program across approximately 60 BIA offices, it is important to consider streamlining options such as centralization of collections, accounting, and land title and recordkeeping functions. Finally, Interior and BIA officials told us that they lack the resources to implement many needed corrective actions. However, the development of a comprehensive strategic plan that addresses interrelated functions and systems, identifies costs and benefits of options and alternatives, and establishes realistic milestones is a necessary first step. A departmentwide plan would provide the basis for management and congressional decisions on requests for resources. Mr. Chairman, this concludes my statement. I would be glad to answer any questions that you or the Members of the Task Force might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed the Department of the Interior's management of Indian trust funds. GAO noted that: (1) the Bureau of Indian Affairs (BIA) has completed its reconciliation of trust fund accounts, but the accounts could not be fully reconciled due to missing records and the lack of an audit trail; (2) the January 1996 BIA report to the tribes did not explain limitations in scope and methodologies used for the reconciliation process; (3) two tribes have accepted their reconciliation results, three tribes are disputing their results, and the remaining 275 tribes have not yet decided whether to accept or dispute their reconciliation results; (4) if Interior cannot resolve the tribes' concerns, the disputes can be resolved through a legislated settlement process; (5) Interior's trust fund management improvements will take several years to complete; (6) although BIA is replacing its inadequate management and accounting systems, it has not developed systems requirements to ensure that the new systems provide accurate information; (7) Interior has appointed a special trustee for Native Americans who has developed an outline of needed trust fund management improvements, but this outline needs to include various departmentwide options and alternatives and their associated costs and benefits to become a comprehensive strategic plan; and (8) resource constraints have limited Interior's ability to make trust fund management improvements.
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Solar energy can be used to heat, cool, and power homes and businesses with a variety of technologies that convert sunlight into usable energy. Examples of solar energy technologies include photovoltaics, concentrated solar power, and solar hot water. Solar cells, also known as photovoltaic cells, convert sunlight directly into electricity. Photovoltaic technologies are used in a variety of applications. They can be found on residential and commercial rooftops to power homes and businesses; utility companies use them for large power stations, and they power space satellites, calculators, and watches. Concentrated solar power uses mirrors or lenses to concentrate sunlight and produce intense heat, which is used to generate electricity via a thermal energy conversion process; for example, by using concentrated sunlight to heat a fluid, boil water with the heated fluid, and channel the resulting steam through a turbine to produce electricity. Most concentrated solar power technologies are designed for utility-scale operations and are connected to the electricity-transmission system. Solar hot water technologies use a collector to absorb and transfer heat from the sun to water, which is stored in a tank until needed. Solar hot water systems can be found in residential and industrial buildings. Innovation in solar energy technology takes place across a spectrum of activities, which we refer to as technology advancement activities, and which include basic research, applied research, demonstration, and commercialization. For purposes of this report, we defined basic research to include efforts to explore and define scientific or engineering concepts or is conducted to investigate the nature of a subject without targeting any specific technology; applied research includes efforts to develop new scientific or engineering knowledge to create new and improved technologies; demonstration activities include efforts to operate new or improved technologies to collect information on their performance and assess readiness for widespread use; and commercialization efforts transition technologies to commercial applications by bridging the gap between research and demonstration activities and venture capital funding and marketing activities. Congressional Budget Office, Federal Financial Support for the Development and Production of Fuels and Energy Technologies (Washington, D.C.: March 2012). as a whole but not necessarily for the firms that invested in the activities. For example, basic research can create general scientific knowledge that is not itself subject to commercialization but that can lead to multiple applications that private companies can produce and sell. As activities get closer to the commercialization stage, the private sector may increase its support because its return on investment increases. We identified 65 solar-related initiatives with a variety of key characteristics at six federal agencies. Over half of the 65 initiatives supported solar projects exclusively; the remaining initiatives supported solar energy technologies in addition to other renewable energy technologies. The initiatives demonstrated a variety of key characteristics, including focusing on different types of solar technologies and supporting a range of technology advancement activities from basic research to commercialization, with an emphasis on applied research and demonstration activities. Additionally, the initiatives supported several types of funding recipients including universities, industry, nonprofit organizations, and federal labs and researchers, primarily through grants and contracts. Agency officials reported that they obligated around $2.6 billion for the solar projects in these initiatives in fiscal years 2010 and 2011. In fiscal years 2010 and 2011, six federal agencies--DOD, DOE, EPA, NASA, NSF, and USDA--undertook 65 initiatives that supported solar energy technology, at least in part. (See app. II for a full list of the initiatives). Of these initiatives, 35 of 65 (54 percent) supported solar projects exclusively and 30 (46 percent) also supported projects that were not solar. For example, in fiscal years 2010 and 2011, DOE's Solar Energy Technologies Program--Photovoltaic Research and Development initiative, had 263 projects, all of which focused on solar energy. In contrast, in fiscal years 2010 and 2011, DOE's Hydrogen and Fuel Research and Development initiative--which supports wind and other renewable sources that could be used to produce hydrogen--had 209 projects, 26 of which were solar projects. Although initiatives support solar energy technologies, in a given year, they might not support any solar projects. For example, NSF officials noted that the agency funds research across all fields and disciplines of science and engineering and that individual initiatives invite proposals for projects across a broad field of research, which includes solar-related research in addition to other renewable energy research. However, in any given year, NSF may not fund proposals that address solar energy because either no solar proposals were submitted or the submitted solar-related proposals were not deemed meritorious for funding based upon competitive, merit-based reviews. Although more than half of the agencies' initiatives supported solar energy projects exclusively, the majority of projects supported by all 65 initiatives were not focused on solar. As shown in table 1, of the 4,996 total projects active in fiscal years 2010 and 2011 under the 65 initiatives, 1,506 (30 percent) were solar projects, and 3,490 (70 percent) were not solar projects. Agencies' solar-related initiatives supported different types of solar energy technologies. According to agency officials responding to our questionnaire, 47 of the 65 initiatives supported photovoltaic technologies, and 18 supported concentrated solar power; some initiatives supported both of these technologies or other solar technologies. For example, NSF's CHE-DMR-DMS Solar Energy Initiative (SOLAR) supports both photovoltaic and concentrated solar power technologies, including a project that is developing hybrid organic/inorganic materials to create ultra-low-cost photovoltaic devices and to advance solar concentrating technologies. These initiatives supported solar energy technologies through multiple technology advancement activities, ranging from basic research to commercialization. As shown in figure 1, five of the six agencies supported at least three of the four technology advancement activities we examined, and four of the six supported all four. Our analysis showed that of the 65 initiatives, 20 initiatives (31 percent) supported a single type of technology advancement activity; 45 of the initiatives (69 percent) supported more than one type of technology advancement activity; and 4 of those 45 initiatives (6 percent) supported all four. For example, NASA's Solar Probe Plus Technology Development initiative--which tests the performance of solar cells in elevated temperature and radiation environments such as near the sun-- supported applied research exclusively. In contrast, NASA's Small Business Innovations Research/Small Business Technology Transfer Research initiative--which seeks high-technology companies to participate in government-sponsored research and development efforts critical to NASA's mission--supported all four technology advancement activities. The technology advancement activities supported by the initiatives were applied research (47 initiatives), demonstration (41 initiatives), basic research (27 initiatives), and commercialization (17 initiatives). The initiatives supported these technology advancement activities by providing funding to four types of recipients: universities, industry, nonprofit organizations, and federal laboratories and researchers. The initiatives most often supported universities and industry. In many cases, initiatives provided funding to more than one type of recipient. Specifically, our analysis showed that of the 65 initiatives, 23 of the initiatives (35 percent) supported one type of recipient; 21 of the initiatives (32 percent) provided funding to at least two types of recipients; 17 initiatives (26 percent) supported three types; and 4 initiatives (6 percent) supported all four. In two cases, agency officials reported that their initiatives supported "other" types of recipients, which included college students and military installations. Initiatives often supported a variety of recipient types, but individual agencies more often supported one or two types. As shown in figure 2, DOE's initiatives most often supported federal laboratories and researchers; DOD's most often supported industry recipients; NASA's supported federal laboratories and industry equally; NSF's supported universities exclusively. For example, NASA's Small Business Innovations Research/Small Business Technology Transfer Research initiative provided contracts to industry to participate in government- sponsored research and development for advanced photovoltaic technologies to improve efficiency and reliability of solar power for space exploration missions. NSF's Emerging Frontiers in Research and Innovation initiative provided grants to universities for, among other purposes, promoting breakthroughs in computational tools and intelligent systems for large-scale energy storage suitable for renewable energy sources such as solar energy. Federal solar-related initiatives provided funding to these recipients through multiple mechanisms, often using more than one mechanism per initiative. As shown in figure 3, the initiatives primarily used grants and contracts. Of the 65 initiatives, 27 awarded grants, and 36 awarded contracts; many awarded both. Agency officials also reported funding solar projects via cooperative agreements, loans, and other mechanisms. Agency officials reported that the 65 initiatives as a group used multiple funding mechanisms, but we found that individual agencies tended to use primarily one or two funding mechanisms. For example, USDA exclusively used grants, while DOD tended to use contracts. DOE reported using grants and cooperative agreements almost equally. For example, DOE's Solar ADEPT initiative, an acronym for "Solar Agile Delivery of Electrical Power Technology," awards cooperative agreements to universities, industry, nonprofit organizations, and federal laboratories and researchers. Through a cooperative agreement, the initiative supported a project at the University of Colorado at Boulder that is developing advanced power conversion components that can be integrated into individual solar panels to improve energy yields. According to the project description, the power conversion devices will be designed for use on any type of solar panel. The University of Colorado at Boulder is partnering with industry and DOE's National Renewable Energy Laboratory on this project. In responding to our questionnaire, officials from the six agencies reported that they obligated around $2.6 billion for the 1,506 solar projects in fiscal years 2010 and 2011. These obligations data represented a mix of actual obligations and estimates. Actual obligations were provided for both years for 51 of 65 initiatives. Officials provided estimated obligations for 12 initiatives for at least 1 of the 2 years, and officials from another 2 initiatives were unable to provide any obligations data. Those officials who provided estimates or were unable to provide obligations data noted that the accuracy or the availability of the obligations data was limited because isolating the solar activities from the overall initiative obligations can be difficult. (See app. II for a full list of the initiatives and their related obligations.) As shown in table 2, over 90 percent of the funds (about $2.3 billion of $2.6 billion) were obligated by DOE. The majority of DOE's obligations (approximately $1.7 billion) were obligated as credit subsidy costs--the government's estimated net long-term cost, in present value terms, of the loans--as part of Title XVII Section 1705 Loan Guarantee Program from funds appropriated by Congress under the American Recovery and Reinvestment Act (Recovery Act). Even excluding the Loan Guarantee Program funds, DOE obligated $661 million, which is more than was obligated by the other five agencies combined. The 65 solar-related initiatives are fragmented across six agencies and many overlap to some degree, but agency officials reported a number of coordination activities to avoid duplication. We found that many initiatives overlapped in the key characteristics of technology advancement activities, types of technologies, types of funding recipients, or broad goals; however, these areas of overlap do not necessarily lead to duplication of efforts because the initiatives sometimes differ in meaningful ways or leverage the efforts of other initiatives, and we did not find clear evidence of duplication among initiatives. Officials from most initiatives reported that they engage in a variety of coordination activities with other solar-related initiatives, at times specifically to avoid duplication. The 65 solar-related initiatives are fragmented in that they are implemented by various offices across six agencies and address the same broad area of national need. In March 2011, we reported that fragmentation has the potential to result in duplication of resources. However, such fragmentation is, by itself, not an indication that unnecessary duplication of efforts or activities exists. For example, in our March 2011 report, we stated that there can be advantages to having multiple federal agencies involved in a broad area of national need-- agencies can tailor initiatives to suit their specific missions and needs, among other things. In particular, DOD is able to focus its efforts on solar energy technologies that serve its energy security mission, among other things, and NASA is able to focus its efforts on solar energy technologies that aid in aeronautics and space exploration, among other things. As table 3 illustrates, we found that many initiatives overlap because they support similar technology advancement activities and types of funding recipients. For example, initiatives that support basic and applied research most often fund universities, and those initiatives that support demonstration and commercialization activities most often fund industry. Almost all of the initiatives overlapped to some degree with at least one other initiative in that they support broadly similar technology advancement activities, types of technologies, and eligible funding recipients. Twenty-seven initiatives support applied research for photovoltaic technologies by universities. For example, NSF's Engineering Research Center for Quantum Energy and Sustainable Solar Technologies at Arizona State University pursues cost-competitive photovoltaic technologies with sustained market growth. The Air Force's Space Propulsion and Power Generation Research initiative partners with various universities to develop improved methods for powering spacecraft, including solar cell technologies. Sixteen initiatives support demonstration activities focused on photovoltaic technologies by federal laboratories and researchers. For example, NASA's High-Efficiency Space Power Systems initiative conducts activities at NASA's Glenn Research Center to develop technologies to provide low cost and abundant power for deep space missions, such as highly reliable solar arrays, to enable a crewed mission to explore a near Earth asteroid. DOE's Solar Energy Technologies Program (SETP), which includes the Photovoltaic Research and Development initiative, works with national laboratories such as the National Renewable Energy Laboratory, Sandia National Laboratories, Brookhaven National Laboratory, and Oak Ridge Laboratory to advance a variety of photovoltaic technologies to enable solar energy to be as cost competitive as traditional energy sources by 2015. Seven initiatives supported applied research on concentrated solar power technologies by industry. For example, DOE's SETP Concentrated Solar Power subprogram, which focuses on reducing the cost of and increasing the use of solar power in the United States, funded a company to develop the hard coat on reflective mirrors that is now being used in concentrated solar power applications. In addition, DOD's Fast Access Spacecraft Testbed Program, which concluded in March 2011, funded industry to demonstrate a suite of critical technologies including high-efficiency solar cells, sunlight concentrating arrays, large deployable structures, and ultra- lightweight solar arrays. Additionally, 40 of the 65 initiatives overlap with at least one other initiative in that they supported similar broad goals, types of technologies, and technology advancement activities. Providing lightweight, portable energy sources. Officials from several initiatives within DOD reported that their initiatives supported demonstration activities with the broad goal of providing lightweight, portable energy sources for military applications. For example, the goal of the Department of the Army's Basic Solar Power Generation Research initiative is to determine the feasibility and applicability of lightweight flexible, foldable solar panels for remote site power generation in tactical battlefield applications. Similarly, the goal of the Office of the Secretary of Defense's Engineered Bio-Molecular Nano- Devices and Systems initiative is to provide a low-cost, lightweight, portable photovoltaic device to reduce the footprint and logistical burden on the warfighter. Artificial photosynthesis. Several initiatives at DOE and NSF reported having the broad goal of supporting artificial photosynthesis, which converts sunlight, carbon dioxide, and water into a fuel, such as hydrogen. For example, one of DOE's Energy Innovation Hubs, the Fuels from Sunlight Hub, supports basic research to develop an artificial photosynthesis system with the specific goals of (1) understanding and designing catalytic complexes or solids that generate chemical fuel from carbon dioxide and/or water; (2) integrating all essential elements, from light capture to fuel formation components, into an effective system; and (3) providing a pragmatic evaluation of the system under development. NSF's Catalysis and Biocatalysis initiative has a specific goal of developing new materials that will be catalysts for converting sunlight into usable energy for direct use, or for conversion into electricity, or into fuel for use in fuel cell applications. Integrating solar energy into the grid. Officials from several initiatives reported focusing on demonstration activities for technologies with the broad goal of integrating solar or renewable energies into the grid or onto military bases. For example, DOE's Smart Grid Research and Development initiative has a goal of developing smart grid technologies, particularly those that help match supply and demand in real time, to enable the integration of renewable energies, including solar energy, into the grid by helping stabilize variability and facilitate the safe and cost-effective operation by utilities and consumers. The goal of this initiative is to achieve a 20 percent improvement in the ratio of the average power supplied to the maximum demand for power during a specified period by 2020. DOD's Installation Energy Research initiative has a goal of developing better ways to integrate solar energy into a grid system, thereby optimizing the benefit of renewable energy sources. Some initiatives may overlap on key characteristics such as technology advancement activities, types of technologies, types of recipients, or broad goals, but they also differ in meaningful ways that could result in specific and complementary research efforts, which may not be apparent when analyzing the characteristics. For example, an Army official told us that both the Army and Marine Corps were interested in developing a flexible solar substrate, which is a photovoltaic panel laminated onto fabric that can be rolled up and carried in a backpack. The Army developed technology that included a battery through its initiative, while the Marine Corps, through a separate initiative, altered the Army's technology to create a flexible solar substrate without a battery. Other initiatives may also overlap on key characteristics, but the efforts undertaken by their respective projects may complement each other rather than result in duplication. For example, DOE officials told us that one solar company may receive funding from multiple federal initiatives for different components of a larger project, thus simultaneously supporting a common goal without providing duplicative support. While we did not find clear instances of duplicative initiatives, it is possible that there are duplicative activities among the initiatives that could be consolidated or resolved through enhanced coordination across agencies and at the initiative level. Also, it is possible that there are instances in which recipients receive funding from more than one federal source or that initiatives may fund some activities that would have otherwise sought and received private funding. Because it was beyond the scope of this work to look at the vast number of activities and individual awards that are encompassed in the initiatives we evaluated, we were unable to rule out the existence of any such duplication of activities or funding. Officials from 57 of the 65 initiatives (88 percent) reported coordinating with other solar-related initiatives. Coordination is important because, as we have previously reported, a lack of coordination can waste scarce funds and limit the overall effectiveness of the federal effort. We have also previously reported that coordination across programs may help address fragmentation, overlap, and duplication. Officials from nearly all initiatives that we identified as overlapping in their broad goals, types of technologies, and technology advancement activities, reported coordinating with other solar-related initiatives. In October 2005, we identified key practices that can help enhance and sustain federal agency coordination, such as (1) establishing joint strategies, which help align activities, core processes, and resources to accomplish a common outcome; (2) developing mechanisms to evaluate and report on the progress of achieving results, which allow agencies to identify areas for improvement; (3) leveraging resources, which helps obtain additional benefits that would not be available if agencies or offices were working separately; and (4) defining a common outcome, which helps overcome differences in missions, cultures, and established ways of doing business. Agency officials at solar-related initiatives reported coordination activities that are consistent with these key practices, as described below. Some agency officials reported undertaking formal activities within their own agency to coordinate the efforts of multiple initiatives. For example: Establishing a joint strategy. NSF initiatives reported participating in an Energy Working Group, which includes initiatives in the agency's Directorates for Mathematical and Physical Sciences and for Engineering. Officials from initiatives we identified as overlapping reported participating in the Energy Working Group. NSF formed this group to initiate coordination of energy-related efforts between the two directorates, including solar efforts, and tasked it with establishing a uniform clean, sustainable energy strategy and implementation plan for the agency. Developing mechanisms to monitor, evaluate, and report results. DOD officials from initiatives in the Army, Marine Corps, and Navy that we identified as overlapping reported they participated in the agency's Energy and Power Community of Interest. The goal of this group is to coordinate the R&D activities within DOD. The group is scheduled to meet every quarter, but an Army official told us the group has been meeting every 3 to 4 weeks recently to produce R&D road maps and to identify any gaps in energy and power R&D efforts that need to be addressed. Because of the information sharing that occurs during these meetings, the official said the risk of such duplication of efforts across initiatives within DOD is minimized. In responding to our questionnaire, agency officials also reported engaging in formal activities across agencies to coordinate the efforts of multiple initiatives. For example: Leveraging resources. The Interagency Advanced Power Group (IAPG), which includes the Central Intelligence Agency, DOD, DOE, NASA, and the National Institute of Standards and Technology, is a federal membership organization that was established in the 1950s to streamline energy efforts across the government and to avoid duplicating research efforts. A number of smaller working groups were formed as part of this effort, including the Renewable Energy Conversion Working Group, which includes the coordination of solar efforts. The working groups are to meet at least once each year, but according to a DOD official, working group members often meet more often than that in conjunction with outside conferences and workshops. The purpose of the meetings is to present each agency's portfolio of research efforts and to inform and ultimately leverage resources across the participating agencies. According to IAPG documents, group activities allow agencies to identify and avoid duplication of efforts. Several of the initiatives that we identified as overlapping also reported participating in the IAPG. Leveraging resources and defining a common outcome. DOE's SETP in the Office of Energy Efficiency and Renewable Energy (EERE) coordinates with DOE's Office of Science and the Advanced Research Projects Agency-Energy (ARPA-E) through the SunShot Initiative, which according to SunShot officials, was established expressly to prevent duplication of efforts while maximizing agencywide impact on solar energy technologies. The goal of the SunShot Initiative is to reduce the total installed cost of solar energy systems by 75 percent. SunShot officials said program managers from all three offices participate on the SunShot management team, which holds "brain-storming" meetings to discuss ideas for upcoming funding announcements and subsequently vote on proposed funding announcements. Officials from other DOE offices and other federal agencies are invited to participate, with coordination occurring as funding opportunities arise in order to leverage resources. Officials said meetings may include as few as 25 or as many as 85 attendees, depending on the type of project and the expertise required of the attending officials. Additionally, DOE and NSF coordinate through the SunShot Initiative on the Foundational Program to Advance Cell Efficiency (F-PACE), which identifies and funds solar device physics and photovoltaic technology research and development that will improve photovoltaic cell performance and reduce module cost for grid-scale commercial applications. The initiatives that reported participating in SunShot activities also included many that we found to be overlapping. Developing joint strategies; developing mechanisms to monitor, evaluate, and report results; and defining a common outcome. The National Nanotechnology Initiative (NNI) an interagency program, which includes DOD, DOE, NASA, NSF, and USDA, among others, was established to coordinate the nanotechnology-related activities across federal agencies that fund nanoscale research or have a stake in the outcome of this research. The NNI is directed to (1) establish goals, priorities, and metrics for evaluation for federal nanotechnology research, development, and other activities; (2) invest in federal R&D programs in nanotechnology and related sciences to achieve these goals; and (3) provide for interagency coordination of federal nanotechnology research, development, and other activities. The NNI implementation plan states that the NNI will maximize the federal investment in nanotechnology and avoid unnecessary duplication of efforts. NNI includes a subgroup that focuses on nanotechnology for solar energy collection and conversion. Specifically, this subgroup is to (1) improve photovoltaic solar electricity generation with nanotechnology, (2) improve solar thermal energy generation and conversion with nanotechnology, and (3) improve solar-to-fuel conversions with nanotechnology. In addition to the coordination efforts above, officials reported through our questionnaire that their agencies coordinate through discussions with other agency officials or as part of the program and project management and review processes. Some officials said such discussions and reviews among officials occur explicitly to determine whether there is duplication of funding occurring. For example, SETP projects include technical merit reviews, which include peer reviewers from outside of the federal government, as well as a federal review panel composed of officials from several agencies. Officials from SETP also participate in the technical merit reviews of other DOE offices' projects. ARPA-E initiatives also go through a review process that includes federal officials and independent experts. DOE officials told us that an ARPA-E High Energy Advanced Thermal Storage review meeting, an instance of potential duplicative funding was found with an SETP project. Funding of the project through SETP was subsequently removed because of the ARPA-E review process, and no duplicative funds were expended. In addition to coordinating to avoid duplication, officials from 59 of the 65 initiatives (91 percent) reported that they determine whether applicants have received other sources of federal funding for the project for which they are applying. Twenty-one of the 65 initiatives (32 percent) further reported that they have policies that either prohibit or permit recipients from receiving other sources of federal funding for projects. Some respondents to our questionnaire said it is part of their project management process to follow up with funding recipients on a regular basis to determine whether they have subsequently received other sources of funding. For example, DOE's ARPA-E prohibits recipients from receiving duplicative funding from either public or private sources, and requires disclosure of other sources of funding both at the time of application, as well as on a quarterly basis throughout the performance of the award. Even if an agency requires that such funding information be disclosed on applications, applicants may choose not to disclose it. In fact, it was recently discovered that a university researcher did not identify other sources of funding on his federal applications as was required and accepted funding for the same research on solar conversion of carbon dioxide into hydrocarbons from both NSF and DOE. Ultimately, the professor was charged with and pleaded guilty to wire fraud, false statements, and money laundering in connection with the federal research grant. We provided DOD, DOE, EPA, NASA, NSF, and USDA with a draft of this report for review and comment. USDA generally agreed with the overall findings of the report. NASA and NSF provided technical or clarifying comments, which we incorporated as appropriate. DOD, DOE, and EPA indicated that they had no comments on the report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Agriculture, Defense, and Energy; the Administrators of EPA and NASA; the Director of NSF; the appropriate congressional committees; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of our report were to identify (1) solar-related initiatives supported by federal agencies in fiscal years 2010 and 2011 and key characteristics of those initiatives and (2) the extent of fragmentation, overlap, and duplication, if any, among federal solar-related initiatives, as well as the extent of coordination among these initiatives. To inform our objectives, we reviewed a February 2012 GAO report that was conducted to identify federal agencies' renewable energy initiatives, which included solar-related initiatives, and examine the federal roles the agencies' initiatives support. The GAO report on renewable energy- related initiatives identified nearly 700 initiatives that were implemented in fiscal year 2010 across the federal government, of which 345 initiatives supported solar energy. For purposes of this report, we only included those solar-related initiatives that we determined were focused on research and development (R&D), and commercialization, which we defined as follows: Research and development. Efforts ranging from defining scientific concepts to those applying and demonstrating new and improved technologies. Commercialization. Efforts to bridge the gap between research and development activities and the marketplace by transitioning technologies to commercial applications. We did not include those initiatives that focused solely on deployment activities, which include efforts to facilitate or achieve widespread use of existing technologies either in the commercial market or for nonmarket uses such as defense, through their construction, operation, or use. Initiatives that focus on deployment activities include a variety of tax incentives. We also narrowed our list to only those initiatives that focused research on advancing or developing new and innovative solar technologies. Next, we shared our list with agency officials and provided our definitions of R&D and commercialization. We asked officials to determine whether the list was complete and accurate for fiscal year 2010 initiatives that met our criteria, whether those initiatives were still active in fiscal year 2011, and whether there were any new initiatives in fiscal year 2011. If officials wanted to remove an initiative from our list, we asked for additional information to support the removal. In total, we determined that there were 65 initiatives that met our criteria. To identify and describe the key characteristics of solar-related initiatives implemented by federal agencies, we developed a questionnaire to collect information from officials of those 65 federal solar energy-related initiatives. The questionnaire was prepopulated with information that was obtained from the agencies for GAO's renewable energy report including program descriptions, type of solar technology supported, funding mechanisms, and type of funding recipients. Questions included the type of technology advancement activities, obligations for solar activities in fiscal years 2010 and 2011, initiative-wide and solar-specific goals, and coordination efforts with other solar-related initiatives. We conducted pretests with officials of three different initiatives at three different agencies to check that (1) the questions were clear and unambiguous, (2) terminology was used correctly, (3) the questionnaire did not place an undue burden on agency officials, (4) the information could feasibly be obtained, and (5) the questionnaire was comprehensive and unbiased. An independent GAO reviewer also reviewed a draft of the questionnaire prior to its administration. On the basis of feedback from these pretests and independent review, we revised the survey in order to improve its clarity. After completing the pretests, we administered the questionnaire. We sent questionnaires to the appropriate agency liaisons in an attached Microsoft Word form, who in turn sent the questionnaires to the appropriate officials. We received questionnaire responses for each initiative and, thus, had a response rate of 100 percent. After reviewing the responses, we conducted follow-up e-mail exchanges or telephone discussions with agency officials when responses were unclear or conflicting. When necessary, we used the clarifying information provided by agency officials to update answers to questions to improve the accuracy and completeness of the data. Because this effort was not a sample survey, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in interpreting a particular question, sources of information available to respondents, or entering data into a database or analyzing them can introduce unwanted variability into the survey results. However, we took steps to minimize such nonsampling errors in developing the questionnaire--including using a social science survey specialist for design and pretesting the questionnaire. We also minimized the nonsampling errors when collecting and analyzing the data, including using a computer program for analysis, and using an independent analyst to review the computer program. Finally, we verified the accuracy of a small sample of keypunched records by comparing them with their corresponding questionnaires, and we corrected the errors we found. Less than 0.5 percent of the data items we checked had random keypunch errors that would not have been corrected during data processing. To conduct our analysis, a technologist compared all of the initiatives and identified overlapping initiatives as those sharing at least one common technology advancement activity, one common technology, and having similar goals. A second technologist then completed the same analysis, and the two then compared their findings and, where they differed, came to a joint decision as to which initiatives broadly overlapped on their technology advancement activities, technologies, and broad goals. If the two technologists could not come to an agreement, a third technologist determined whether there was overlap. To assess the reliability of obligations data, we asked officials of initiatives that comprised over 90 percent of the total obligations follow-up questions on the data systems used to generate that data. While we did not verify all responses, on the basis of our application of recognized survey design practices and follow-up procedures, we determined that the data used in this report were of sufficient quality for our purposes. We conducted this performance audit from September 2011 to August 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Tables 4, 5, 6, 7, 8, and 9 provide descriptions, by agency, of the 65 initiatives that support solar energy technologies and the obligations for those initiatives' solar activities in fiscal years 2010 and 2011. In addition to the individual named above, key contributors to this report included Karla Springer (Assistant Director), Tanya Doriss, Cindy Gilbert, Jessica Lemke, Cynthia Norris, Jerome Sandau, Holly Sasso, Maria Stattel, and Barbara Timmerman.
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The United States has abundant solar energy resources and solar, along with wind, offers the greatest energy and power potential among all currently available domestic renewable resources. In February 2012, GAO reported that 23 federal agencies had implemented nearly 700 renewable energy initiatives in fiscal year 2010-- including initiatives that supported solar energy technologies (GAO-12-260). The existence of such initiatives at multiple agencies raised questions about the potential for duplication, which can occur when multiple initiatives support the same technology advancement activities and technologies, direct funding to the same recipients, and have the same goals. GAO was asked to identify (1) solar- related initiatives supported by federal agencies in fiscal years 2010 and 2011 and key characteristics of those initiatives and (2) the extent of fragmentation, overlap, and duplication, if any, of federal solar- related initiatives, as well as the extent of any coordination among these initiatives. GAO reviewed its previous work and interviewed officials at each of the agencies identified as having federal solar initiatives active in fiscal years 2010 and 2011. GAO developed a questionnaire and administered it to officials involved in each initiative to collect information on: initiative goals, technology advancement activities, funding obligations, number of projects, and coordination activities. This report contains no recommendations. In response to the draft report, USDA generally agreed with the findings, while the other agencies had no comments. Sixty-five solar-related initiatives with a variety of key characteristics were supported by six federal agencies. Over half of these 65 initiatives supported solar projects exclusively; the remaining initiatives supported solar and other renewable energy technologies. The 65 initiatives exhibited a variety of key characteristics, including multiple technology advancement activities ranging from basic research to commercialization by providing funding to various types of recipients including universities, industry, and federal laboratories and researchers, primarily through grants and contracts. Agency officials reported that they obligated about $2.6 billion for the solar projects in these initiatives in fiscal years 2010 and 2011, an amount higher than in previous years, in part, because of additional funding from the 2009 American Recovery and Reinvestment Act. The 65 solar-related initiatives are fragmented across six agencies and overlap to some degree in their key characteristics, but most agency officials reported coordination efforts to avoid duplication. The initiatives are fragmented in that they are implemented by various offices across the six agencies and address the same broad areas of national need. However, the agencies tailor their initiatives to meet their specific missions, such as DOD's energy security mission and NASA's space exploration mission. Many of the initiatives overlapped with at least one other initiative in the technology advancement activity, technology type, funding recipient, or goal. However, GAO found no clear instances of duplicative initiatives. Furthermore, officials at 57 of the 65 initiatives (88 percent) indicated that they coordinated in some way with other solar-related initiatives, including both within their own agencies and with other agencies. Such coordination may reduce the risk of duplication. Moreover, 59 of the 65 initiatives (91 percent) require applicants to disclose other federal sources of funding on their applications to help ensure that they do not receive duplicative funding.
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Prior to September 11, 2001, emergency preparedness and response had primarily been the responsibility of state and local governments and had focused principally on emergencies resulting from nature, such as fires, floods, hurricanes, and earthquakes, or accidental acts of man, not acts of terrorism. The federal government's role in supporting emergency preparedness and management prior to September 11 was limited primarily to providing resources before large-scale disasters like floods, hurricanes, and earthquakes, and response and recovery assistance after such disasters. However, after September 11 and the concern it engendered about the need to be prepared to prevent, mitigate, and respond to acts of terrorism, the extent of the federal government's financial support for state and local government emergency preparedness and response grew enormously, with about $11 billion in grants distributed from fiscal years 2002 through 2005. At the same time the federal government has been developing guidance and standards for state and local first responders in the areas of incident management and capabilities and tying certain requirements to the award of grants. The nation's emergency managers and first responders have lead responsibilities for carrying out emergency management efforts. First responders have traditionally been thought of as police, fire fighters, emergency medical personnel, and others who are among the first on the scene of an emergency. However, since September 11, 2001, the definition of first responder has been broadened to include those, such as public health and hospital personnel, who may not be on the scene, but are essential in supporting effective response and recovery operations. The role of first responders is to prevent where possible, protect against, respond to, and assist in the recovery from emergency events. First responders are trained and equipped to arrive at the scene of an emergency and take immediate action. Examples include entering the scene of the event and assessing the situation, setting up a command center, establishing safe and secure perimeters around the event site, evacuating those within or near the site, tending to the injured and dead, transporting them to medical care centers or morgues, rerouting traffic, helping to restore public utilities, and clearing debris. Last year, GAO issued a special report on 21st Century Challenges, examining the federal government's long-term fiscal outlook, the nation's ability to respond to emerging forces reshaping American Society, and the future role of the federal government. Among the issues discussed was homeland security. In our report we identified the following illustrative challenges and questions for examining emergency preparedness and response in the nation: Defining an acceptable, achievable (within budget constraints) level of risk. The nation can never be completely safe; total security is an unachievable goal. Therefore, the issue becomes what is an acceptable level of risk to guide homeland security strategies and investments, particularly federal funding? What criteria should be used to target federal and state funding for homeland security in order to maximize results and mitigate risk within available resource levels? What should be the role of federal, state, and local governments in identifying risks--from nature or man--in individual states and localities and establishing standards for the equipment, skills, and capacities that first responders need? Are existing incentives sufficient to support private sector protection of critical infrastructure the private sector owns, and what changes might be necessary? What is the most viable way to approach homeland security results management and accountability? What are the appropriate goals and who is accountable for the many components of homeland security when many partners and functions and disciplines are involved? How can these actors be held accountable and by whom? What costs should be borne by federal, state, and local governments or the private sector in preparing for, responding to, and recovery from disasters large and small--whether the acts of nature or the deliberate or accidental acts of man? To what extent and how should the federal government encourage and foster a role for regional or multistate entities in emergency planning and response? These issues are enormously complex and represent a major challenge for all levels of government. But the experience of Hurricane Katrina illustrated why it is important to tackle these difficult issues. Katrina was a catastrophe of historic proportions in both its geographic scope--about 90,000 square miles--and its destruction. Its impact on individuals and communities was horrific. Katrina highlighted the limitations of our current capacity to respond effectively to catastrophic events--those of unusual severity that almost immediately overwhelm state and local response capacities. Katrina gives us an opportunity to learn from what went well and what did not go so well and improve our ability to respond to future catastrophic disasters. It is generally accepted that emergency preparedness and response should be characterized by measurable goals and effective efforts to identify key gaps between those goals and current capabilities, with a clear plan for closing those gaps and, once achieved, sustaining desired levels of preparedness and response capabilities and performance. The basic goal of emergency preparedness for a major emergency is that first responders should be able to respond swiftly with well-planned, well-coordinated, and effective actions that save lives and property, mitigate the effects of the disaster, and set the stage for a quick, effective recovery. In a major event, coordinated, effective actions are required among responders from different local jurisdictions, levels of government, and nongovernmental entities, such as the Red Cross. Essentially, all levels of government are still struggling to define and act on the answers to four basic, but hardly simple, questions with regard to emergency preparedness and response: 1. What is important (that is, what are our priorities)? 2. How do we know what is important (e.g., risk assessments, performance standards)? 3. How do we measure, attain, and sustain success? 4. On what basis do we make necessary trade-offs, given finite resources? There are no simple, easy answers to these questions, and the data available for answering them are incomplete and imperfect. We have better information and a sense of what needs to be done for some types of major emergency events than others. For some natural disasters, such as regional wildfires and flooding, there is more experience and therefore a better basis on which to assess preparation and response efforts and identify gaps that need to be addressed. California has experience with earthquakes, and Florida has experience with hurricanes. However, no one in the nation has experience with such potential catastrophes as a dirty bomb detonated in a major city. Nor is there any recent experience with a pandemic that spreads to thousands of people rapidly across the nation, although both the AIDS epidemic and SARS provide some related experience. Planning and assistance has largely been focused on single jurisdictions and their immediately adjacent neighbors. However, well-documented problems with first responders from multiple jurisdictions to communicate at the site of an incident and the potential for large scale natural and terrorist disasters have generated a debate on the extent to which first responders should be focusing their planning and preparation on a regional and multi-governmental basis. The area of interoperable communications is illustrative of the general challenge of identifying requirements, current gaps in the ability to meet those requirements and assess success in closing those gaps, and doing this on a multi-jurisdictional basis. We identified three principal challenges to improving interoperable communications for first responders: clearly identifying and defining the problem; establishing national interoperability performance goals and standards that balance nationwide standards with the flexibility to address differences in state, regional, and local needs and conditions; and defining the roles of federal, state, and local governments and other entities in addressing interoperable needs. The first, and most formidable, challenge in establishing effective interoperable communications is defining the problem and establishing interoperability requirements. This requires addressing the following questions: Who needs to communicate what (voice and/or data) with whom, when, for what purpose, under what conditions? Public safety officials generally recognize that effective interoperable communications is the ability to talk with whom you want, when you want, when authorized, but not the ability to talk with everyone all of the time. Various reports, including ours, have identified a number of barriers to achieving interoperable public safety wire communications, including incompatible and aging equipment, limited equipment standards, and fragmented planning and collaboration. However, perhaps the fundamental barrier has been and is the lack of effective, collaborative, interdisciplinary, and intergovernmental planning. The needed technology flows from a clear statement of communications needs and plans that cross jurisdictional lines. No one first responder group or governmental agency can successfully "fix" the interoperable communications problems that face our nation. The capabilities needed vary with the severity and scope of the event. In a "normal" daily event, such as a freeway accident, the first responders who need to communicate may be limited to those in a single jurisdiction or immediately adjacent jurisdictions. However, in a catastrophic event, effective interoperable communications among responders is vastly more complicated because the response involves responders from the federal government--civilian and military--and, as happened after Katrina, responders from various state and local governments who arrived to provide help under the Emergency Management Assistance Compact (EMAC) among states. These responders generally bring their own communications technology that may or may not be compatible with those of the responders in the affected area. Even if the technology were compatible, it may be difficult to know because responders from different jurisdictions may use different names for the same communications frequencies. To address this issue, we recommended that a nationwide database of all interoperable communications frequencies, and a common nomenclature for those frequencies, be established. Katrina reminded us that in a catastrophic event, most forms of communication may be severely limited or simply destroyed--land lines, cell phone towers, satellite phone lines (which quickly became saturated). So even if all responders had had the technology to communicate with one another, they would have found it difficult to do so because transmission towers and other key supporting infrastructure were not functioning. The more comprehensive the interoperable communications capabilities we seek to build, the more difficult it is to reach agreement among the many players on how to do so and the more expensive it is to buy and deploy the needed technology. And an always contentious issue is who will pay for the technology--purchase, training, maintenance, and updating. Effective preparation and response requires clear planning, a clear understanding of expected roles and responsibilities, and performance standards that can be used to measure the gap between what is and what should be. It also requires identifying the essential capabilities whose development should be a priority, and capabilities that are useful, but not as critical to successful response and mitigation in a major emergency. What is critical may cut across different types of events (e.g., incident command and communications) or may be unique to a specific type of event (e.g., defusing an explosive device). DHS has undertaken three major policy initiatives to promote the further development of the all-hazards emergency preparedness capabilities of first responders. These include the development of the (1) National Response Plan (what needs to be done to manage a nationally significant incident, focusing on the role of federal agencies); (2) National Incident Management System (NIMS), a command and management process to be used with the National Response Plan during an emergency event (how to do what needs to be done); and (3) National Preparedness Goal (NPG), which identifies critical tasks and capabilities (how well it should be done). The National Response Plan's (NRP) stated purpose is to "establish a comprehensive, national, all-hazards approach to domestic incident management across a spectrum of activities including prevention, preparedness, response, and recovery." It is designed to provide the framework for federal interaction with state, local, and tribal governments; the private sector; and nongovernmental organizations. The Robert T. Stafford Disaster Relief and Emergency Assistance Act, as amended, established the process for states to request a presidential disaster declaration in order to respond to and recover from events that exceed state and local capabilities and resources. Under the NRP and the Stafford Act, the role of the federal government is principally to support state and local response activities. A key organizational principle of the NRP is that "incidents are typically managed at the lowest possible geographic, organizational, and jurisdictional level." An "incident of national significance" triggers federal support under the NRP; a second "catastrophic incident" trigger allows for accelerated federal support. All catastrophic incidents are incidents of national significance, but not vice-versa. The basic assumption of the federal government as supplement to state and local first responders was challenged by Katrina, which (1) destroyed key communications infrastructure; (2) overwhelmed state and local response capacity, in many cases crippling their ability to perform their anticipated roles as initial on-site responders; and (3) destroyed the homes and affected the families of first responders, reducing their capacity to respond. Katrina almost completely destroyed the basic structure and operations of some local governments as well as their business and economic bases. "any natural or manmade incident, including terrorism, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the population, infrastructure, environment, economy, national morale, and/or government functions. A catastrophic incident could result in sustained national impacts over a prolonged period of time; almost immediately exceeds resources normally available to State, local, tribal, and private-sector authorities in the impacted area; and significantly interrupts governmental operations and emergency services to such an extent that national security could be threatened. All catastrophic incidents are Incidents of National Significance. These factors drive the urgency for coordinated national planning to ensure accelerated Federal/national assistance." Exactly what this means for federal, state, and local response has been the subject of recent congressional hearings on Katrina and the recently issued report by the Select Bipartisan Committee to Investigate the Preparation for and Response to Hurricane Katrina. Homeland Security Presidential Directive 5 required the adoption of NIMS by all federal departments and agencies and that federal preparedness grants be dependent upon NIMS compliance by the recipients. NIMS is designed as the nation's incident management system. The intent of NIMS is to establish a core set of concepts, principles, terminology, and organizational processes to enable effective, efficient, and collaborative emergency event management at all levels. The idea is that if state and local firsts responders implement NIMS in their daily response activities, they will have a common terminology and understanding of incident management that will foster a swift and effective response when emergency responders from a variety of levels of government and locations must come together to respond to a major incident. As we noted in our report on interoperable communications, such communications are but one important component of an effective incident command planning and operations structure. Homeland Security Presidential Directive 8 required DHS to coordinate the development of a national domestic all-hazards preparedness goal "to establish measurable readiness priorities and targets that appropriately balance the potential threat and magnitude of terrorist attacks and large- scale natural or accidental disasters with the resources required to prevent, respond to, and recover from them." The goal was also to include readiness metrics and standards for preparedness assessments and strategies and a system for assessing the nation's overall preparedness to respond to major events. To implement the directive, DHS developed the National Preparedness Goal using 15 emergency event scenarios, 12 of which were terrorist related, whose purpose was to form the basis for identifying the capabilities needed to respond to a wide range of emergency events. Some state and local officials and experts have questioned whether the scenarios were appropriate inputs for preparedness planning, particularly in terms of their plausibility and the emphasis on terrorist scenarios (12 of 15). The scenarios focused on the consequences that first responders would have to address. According to DHS's National Preparedness Guidance, the planning scenarios are intended to illustrate the scope and magnitude of large-scale, catastrophic emergency events for which the nation needs to be prepared. Using the scenarios, and in consultation with federal, state, and local emergency response stakeholders, DHS developed a list of over 1,600 discrete tasks, of which 300 were identified as critical tasks. DHS then identified 36 target capabilities to provide guidance to federal, state, and local first responders on the capabilities they need to develop and maintain. That list has since been refined, and DHS released a revised draft list of 37 capabilities in December 2005 (see appendix I). 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. However, DHS is still in the process of developing goals, requirements, and metrics for these capabilities; and DHS is reassessing both the National Response Plan and the National Preparedness Goal in light of the Hurricane Katrina experience. Prior to Katrina, DHS had established seven priorities for enhancing national first responder preparedness: implementation of NRP and NIMS; implementation of the Interim National Infrastructure Protection Plan; expanding regional cooperation; strengthening capabilities in interoperable communications; strengthening capabilities in information sharing and collaboration; strengthening capabilities in medical surge and mass prophylaxis; and strengthening capabilities in detection and response for chemical, biological, radiological, nuclear, and explosive weapons. Those seven priorities are incorporated into DHS's fiscal year 2006 homeland security grant guidance. The guidance also adds an eighth priority that emphasizes emergency operations and catastrophic planning. With almost any skill and capability, experience and practice enhance proficiency. For first responders, exercises--particularly for the type or magnitude of events for which there is little actual experience--are essential for developing skills and identifying what works well and what needs further improvement. Major emergency incidents, particularly catastrophic incidents, by definition require the coordinated actions of personnel from many first responder disciplines and all levels of government, plus nonprofit organizations and the private sector. It is difficult to overemphasize the importance of effective interdisciplinary, intergovernmental planning, training, and exercises in developing the coordination and skills needed for effective response. Following are some illustrative tasks needed to prepare for and respond to a major emergency incident that could be tested with realistic exercises: assessing potential needs, marshalling key resources, and moving property and people out of harm's way prior to the actual event (where predictable or where there is forewarning), obtaining and communicating accurate situational data for evaluating and coordinating appropriate response during and after the event; leadership: effectively blending (1) active involvement of top leadership in unified incident command and control with (2) decentralized decision making authority that encourages innovative approaches to effective response; clearly understood roles and responsibilities prior to and in response to effective communication and coordination; and the ability to identify, draw on, and effectively deploy resources from other governmental, nonprofit, and private entities for effective response For exercises to be effective in identifying both strengths and areas needing attention, it is important that they be realistic, designed to test and stress the system, involve all key persons who would be involved in responding to an actual event, and be followed by honest and realistic assessments that result in action plans that are implemented. In addition to relevant first responders, exercise participants should include, depending upon the scope and nature of the exercise, mayors, governors, and state and local emergency managers who would be responsible for such things as determining if and when to declare a mandatory evacuation or ask for federal assistance. The Hurricane PAM exercise of 2004 was essentially a detailed planning exercise that was highly realistic and involved a wide variety of federal, state, and local first responders and officials. Although action plans based on this exercise were still being developed and implemented when Katrina hit, the exercise proved to be remarkably prescient in identifying the challenges presented if a major hurricane hit New Orleans and resulted in flooding the city. The importance of post-exercise assessments is illustrated by a November 2005 report by the Department of Homeland Security's Office of Inspector General on the April 2005 Top Officials 3 Exercise (TOPOFF3) which noted that the exercise highlighted at all levels of government a fundamental lack of understanding regarding the principles and protocols set forth in the NRP and NIMS. For example, the report cited confusion over the different roles and responsibilities performed by the Principal Federal Officer (PFO) and the Federal Coordinating Officer (FCO). The PFO is designated by the DHS Secretary to act as the Secretary's local representative in overseeing and executing the incident management responsibilities under HSPD-5 for incidents of national significance. The PFO does not direct or replace the incident command system and structure, and does not have direct authority over the senior law enforcement officials, the FCO, or other federal and state officials. The FCO is designated by the President and manages federal resources and support activities in response to disasters and emergencies declared by the President. The FCO is responsible for coordinating the timely delivery of federal disaster assistance and programs to the affected state, the private sector, and individual victims. The FCO also has authority under the Stafford Act to request and direct federal departments and agencies to use their authorities and resources in support of state and local response and recovery efforts. In addition to confusion over the respective roles and authority of the PFO and FCO, the report noted that the exercise highlighted problems regarding the designation of a PFO and the lack of guidance on training and certification standards for PFO support personnel. The report recommended that DHS continue to train and exercise the NRP and NIMS at all levels of government and develop operating procedures that clearly define individual and organizational roles and responsibilities under the NRP. In the last several years, the federal government has awarded some $11 billion in grants to federal, state, and local authorities to improve emergency preparedness, response, and recovery capabilities. What is remarkable about the whole area of emergency preparedness and homeland security is how little we know about how states and localities (1) finance their efforts in this area, (2) have used their federal funds, and (3) are assessing the effectiveness with which they spend those funds. The National Capital Region (NCR) is the only area in the nation that has a statutorily designated regional coordinator. In our review of emergency preparedness in the NCR, we noted that a coordinated, targeted, and complementary use of federal homeland security grant funds was important in the NCR--as it is in all areas of the nation. The findings from our work on the NCR are relevant to all multiagency, multijurisdictional efforts to assess and improve emergency preparedness and response capabilities. In May 2004, we reported that the NCR faced three interrelated challenges: the lack of (1) preparedness standards (which the National Preparedness Goal was designed to address); (2) a coordinated regionwide plan for establishing first responder performance goals, needs, and priorities, and assessing the benefits of expenditures in enhancing first responder capabilities; and (3) a readily available, reliable source of data on the funds available to first responders in the NCR and their use. Without the standards, a regionwide plan, and data on spending, we noted, it is extremely difficult to determine whether NCR first responders have the ability to respond to threats and emergencies with well-planned, well- coordinated, and effective efforts that involve a variety of first responder disciplines from NCR jurisdictions. To the extent that the NCR had coordinated the use of federal grant funds, it had focused on funds available through the Urban Area Security Initiative grants. We noted that it was important to have information on all grant funds available to NCR jurisdictions and their use if the NCR was to effectively leverage regional funds and avoid unnecessary duplication. As we observed, the fragmented nature of the multiple federal grants available to first responders--some awarded to states, some to localities, some directly to first responder agencies--may make it more difficult to collect and maintain regionwide data on the grant funds received and the use of those funds. Our previous work suggests that this fragmentation in federal grants may reinforce state and local fragmentation and can also make it more difficult to coordinate and use those multiple sources of funds to achieve specific objectives. A new feature in the fiscal year 2006 DHS homeland security grant guidance for the Urban Area Security Initiative (UASI) grants is that eligible recipients must provide an "investment justification" with their grant application. States must use this justification to outline the implementation approaches for specific investments that will be used to achieve the initiatives outlined in their state Program and Capability Enhancement Plan. These plans are multiyear global program management plans for the entire state homeland security program that look beyond federal homeland security grant programs and funding. The justifications must justify all funding requested through the DHS homeland security grant program, including all UASI funding, any base formula allocations for the State Homeland Security Program and the Law Enforcement Terrorism Prevention Program, and all formula allocations under the Metropolitan Medical Response System and Citizen Corps Program. In the guidance DHS notes that it will use a peer review process to evaluate grant applications on the basis of the effectiveness of a state's plan to address the priorities it has outlined and thereby reduce its overall risk. On February 1, 206, GAO issued its preliminary observations regarding the preparation for and response to Hurricane Katrina. Catastrophic events are different in the severity of the damage, number of persons affected, and the scale of preparation and response required. They quickly overwhelm or incapacitate local and/or state response capabilities, thus requiring coordinated assistance from outside the affected area. Thus, the response and recovery capabilities needed during a catastrophic event differ significantly from those required to respond to and recover from a "normal disaster." Key capabilities such as emergency communications, continuity of essential government services, and logistics and distribution systems underpin citizen safety and security and may be severely affected. Katrina basically destroyed state and local communications capabilities, severely affecting timely, accurate damage assessments in the wake of Katrina. Whether the catastrophic event comes without warning or there is some prior notice, such as a hurricane, it is essential that the leadership roles, responsibilities, and lines of authority for responding to such an event be clearly defined and effectively communicated in order to facilitate rapid and effective decision making, especially in preparing for and in the early hours and days after the event. Streamlining, simplifying, and expediting decision making must quickly replace "business as usual." Yet at the same time, uncoordinated initiatives by well-meaning persons or groups can actually hinder effective response, as was the case following Katrina. Katrina raised a number of questions about the nation's ability to respond effectively to catastrophic events--even one with several days warning. GAO has underway work on a number of issues related to the preparation, response, recovery, and reconstruction efforts related to Hurricanes Katrina and Rita. We are examining what went well and why and what did not go well and why, and what our findings suggest for any specific changes that may be needed. Assessing, developing, attaining, and sustaining needed emergency preparedness, response, and recovery capabilities is a difficult task that requires sustained leadership, the coordinated efforts of many stakeholders from a variety of first responder disciplines, levels of government, and nongovernmental entities. There is a no "silver bullet," no easy formula. It is also a task that is never done, but requires continuing commitment and leadership and trade-offs because circumstances change and we will never have the funds to do everything we might like to do. The basic steps are easy to state but extremely difficult to complete: develop a strategic plan with clear goals, objectives, and milestones; develop performance goals that can be used to set desired performance collect and analyze relevant and reliable data; assess the results of analyzing those data against performance goals to guide priority setting; take action based on those results; and monitor the effectiveness of actions taken to achieve the designated performance goals. It is important to identify the specific types of capabilities, such as incident command and control, with broad application across emergencies arising from "all-hazards," and those that are unique to particular types of emergency events. The priority to be given to the development of specific, "unique" capabilities should be tied to an assessment of the risk that those capabilities will be needed. In California, for example, it is not a question of if, but when, a major earthquake will strike the state. There is general consensus that the nation is at risk of an infectious pandemic at some point, and California has just issued a draft plan for preparing and responding to such an event. On the other hand, assessing specific terrorist risks is more difficult. As the nation assesses the lessons of Katrina, we must incorporate those lessons in assessing state and local emergency management plans, amend those plans as appropriate, and reflect those changes in planned expenditures and exercises. This effort requires clear priorities, hard choices, and objective assessments of current plans and capabilities. Failure to address these difficult tasks directly and effectively will result in preparedness and response efforts that are less effective than they should and can be. That concludes my statement, and I would be pleased to respond to any questions the Commission Members may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony discusses the challenges of effective emergency preparedness for, response to, and recovery from major emergencies, including catastrophic incidents. Effective emergency preparedness and response for major events requires the coordinated planning and actions of multiple players from multiple first responder disciplines, jurisdictions, and levels of government as well as nongovernmental entities. Effective emergency preparedness and response requires putting aside parochialism and working together prior to and after an emergency incident. September 11, 2001 fundamentally changed the context of emergency management preparedness in the United States, including federal involvement in preparedness and response. The biggest challenge in emergency preparedness is getting effective cooperation in planning, exercises, and capability assessment and building across first responder disciplines and intergovernmental lines. DHS has developed several policy documents designed to define the federal government's role in supporting state and local first responders in emergencies, implement a uniform incident command structure across the nation, and identify performance standards that can be used in assessing state and local first responder capabilities. Realistic exercises are a key component of testing and assessing emergency plans and first responder capabilities, and the Hurricane PAM planning exercise demonstrated their value. With regard to the status of emergency preparedness across the nation, we know relatively little about how states and localities (1) finance their efforts in this area, (2) have used their federal funds, and (3) are assessing the effectiveness with which they spend those funds. Katrina has raised a host of questions about the nation's readiness to respond effectively to catastrophic emergencies. Effective emergency preparedness is a task that is never done, but requires continuing commitment and leadership because circumstances change and continuing trade-offs because we will never have the funds to do everything we might like to do.
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Many land use authorities currently exist that permit the Secretary of Defense, the secretaries of the military departments, or both to make more efficient use of underutilized or not utilized real property under their jurisdiction or control, such as authorities permitting outleasing or conveyance of real property controlled by DOD or the issuance of licenses, permits, or easements upon real property controlled by DOD. The services reported that one of the most commonly used authorities is Section 2667 of Title 10. Under this authority, the secretaries of the military departments generally have the authority to lease nonexcess real property under the control of the respective department in exchange for cash or in-kind consideration not less than the fair market value of the lease interest. Leases executed pursuant to this authority must comply with several conditions; for example, a lease may not be for more than 5 years unless the secretary concerned determines that a lease for a longer period will promote the national defense or be in the public interest. Money received from leases entered into pursuant to Section 2667 must be deposited into special Treasury accounts, with some exceptions. Further, to the extent provided in appropriations acts, at least half of the proceeds deposited into these special Treasury accounts must be returned to the installation where the proceeds were derived. Most recently, the National Defense Authorization Act for Fiscal Year 2008 further refined this leasing authority in several ways; for example, provision or payment of utility services was designated as an acceptable in-kind service, while facility operation support for the secretary concerned was eliminated as an acceptable form of consideration. Leases executed pursuant to Section 2667 not only benefit the installation by leveraging underutilized land in exchange for rent money or in-kind consideration, such as new construction or maintenance of existing facilities, they also benefit the developer and the community. For example, according to DOD officials, these projects can establish long-term relationships between developers and private sector and government entities with specific real estate needs that are potential occupants of the space. In addition, developers receive market rate returns on their investments and access to new markets, such as federal government and military support contractors. These agreements benefit the community by providing additional jobs, a broader tax base, and renovation of deteriorated assets. Another frequently used authority, Section 2681 of Title 10, authorizes the Secretary of Defense to enter into contracts with commercial entities that desire to conduct commercial test and evaluation activities at a major range and test facility installation. Such contracts must contain various provisions pertaining to the Secretary's ability to terminate, prohibit, or suspend certain tests under the contracts, as well as requirements pertaining to the contract price. Section 2681 also contains rules on the retention of funds. Further, the Secretary of Defense is required to issue regulations to carry out this provision. Under Section 2878 of Title 10, the secretary concerned may convey or lease property or facilities to eligible entities for the purpose of using the proceeds to carry out activities under the Military Housing Privatization Initiative (MHPI). This authority cannot be used to convey or lease property or facilities located on or near military installations approved for closure under a base closure law. The conveyance or lease of property or facilities under this section must be for such terms and conditions as the secretary concerned considers appropriate for MHPI purposes while protecting the interests of the United States. As part or all of the consideration for a conveyance or lease under this section, the purchaser, or lessor, shall enter into an agreement with the secretary to ensure that a preference will be given to members of the armed forces and their dependents in the lease or sublease for a reasonable number of the housing units covered by the conveyance or lease. Property leased or conveyed using this authority is exempt from certain property management laws. Another authority, Section 2869 of Title 10, allows the secretary concerned to enter into an agreement to convey real property (including any improvements) under the secretary's jurisdiction that is located on a military installation that is either closed or realigned under a base closure law or located on an installation not closed or realigned under base closure law and determined to be excess to DOD needs. Such a conveyance may be made only to a person who agrees, in exchange for the real property, (1) to carry out a military construction project or land acquisition, including the acquisition of all right, title, and interest or a lesser interest in real property under an agreement entered into under section 2684a of Title 10 to limit encroachments and other constraints on military training, testing, and operations, or (2) to transfer to the secretary concerned housing that is constructed or provided by the person and located at or near a military installation at which there is a shortage of suitable military family housing, military unaccompanied housing, or both. There are various rules and conditions regarding the use of this authority, including a requirement that advance notice be provided to Congress before use, certain limits on the deposit and use of funds, and annual reporting requirements to Congress. Beyond the various real property authorities that may be utilized by DOD under certain circumstances, a framework of legal requirements and restrictions must be complied with in DOD's use of its land, buildings, and facilities, many of which relate to environmental and cultural preservation. For example, DOD guidance requires that all proposed outleasing actions (regardless of grantee or consideration) be subject to the appropriate level of analysis required by the National Environmental Policy Act of 1969 and its implementing regulations. Further, the National Historic Preservation Act lays out the responsibilities of federal agencies related to certain cultural resources under their stewardship and authorizes the expansion and maintenance of a National Register of Historic Places composed of districts, sites, buildings, structures, and objects significant in the history, architecture, archeology, engineering, and culture of the United States and worthy of preservation, among other things. Although many land use planning authorities currently exist that permit the Secretary of Defense, the secretaries of the military departments, or both to help make more efficient use of real property under their jurisdiction or control under various circumstances, our analysis of service data showed that Section 2667 of Title 10 is most frequently used for both traditional leases as well as longer-term, more financially complex enhanced use leases. We further found that the second most frequently used authority is Section 2681 of Title 10, though this authority was most frequently used with respect to Army real property with about 86 percent of its reported usage during fiscal years 2005 through 2007. There are many other land use planning authorities that the Secretary of Defense, the secretaries of the military departments, or both may use under certain circumstances to better utilize existing real property under their control. Our analysis indicates that there are more than 30 available authorities of general and permanent applicability in the U.S. Code available to the Secretary of Defense, the secretaries of the military departments, or both pertaining to the utilization of existing real property controlled by DOD. The services reported that these other authorities have not been used as frequently as Section 2667 and Section 2681 of Title 10. In addition to these codified authorities of general and permanent applicability, special legislation is often enacted that grants authority to or requires the Secretary of Defense, the secretary of a military department, or both to execute particular land use activities at specific installations or parcels of land controlled by DOD. The services reported using Section 2667 of Title 10 a total of 744 times during fiscal years 2005 through 2007 for both traditional leases as well as longer-term, more financially complex enhanced use leases. Table 1 shows the breakdown by the reported use of Section 2667 of Title 10 according to the service at which the real property was located during fiscal years 2005 through 2007. The majority of agreements that have been executed under Section 2667 of Title 10 over the past 3 years are traditional non-enhanced use lease agreements. During fiscal year 2007, the services reported that 222 new agreements were signed under Section 2667 of Title 10 and earned approximately $51 million in revenue. For example, at Fort Meade, Maryland, installation officials provided data showing that the installation will receive $5,600 monthly through November 2010 on two 5-year cellular phone tower leases and at Camp Pendleton, California, the Marine Corps earned over $1 million from two agricultural leases during fiscal year 2007. Using Section 2667 of Title 10, the Army and Air Force reported earning combined totals of approximately $14 million in fiscal year 2005 and $22 million in fiscal year 2006. Under this same authority, the services also reported that more financially complex, longer-term enhanced use leases were executed. These leases are usually for a term of greater than 30 years and payment is typically in in-kind services, such as new construction or maintenance and repair, rather than cash. According to the Army's draft Enhanced Use Leasing Handbook, the longer lease terms are more in line with private real estate development standards, and therefore help satisfy financial lending requirements and help make the development worthwhile to all enhanced use lease project stakeholders. During fiscal years 2005 through 2007, Army officials reported that 10 of these enhanced use leases were signed, and Air Force officials reported that 4 were signed. These leases are projected by the services to be worth more than $1.1 billion over the life of the leases, with the Army estimating the bulk of the projected revenue. For example, the Army reported that a lease was signed with a motor vehicle company to provide land for it to install a hot weather vehicle test track at Yuma Proving Ground, Arizona. The track will be available for the Army's use for testing its vehicles, and the Army will obtain additional compensation to allow it to install an additional test track at a total net present value estimated at $26.8 million over the 50-year life of the lease. In addition, at Nellis Air Force Base, Nevada, Air Force officials reported that land was provided through a public-private partnership to install an electricity generating photo voltaic array whose net present value is estimated at $10.9 million for electricity that will be provided to the installation over the 20-year life of the lease. Furthermore, service officials reported that several more enhanced use leases are in process - 24 for the Army, 33 for the Air Force, and 14 for the Navy. For example, the Army is trying to lease land owned by Fort Meade, Maryland, to a contractor who will build a new office complex. This 50- year lease project is expected to provide office space for military and security-related defense contractor jobs coming to the area as a result of the 2005 BRAC round. The contractor is expected to move a golf course at the interior of the fort to the exterior of the fort to make room on the old golf course for BRAC and National Security Agency-related construction. The Air Force is negotiating for a 50-year ground lease of 180 acres of land along the western perimeter of Hill Air Force Base, Utah. Air Force officials told us that the lessee will construct an approximately 2.8 million square foot office park consisting of commercial office, retail, hotel, and restaurant space on the 180 acres of leased Air Force land. At least 600,000 square feet of the development will become Air Force owned and maintained office space, and Air Force officials expect to receive additional in-kind compensation over the life of the lease to be used for additional Air Force projects and maintenance. At the end of the lease period, the land and all improvements on both of the projects described above will revert back to the applicable service. At the time of our review, the Navy was considering an enhanced use lease of the former Portsmouth Naval Prison at Portsmouth Naval Shipyard in Kittery, Maine, for not more than 50 years. Marine Corps officials told us that an enhanced use lease has not yet been executed with regard to Marine Corps land, but that several potential projects are being considered. Service officials reported that Section 2681 of Title 10 was used 601 times during fiscal years 2005 through 2007, and about 86 percent of its use was with respect to Army major range and test facility installations. This authority was also used with respect to Navy and Air Force installations during this period but much less frequently than for the Army. This authority was not used with respect to Marine Corps real property during this period. Table 2 shows the breakdown of the reported use of 2681 of Title 10 during fiscal years 2005 through 2007 according to the service at which the installation was located. The authority was used on Army installations to allow defense contractors to test major weapons systems under development for the Army and the other services. This authority was used on Navy installations for several projects, including allowing an aviation company to evaluate noise reduction technology of a static engine. The authority was also used at an Air Force facility to allow a major automobile manufacturing company to test automobile antennas for radio frequency emissions. Our analysis shows that there are more than 30 authorities of general and permanent applicability in the U.S. Code available to the Secretary of Defense, the secretaries of the military departments, or both pertaining to the utilization of existing DOD real property, such as the authority to outlease, grant easement upon, permit special use of, or convey real property. Many of these authorities may only be used under various specified circumstances and contain unique requirements or limitations. For example, while Section 2878 of Title 10 gives the secretary concerned the authority to convey or lease certain DOD real property to an eligible entity, this authority may only be used for the specific purpose of using the proceeds to carry out activities under MHPI and contains limitations, including the kind of real property leased or conveyed and certain requirements for consideration. Service officials indicated that while some of these other authorities were utilized with regard to their respective real property during fiscal years 2005 through 2007, they have been used much less often than Section 2667 and Section 2681 of Title 10. For example, the services reported the authority in Section 2878 of Title 10 was used 53 times during fiscal years 2005 through 2007. Table 3 shows examples of authorities other than Section 2667 and Section 2681 of Title 10 that the services reported using with respect to real property under their control over the 3-year period. The services reported that Section 2869 of Title 10 was used only two times during fiscal years 2005 through 2007. DOD reported that in 2005, the Secretary of the Army signed an exchange agreement with a private developer, trading the 16.29-acre Bellmore, New York, property--closed during the 1995 BRAC process--for the construction of a covered fuel truck storage facility at Fort Drum, New York, and an additional $6.65 million in cash. DOD also reported that in 2006, 13 acres of Army land at Devens Reserve Forces Training Area, Massachusetts, were transferred to the Massachusetts Development Finance Agency in exchange for over $1 million in renovations to buildings and land at the same installation. Air Force officials stated that Section 2869 of Title 10 is currently being used to exchange land, previously used by the Defense Logistics Agency as a fuel supply depot, for military construction at March Air Reserve Base, California. In addition to land use authorities of general and permanent applicability in the U.S. Code, special legislation pertaining to specific land use activities at particular installations or parcels of land is also regularly enacted. For example, the John Warner National Defense Authorization Act for Fiscal Year 2007 contained a provision prohibiting the Secretary of Defense and the Secretary of the Navy from entering into an agreement (or authorizing any other person to enter into an agreement) that would either (1) authorize civil aircraft to regularly use an airfield or any other property or (2) convey any real property at the installation for the purpose of permitting the use of the property by civil aircraft, at four Navy and Marine Corps bases in California--Naval Air Station North Island, Marine Corps Air Station Miramar, Marine Corps Air Station Camp Pendleton, and Marine Corps Base Camp Pendleton. Most of the nearly 50 pieces of special legislation included in the National Defense Authorization Acts for Fiscal Years 2005, 2006, and 2007 pertained to land conveyances or exchanges at specific bases or installations. For example, Section 2851 of the National Defense Authorization Act for Fiscal Year 2006 authorized the Secretary of the Navy to convey to the County of San Diego, California, approximately 230 acres along the eastern boundary of Marine Corps Air Station, Miramar, California, for the purpose of removing the property from the boundaries of the installation and permitting the county to preserve the entire property as a public park and recreational area known as the Stowe Trail. The legislation contained several terms and conditions on its use, such as a requirement to provide written notice to Congress related to its use. Land, buildings, and facilities on DOD installations may appear underutilized or not utilized but are nonetheless unavailable for other uses for several reasons. Restrictions and constraints on DOD's use of lands under its control include setbacks for antiterrorism protection, mission requirements, necessary safety zones, and environmental considerations. In addition to underutilized land, buildings and facilities on DOD installations may appear underutilized or not utilized because of historical considerations, the need to make room for incoming personnel, or the need for repair or demolition funding. Antiterrorism requirements place constraints on the use of land. For example, antiterrorism concerns require standoff distances for inhabited buildings from the controlled perimeter of the base and from other adjacent buildings, parking areas, and trash containers, to minimize the extent of injury or death to occupants in the event of a terrorist incident. For example, officials at Marine Corps Base Camp Pendleton, California, told us that unutilized land between existing buildings could not be used to construct new buildings because of antiterrorism constraints and requirements. Installation mission needs, including the need for open space to fulfill training requirements, also cause restrictions on the use of land. Maneuver training lands and ranges are strictly controlled areas that do not mix well with other land uses. For example, officials at Marine Corps Base Camp Pendleton stated that undeveloped land on the coast is the only space available to the Marines on the West Coast for amphibious assault training. Similarly, at Fort Sam Houston, Texas, a curving strip of land on the western side of the base, approximately 1 mile long and 800 feet wide, serves as a combination parade, drill, and training ground for the units headquartered along its length. In addition, safety requirements, which necessitate that land be kept clear to perform the installation's mission, can place additional restrictions on the use of land. For instance, installations that have active runways require clear zones and accident potential zones that place constraints on land use because of air operations. These constraints include restrictions on development requiring a minimum separation distance from airfield pavements and height limitations on buildings. Structures that violate these criteria are generally not permitted to be built without a waiver. Randolph Air Force Base, Texas, for example, has clear zones and accident potential zones that extend off both ends of its dual parallel runways into the adjacent communities. These communities, base officials told us, have cooperated with the Air Force to limit development within the accident potential zones. Also, for safety reasons, live fire ranges and munitions storage bunkers require clear zones. Facilities are usually not sited within munitions clear zones unless they are part of the munitions operations. Various environmental restrictions and constraints, which can affect the location of new facilities and even mission operations, place additional limits on land use. These restrictions and constraints can be caused by the presence of threatened or endangered species; critical habitats, such as seasonal breeding grounds, flood plains, wetlands, and sensitive plant communities; and the existence of hazardous materials. Further, a framework of legal requirements and restrictions must be complied with in DOD's use of its land use planning authorities. For example, DOD guidance requires that all proposed outleasing actions (regardless of grantee or consideration) be subject to the appropriate level of analysis required by the National Environmental Policy Act of 1969 and its implementing regulations. Installations use various management tools, such as integrated natural resource management plans, to integrate their military missions and natural resources conservation. The construction of new facilities can damage critical habitats, and mission-related noise and light can affect the ability of some endangered species to successfully breed. For example, Navy officials told us that Naval Air Station North Island, California, an installation of Naval Base Coronado, has a vacant parcel of land that remains undeveloped because it is the nesting area for an endangered bird, the California least tern. As shown in figures 1 and 2, the nesting area borders maintenance facilities and is adjacent to the control tower. A base official told us that an attempt to transplant the nesting area to a more suitable location on the installation could take 5 years, if it is successful at all. Additionally, at Naval Base San Diego, a reclamation project on the largest parcel of open usable land on the base is removing the top 2 feet of soil from the location and disposing of the contaminated soil. Base officials told us that the reclaimed land will house the base transportation office and a Defense Logistics Agency facility. The historical significance of buildings and structures may contribute to buildings being underutilized or not utilized. Installations work with state- designated state historic preservation officers and their representatives to determine the cultural impact that actions such as construction, renovation, or demolition might have on a historic building. Because of the expense of meeting requirements for historic buildings, installation officials indicated that it often costs less to demolish a building and construct a new one than to renovate an existing historic building for reuse with a new or different mission. In fiscal year 2007, DOD reported more than 2,200 buildings as historically significant and more than 7,500 buildings eligible for historic designation. For example, Army officials stated that Fort Sam Houston has over 800 historical buildings, many of which are located in a designated national historic district. One group of these buildings, the Long Barracks, on the periphery of the historic district, consists of 11 buildings that have been largely unutilized for over 15 years. (See fig. 3.) One of these unutilized buildings is a 1,000-foot long, two-story former barracks listed as a contributing element to a national historic district. A base official told us that the prolonged nonutilization is both because of the Long Barracks' inclusion in a national historic district and because the associated buildings require extensive, costly renovations. In some cases, the services reported that the enhanced use leasing and housing privatization authorities have been used to creatively maintain and renovate historic buildings. For example, the old Brooke Army Medical Center at Fort Sam Houston went unutilized after the new Brooke Army Medical Center opened. Army officials stated that an enhanced use lease was negotiated with developers whereby the old Brooke Army Medical Center was renovated into usable office space that is currently fully leased to various Army tenants. Similarly, Air Force officials stated that Section 2878 of Title 10 was used on Randolph Air Force Base to successfully renovate, repair, and maintain 297 housing units designated as contributing elements to the national historic district located on the base. Incoming and outgoing or reduced missions, units, or personnel can leave portions of buildings and structures temporarily underutilized or not utilized while the transition occurs. A building or facility may require renovation to accommodate incoming or changing missions. For example, officials at Naval Base Point Loma, California, described two buildings currently not utilized. The first, an empty warehouse, is under consideration to house the Navy Band, currently located at Naval Base Coronado. If this plan is approved, the warehouse would have to be modified to fit the Navy Band's mission requirements before the relocation could occur. The second unutilized building is a barracks that has been laid up, or mothballed, because of the reduced number of personnel on the base. In addition, at Naval Base San Diego, units have been consolidated into one building so that another building may be renovated prior to the arrival of a new shipping platform at the base. The Navy will be unable to utilize this building during the renovation. In addition, property may be classified as not utilized when a service is waiting for funding for repairs or demolition. For example, Lackland Air Force Base has a 48-unit visiting officers' quarters and a student dormitory, both of which are unused because of the presence of mold. The Air Force has sought funding both to demolish the visiting officers' quarters and to repair the student dormitory; meanwhile, both of these facilities remain not utilized. In addition, officials at Naval Base San Diego told us that a condemned maintenance repair building is occupied by tenants on the first floor only. The second and third floors have been condemned because of structural conditions and remain unoccupied while the building awaits demolition. The services use similar policies and procedures for responding to requests for space on an installation by other federal agencies and by organizations within DOD. DOD guidance requires the military departments to maintain a program monitoring the use of real property to ensure that all real property holdings under their control are being used to the maximum extent possible consistent with both peacetime and mobilization requirements, and establishes priorities that the military departments must use when assigning available space on their respective installations. DOD guidance also provides that DOD activities should provide requested support to other DOD activities when support can be provided without jeopardizing the mission of the installation. Further, the secretaries of the military departments have established programs and procedures to manage their real property, which encourage such space sharing. For example, a Navy instruction states that the outleasing of any underutilized real property that is judged necessary for mobilization/surge capacity to both ensure that the property is maintained and generate revenue for the installation should be pursued, and that in land planning, decision makers be presented with alternatives that analyze and develop recommendations for mutual land and facilities use with other DOD entities; federal, state, and local governments; and private entities, where appropriate. An Army regulation states that when real property is underutilized, not used, or not put to optimum use but required to support DOD missions, the garrison commander should consider allowing its interim use by other federal agencies, state and local governments, or the private sector, among other things. Finally, Air Force policy states that Air Force property should be made available for use by others as much as possible and that priority be given to other military departments and federal agencies over private organizations. Department-specific policies govern the procedures for allowing the use of space by other federal agencies, including both DOD and non-DOD tenants. In general, department officials told us that requests are received at the installation level and must include information on the requester's facilities and land requirements, justification for selecting the proposed installation, and a statement of environmental impact. After a request is received, it is reviewed by the installation. The process for reviewing these requests varies by installation. For example, officials at Camp Pendleton told us that at their installation the request is reviewed by the facilities directorate and any affected base activities. The facilities directorate and affected activities make a presentation to the base commander with their recommendations on the request. Navy Region Southwest has a Regional Space Allocation Committee that reviews all requests for space at Naval Base Point Loma, Naval Base Coronado, and Naval Base San Diego. The committee, with input from the base commanders, meets on an as-needed basis and reviews all requests and then makes recommendations to the Commander, Navy Region Southwest. Final approval authority varies by military department and is specified in department guidance. In accordance with a Secretary of the Navy Instruction, requests for space at Navy installations must be approved by the regional commander and Commander, Navy Installations Command, and requests for space at a Marine Corps installation are approved by either the installation commander/commanding officer and Commandant of the Marine Corps for Marine Corps property, while licenses of 1 year or less may be approved by the regional commander for Navy property or by the commander/commanding officer for Marine Corps property. An Air Force handbook states that the Secretary of the Air Force, under administrative powers, may authorize other federal government agencies, DOD agencies, or military departments to use Air Force real property by permit. An Army regulation states that approval of requests for space by other federal agencies will be made by Headquarters, Department of the Army. We visited installations from each service and found that each installation we visited had multiple DOD and non-DOD federal tenants. For example, the Environmental Protection Agency, the Architect of the Capitol, and the National Guard use space at Fort Meade in Maryland. Installations in Navy Region Southwest are home to groups from the Coast Guard, the Army, the Air Force, the Department of the Interior, and the Department of Transportation. Finally, Hill Air Force Base, Utah, has several DOD tenants, including the Army Corps of Engineers and the Defense Logistics Agency, as well as non-DOD federal tenants, such as the Federal Aviation Administration and the Forest Service. We requested comments from DOD, but none were provided. We are sending copies of this report to the Secretary of Defense and to interested congressional committees. We will make copies available to others upon request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions regarding 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. To determine how the Department of Defense (DOD) has used its land use planning authorities, we researched and developed a comprehensive list of many of the most relevant authorities in the U.S. Code that could potentially be utilized by the Secretary of Defense, the secretaries of the military departments, or both. After speaking with DOD and service officials about the authorities that they used most often, we provided a written request to each service inquiring which of a select list of authorities they used and what kind and amount of overall compensation they obtained from using these authorities during fiscal years 2005 through 2007. We also asked the services, in writing, about special land use planning legislation available to them during these same fiscal years. Service headquarters' officials provided this information to us. Specifically, we spoke with officials from the Air Force Real Property Agency, the Marine Corps' Land Use and Military Construction Branch, the Office of the Assistant Secretary of the Army for Installations and Environment, and the Office of the Assistant Secretary of the Navy for Installations and Environment. We cross referenced data where appropriate. Specifically, in our count of the number of pieces of special legislation pertaining to land use planning in the National Defense Authorization Acts for Fiscal Years 2005, 2006 and 2007, we included both new and modified authorities available to the Secretary of Defense or secretaries of the military departments pertaining to the utilization of a specific piece of real property, such as the authority to outlease, convey, or transfer that property, as well as requirements that the applicable secretary use a specific piece of real property in a particular manner. We did not include, for example, statements regarding the sense of congress with respect to land planning, or reports required regarding land planning. We analyzed their responses and followed up with questions on any areas of ambiguity. We visited selected installations and interviewed installation officials about their land use activities, discussed both traditional leases and enhanced use leases with them, and obtained documentation on specific leases, their terms, and compensation. We selected 10 installations to visit based on size; proximity to other installations; and past, current, or future planned large real estate projects, such as enhanced use leases or conveyances. Table 4 lists the installations that we visited, by service. We also gathered additional information on each service's enhanced use lease program and analyzed data we obtained on existing leases and on those that are currently under consideration. To determine the reasons why land, buildings, and facilities on DOD installations may appear underutilized or not utilized, we reviewed DOD and service guidance relevant to land use planning. We interviewed service officials to identify the available uses for land, buildings, and facilities that may be underutilized or not utilized yet still be unavailable for development or other use. We visited selected installations and interviewed installation officials about the restrictions and constraints placed on the utilization of land, buildings, and facilities. We also reviewed documentation from the installations relevant to land use planning and restrictions and constraints on the use of their lands, buildings, and facilities. To determine the policies and procedures used by the services to respond to requests by other federal agencies for space at a DOD installation, we reviewed relevant DOD and service guidance. We also visited selected installations and interviewed installation officials about how they respond to requests for space by other federal agencies. We reviewed documentation from selected installations on the agreements that they currently have with other federal agencies. We conducted this performance audit from September 2007 to July 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Harold Reich, Assistant Director; William Bates; Scott Behen; Leslie Bharadwaja; Joanne Landesman; Katherine Lenane; Richard Meeks; and Charles Perdue made key contributions to this report.
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The Department of Defense (DOD) is one of the largest landholding agencies in the federal government with more than 577,500 facilities at 5,300 sites on over 32 million acres. GAO has previously reported that the management of DOD-held real property is a high-risk area, in part because of deteriorating facilities and problems with excess and underutilized property. To address these problems, DOD has developed a multipart strategy involving base realignment and closure, housing privatization, and demolition of facilities that are no longer needed. DOD is also leasing out underutilized real property to gain resources to repair or construct facilities. The House Armed Services Committee Report on the National Defense Authorization Act for Fiscal Year 2008 directed the Comptroller General to provide an analysis of DOD's use of its land use planning authorities. Specifically, GAO examined (1) how DOD has used its authorities; (2) the reasons why land, buildings, and facilities on DOD installations may appear to be underutilized or not utilized; and (3) the policies and procedures used by the services to respond to requests by other federal agencies for space at a DOD installation. GAO reviewed pertinent legislation and DOD and service policies, interviewed officials from DOD and all four services, and visited 10 installations from all four services. Although many land use planning authorities currently exist that permit the Secretary of Defense, the secretaries of the military departments, or both to help make more efficient use of real property under their control, Section 2667 of Title 10, U.S. Code, leasing of nonexcess property of military departments, was used the most frequently--744 times from fiscal years 2005 through 2007. Under Section 2667 of Title 10, traditional short-term lease agreements are typically executed, but more financially complex, longer-term enhanced use leases are also executed. Section 2681 of Title 10, the authority to enter into contracts with commercial entities that desire to conduct commercial test and evaluation activities at a major range and test facility installation, was also used frequently, with 601 uses during fiscal years 2005 through 2007. GAO's analysis indicates that there are more than 30 authorities in the U.S. Code pertaining to DOD's utilization of real property. Service officials indicated that they have used these other authorities much less often and only for a limited number of leases or other transactions. Land, buildings, and facilities on DOD installations may appear to be underutilized or not utilized for several reasons. For example, land that appears empty or underutilized often has a variety of restrictions and constraints placed upon its use, including setbacks for antiterrorism protection, mission requirements, safety zones, and environmental concerns. The services identified several reasons why buildings and facilities might be classified as underutilized or not utilized but still remain unavailable for other uses, including historical considerations. Each of the military departments has similar policies and procedures in place for responding to requests for space on an installation from other federal agencies. Service officials told us that requests for space are submitted directly to the installation and should include information on facilities and land requirements, justification for selecting the proposed installation, and a statement of environmental impact. An official request for space is reviewed at the installation level, and the installation commander makes a recommendation to the approving official, although the approving official differs depending on the service and the nature of the request.
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OPM may waive application of the salary offset requirement for reemployed annuitants--thereby permitting dual compensation--pursuant to 5 U.S.C. SS 8344(i) and SS 8468(f). Under these authorities, agencies may request that OPM waive the offset requirement for individuals on a case-by-case basis, or, that OPM delegate to the agency head the authority to waive the offset requirement for individuals on a case-by-case basis. The statutes provide OPM the authority to consider and approve agencies' waiver requests. OPM evaluates and may approve agency requests for waivers on a case-by-case basis for four authorized purposes: need to retain an individual, and other unusual circumstances. OPM evaluates and may approve agency requests for delegation of authority to waive salary offsets on a case-by-case basis for two authorized purposes: other unusual circumstances. Agencies requesting waivers or waiver authority must provide purpose- specific information about the circumstances for which the waiver or authority is requested, as summarized in table 1. In order to obtain delegated authority to waive salary offsets, an agency must describe an emergency or other unusual circumstance comparable to the third and fourth categories above. In addition to the purpose- specific information, agencies must identify the occupations, grades, and locations of positions that might be filled under the delegated authority and provide a statement of expected duration of reemployment to be approved under the requested authority. For individual requests, agencies must identify the individual for whom the exception is requested, the appointing authority to be used, and the position to which he or she will be appointed. In addition, the agency must demonstrate that the annuitant will not agree to reemployment without the waiver. Agencies may also seek to extend previously granted delegated authority. Under 5 C.F.R. 553.201(g), agencies may also request extensions for previously granted individual waivers. Agencies must show that the conditions justifying the original waiver still exist. During this process, OPM asks the agency for the reason why an extension is needed and why other staffing options were unavailable. Should the delegated agreement between OPM and the agency permit the agency to renew individual waivers granted by the agency, the agency may grant an extension of individual waivers. There are other authorities permitting dual compensation for which OPM does not exercise approval authority or otherwise regulate. For example, government-wide waiver authority was contained in the National Defense Authorization Act (NDAA) for Fiscal Year 2010 and allows agencies to waive offset requirements on a temporary basis. Although that authority was set to expire in October 2014, Congress recently passed an extension of that authority through December 2019. In 2012, we reported on the use of the NDAA authority and a few examples of other waiver authorities which OPM does not manage, including waiver authorities unique to Foreign Service annuitants and the Nuclear Regulatory Commission. Additionally, the Department of Defense (DOD) does not seek waiver approval from OPM because DOD has its own authority which permits the reemployment of annuitants without subjecting salaries to offset. Our analysis of OPM's data indicate that agencies' use of reemployed annuitants has increased, with the number of on-board uniformed and civil service annuitants rising from over 95,000 in September 2004 to around 171,000 in September 2013 (from about 5 percent to 8 percent of the federal workforce). This is inclusive of reemployed annuitants with and without dual compensation waivers, as well as retired uniformed service members whose retirement or retainer pay is not subject to reduction. More than half of these reemployed civilian annuitants, specifically DOD's civil service reemployed annuitants, would not be covered under OPM's waiver authority. DOD accounted for 83 percent of the increase in annuitants from 2004 to 2013-- of this increase, approximately 3 percent were civil service annuitants and about 98 percent were uniformed service annuitants. In comparison, our analysis of OPM's data found that the overall size of the permanent career federal workforce, as reflected in the number of employees in the 24 Chief Financial Officers (CFO) Act agencies, increased about 11 percent over the same period and that DOD accounted for about 40 percent of this increase. The increase in reemployed annuitants reflects agencies' greater reliance on all types of annuitants, including former uniformed service members covered by military pension systems as well as retirees from federal civilian service covered by the Federal Employees' Retirement System (FERS) and the Civil Service Retirement System (CSRS). Use of annuitants was concentrated in the three largest agencies--DOD, Veterans Affairs (VA), and Homeland Security (DHS)-- which collectively employed about 92 percent of annuitants in 2013, with nearly 80 percent employed at DOD alone. Most of the increased reliance on annuitants in DOD is tied to reemployment of uniformed service members: 98 percent of DOD's annuitants were retired uniformed service members. Our analysis also indicates that the other 21 CFO Act agencies saw increases in reemployed annuitants, as well. For these agencies, the number of on-board annuitants increased from over 23,000 in 2004 to about 36,000 in 2013 (about 2 to 3 percent of these agencies' workforce). Although these agencies collectively relied more heavily on civil service annuitants than VA and DHS, reemployed uniformed service members still comprised nearly 79 percent of the on-board annuitants among these agencies in 2013. Greater reliance on annuitants suggests recent losses in key staff and institutional knowledge due to retirement. The number of voluntary retirements at the 24 CFO Act agencies increased in recent years, from 41,735 employees in 2004 to 58,313 in 2013 (2.4 to 3 percent of these agencies' workforce). In addition, many of these agencies experienced hiring freezes between 2011and 2013, limiting their options for replacing staff who retired or separated for other reasons. In response to these circumstances and the increasing size of the retirement eligible workforce--about 30 percent eligible to retire in five years--agencies appear to have turned to annuitants to bridge potential staffing gaps.Figure 1 shows the number of annuitants in the federal workforce from 2004 to 2013. Our analysis of OPM data shows that in 2013, 83 percent of on-board annuitants were in administrative, technical, or professional occupations, which include positions related to administration and management, information technology, and engineering, among others. Among civil service annuitants on-board in 2013, aggregate annualized salaries were highest in DOD, at $113.4 million (0.2 percent of DOD employees' aggregate salaries) compared to $246.6 million among the other CFO act agencies collectively (or 0.2 percent of employees' aggregate salaries). Among uniformed service annuitants on-board in 2013, aggregate annualized salaries were also highest in DOD, at $10.2 billion (18.9 percent of DOD employees' aggregate salaries) compared to $2.3 billion among the other CFO Act agencies collectively (2.3 percent of employees' aggregate salaries). Similar to career employees, reemployed annuitants generally had full-time schedules. However, most civil service annuitants were also on term limited appointments, generally serving from one to five years after retirement. Figure 2 shows the salary costs of annuitants as a percentage of agencies aggregate annualized salary rates. OPM officials said that they do not conduct trend analysis of dual compensation waiver requests because each waiver is so unique that there is no trend or pattern to analyze. However, in our review of the small sample of 16 waiver request submissions provided by OPM, we found that "other unusual circumstance" was among the most often cited reasons for requesting a waiver and agencies were requesting waivers for individuals in administrative or professional occupations. An example of an unusual circumstance cited by agencies requesting a delegation is an urgent need to rehire annuitants to support the hiring of critical staff. For example, DHS cited a need to rehire investigative program specialists to support the hiring of law enforcement officers to meet a Congressional mandate. In another example, OPM cited a need to hire retired judges to help review applications for administrative law judge vacancies. This suggests that there may be some benefit to conducting analysis of these waivers because there may be trends that OPM is currently not aware of. While there is no specific statutory requirement for OPM to conduct trend analysis, without such analysis, OPM may be missing opportunities to analyze this information that can help guide the human capital management tools and guidance it develops and provides to agencies government-wide. Ensuring OPM is identifying challenges and assisting agencies as issues emerge is especially important given the increasing number of retirement-eligible employees across the federal government. As we have previously reported, unanticipated retirements could cause skills gaps to further widen and adversely impact the ability of agencies' to carry out their diverse responsibilities. With regard to guidance provided to agencies, OPM officials said that they occasionally identify or provide other tools or resources for human capital workforce management to agencies requesting waivers, but they do not do so routinely. For example, OPM may provide information on advertising tools or other resources to agencies experiencing difficulty hiring qualified candidates. OPM officials said that agency officials submitting waiver requests are generally familiar with OPM's tools or guidance. However, we have previously found that agencies' chief human capital officers were either unfamiliar with some OPM tools or guidance, or found the tools or guidance fell short of their agencies' needs. OPM officials said that on infrequent occasions they refer agencies that make repeated requests to extend dual compensation waivers to OPM's workforce planning division for consultation on how to use its workforce management tools more strategically. As we have recently reported, in an era of limited fiscal resources, it is critical that OPM and agencies are developing and using the most cost-effective tools to ensure agencies can meet their missions. We found that OPM lacks effective policies and procedures for documenting waiver requests which may hamper its ability to conduct trend analysis. OPM officials said that they do not have a systematic and reliable process for maintaining dual compensation waiver documentation. Specifically, OPM officials said they do not have a standard policy for how dual compensation waivers are labeled or saved and, therefore must individually review thousands of electronic documents in their document management system database to identify the waiver records. Officials said the waiver requests and supporting materials are submitted to OPM and assigned to individuals for preliminary review and analysis. OPM staff save these in the document management system, but save documents inconsistently, sometimes merging the request and documentation and saving the evidence separately, without any standard labeling. Officials said that staff create a routing slip, called an executive decision summary, for each file. OPM staff use the routing slip to record the names of officials and dates of their review to recommend approval or denial. However the routing slip may or may not be saved with the corresponding waiver materials and does not include summary information about the waiver request. Federal internal control standards state that agencies should clearly document significant transactions and events and the documentation should be readily available for examination. These actions help organizations run their operations efficiently and effectively, report reliable information about their operations, and comply with applicable laws and regulations. Agencies can achieve this by developing and implementing policies ensuring accountability for records, appropriate documentation of transactions, and sufficient information and communication about programs. However, OPM does not have such a policy to guide its management of the dual compensation waiver files. As a result, OPM was unable to retrieve these files in a timely manner for our review. According to OPM officials, OPM does not monitor the agency's implementation of an individual dual compensation waiver once a waiver is granted. The officials said OPM may require agencies to submit documentation before approving delegated waiver authority in order to determine whether the agency is complying with relevant requirements. OPM officials said OPM's role is limited to application review and approval of dual compensation waiver requests and extensions, and that it does not have a role in their implementation or oversight. OPM officials also said individual and delegated waiver requests may be approved, pending specific actions first taken by the requesting agency. However, OPM officials said it is the requesting agency's responsibility to ensure that it meets the conditions outlined in the dual compensation waiver approval letter. Officials said there was one exception--OPM requires and reviews evidence from agencies requesting approval to extend a previously granted waiver beyond the original term to determine if the circumstances justifying the waiver still exist. The statutory provisions authorizing OPM to grant individual and delegated waiver requests do not specifically require OPM to conduct oversight or monitoring of how agencies implement the authority granted by OPM. However, OPM is generally required to maintain oversight over delegated activities under 5 U.S.C. SS 1104(b)(2). Accordingly, OPM regulations recognize the need for some oversight where OPM delegates waiver authority to an agency with no time limit on that grant of authority. In those instances, OPM regulations state that it may terminate an agency's delegated authority if it determines that the circumstances justifying the delegation have changed substantially, or if the agency has failed to manage the authority in accordance with the law, regulations, or OPM officials stated that they do establish the terms of the agreement.time limits on delegation agreements and, in the one delegated waiver example OPM provided for our review, the waiver was authorized for a specific period. Given OPM's document management challenges, as previously discussed, OPM was unable to provide us with a representative sample of waiver approval letters to determine whether OPM consistently established time limits on the delegation of waiver authority provided to agencies and, if not, whether there were instances where monitoring or oversight was necessary. Given the budgetary and long-term fiscal challenges facing the nation, agencies must identify options to meet their missions with fewer resources. While federal agencies shoulder this responsibility, OPM, through its authority to review and approve dual compensation waivers, as well as its responsibility to assist agencies with all aspects of human capital management, should identify trends in waiver use and develop cost-effective human capital tools and resources, where appropriate. These objectives cannot be achieved without analysis of dual compensation waiver information. However, OPM has not developed adequate policies and procedures for the management of dual compensation waiver documentation. Given the increasing use of reemployed annuitants and the impending wave of retirements, OPM is missing an opportunity to leverage the information gained through the review and approval of dual compensation waivers to inform and improve upon the assistance it provides federal agencies in their management of human capital. To improve OPM's assistance to agencies and management of its dual compensation waiver program, we recommend that the Director of OPM take the following two actions: 1. Analyze dual compensation waivers to identify trends that can inform OPM's human capital management tools. 2. Establish policies and procedures for documenting the dual compensation waiver review process. We provided a draft of this product to OPM for review and comment. In written comments, which are reprinted in appendix II, OPM did not concur with one recommendation and partially concurred with one. OPM also provided technical comments, which we incorporated as appropriate. OPM stated that it did not concur with our recommendation to analyze dual compensation waivers to identify trends that can inform OPM's human capital management tools. OPM noted that the waivers are authorized for specific purposes and that the statue does not require OPM to conduct any trend analysis. OPM also noted that it does not grant a large number of waivers and that those patterns are identified when particular circumstances, like natural disasters prompt agencies to seek waivers for similar issues. As noted in the report, we agree that there are clearly defined purposes and that there is no statutory requirement for OPM to conduct a trend analysis. While our analysis did find that most of rehired annuitants were likely hired under an authority maintained by the Department of Defense, OPM was unable to provide evidence of the number of individual or delegated waivers that it had approved in any year, including currently active waivers. Further, given the likelihood of future agency requests for dual compensation waivers for natural disasters, the patterns OPM identified after Hurricane Katrina and potential lessons learned are evidence of the kind of insight that could be informing OPM's other human capital management tools or resources. We continue to believe that OPM should analyze waivers and identify trends that could improve its other tools. OPM stated that it partially concurred with our recommendation to establish policies and procedures for documenting the dual compensation waiver review process. OPM noted that it has policies and procedures for adjudicating waivers and that it is in compliance with the National Archives and Records Administration policies. However, OPM was unable to provide evidence of any such policies and procedures. In fact, OPM could not demonstrate adherence to federal internal control standards stating agencies should clearly document significant transactions and events and the documentation should be readily available for examination. Further, while OPM was able to ultimately produce 16 waiver decision letters, it was unable to provide a single complete, agency waiver application along with the supporting documentation and corresponding OPM decision letter. OPM also could not identify the total number of waivers for any given time period, meaning that even if OPM individually reviewed the thousands of documents in its document management system, it would not know if all materials were maintained appropriately. We continue to believe that OPM should take action to fully address this recommendation and comply with federal internal control standards. We are sending copies of this report to the appropriate congressional committees and to the Director of the Office of Personnel Management. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to the Committee on Homeland Security and Government Affairs. 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) 512-2717 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. To analyze reemployed annuitant trends, we used the Office of Personnel Management's (OPM) Enterprise Human Resources Integration (EHRI) Statistical Data Mart, which contains personnel action and on board data for most federal civilian employees. We analyzed agency-level EHRI data for the 24 Chief Financial Officers (CFO) Act agencies, which represent the major departments (such as the Department of Defense) and most of the executive branch workforce. We analyzed EHRI data starting with fiscal year 2004 because personnel data for the Department of Homeland Security (which was formed in 2003) had stabilized by 2004. We selected 2013 as the endpoint because it was the most recent, complete fiscal year of data available during most of our review. We classified annuitants in two ways: 1. Military only annuitants (retired uniformed service officers or service enlisted members who are receiving retired or retainer pay).2. Military and Federal Employees' Retirement System or Civil Service Retirement System annuitants (including individuals with all valid EHRI annuitant codes). We analyzed on-board trends for most of the executive branch workforce, including temporary and term-limited employees. However, we focused on career permanent employees in our analysis of separation trends and retirement eligibility because these employees comprise most of the federal workforce and become eligible to retire with a pension, for which temporary and term limited employees are ineligible. To calculate the number of federal civilian employees, we included all on board staff, regardless of their pay status. In addition, we excluded Foreign Service workers at the State Department since those employees were not included in OPM data for the years after 2004. We examined on-board and annuitant counts, voluntary separations, adjusted base pay, and retirement eligibility trends by agency, and occupation. Occupational categories include Professional, Administrative, Technical, Clerical, Blue Collar, and Other white-collar (PATCO) groupings and are defined by the educational requirements of the occupation and the subject matter and level of difficulty or responsibility of the work assigned. Occupations within each category are defined by OPM. To calculate voluntary separation rates, we added the number of career permanent employees with personnel actions indicating they had separated from federal service with either mandatory or voluntary retirement personnel actions and divided that by the 2-year on board average. To calculate retirement eligibility for the next 5 years, we computed the date at which the employee would be eligible for voluntary retirement at an unreduced annuity, using age at hire, years of service, birth date, and retirement plan coverage. We used the EHRI adjusted base pay to examine the annualized salaries of on-board individuals. It is important to note that this amount does not necessarily reflect the actual amount annuitants were paid in the fiscal year, but rather, the total annualized salary of annuitants in the data. We assessed the reliability of the EHRI data through electronic testing to identify missing data, out of range values, and logical inconsistencies. We also reviewed our prior work assessing the reliability of these data and interviewed OPM officials knowledgeable about the data to discuss the data's accuracy and the steps OPM takes to ensure reliability. On the basis of this assessment, we believe the EHRI data we used are sufficiently reliable for the purpose of this report. To evaluate the extent to which OPM analyzes trends in the reasons for waiver requests and provides related guidance, we reviewed OPM's policies and procedures for evaluating waiver requests, analyzed documentation from OPM, and interviewed officials. To evaluate the extent to which OPM ensures compliance with conditions under which the waivers were granted, we reviewed relevant statutes, regulations, OPM's policies and procedures for reviewing waiver requests, and interviewed OPM officials. We also reviewed the 16 waiver decision letters that OPM was able to provide. According to OPM officials, the waivers were selected to represent examples of the types of requests for the different authorized waiver purposes. We were unable to assess whether the examples OPM provided to us were representative of the universe of waiver requests because of the conditions in which the files are maintained. We compared information gathered from reviewing these letters as well as interviews with OPM officials to the statutory and regulatory provisions, OPM's policies and procedures, and internal controls standards for the federal government. In addition to the individual named above, Chelsa Gurkin (Assistant Director), Anthony Patterson (Analyst-in-Charge), Vida Awumey, Sara Daleski, Karin Fangman, Kimberly McGatlin, and Rebecca Shea made major contributions to this report.
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The federal workforce has a large number of retirement-eligible employees that could potentially result in a loss of skills hindering federal agencies' ability to meet their missions. Agencies can mitigate this challenge by hiring uniformed and civil service retirees. Generally, when an agency reemploys a retired civil service employee, their salary rate is subject to offset by the amount of the annuity received. Upon request, OPM has authority to waive offsets, allowing dual compensation (annuity and full salary). Dual compensation is also permitted under other authorities not administered by OPM, such as the authority provided to Defense. GAO was asked to provide information on the use of rehired annuitants and OPM's dual compensation waiver authority. This report: (1) describes the trends in rehired annuitants for fiscal years 2004 to 2013; (2) identifies the extent to which OPM analyzes trends in the reasons for waiver requests, and provides guidance to agencies, and (3) evaluates the extent to which OPM ensures agencies' compliance with the conditions under which the waivers were granted. GAO analyzed OPM data, reviewed OPM documentation, and interviewed OPM officials. Agencies' use of reemployed annuitants has increased, with the number of on-board retired uniformed and civil service annuitants increasing from over 95,000 in fiscal year 2004 to around 171,000 in fiscal year 2013 (from about 5 percent to 8 percent of the federal workforce). This is inclusive of reemployed annuitants with and without dual compensation waivers. The Department of Defense (DOD) accounted for about 80 percent of rehired annuitants in 2013; ninety-eight percent of which were retired uniformed service members whose retirement pay is not subject to reduction. More than half of the total reemployed civilian annuitants in 2013, including DOD's civil service reemployed annuitants, would not be covered under the Office of Personnel Management's (OPM) dual compensation waiver authority. OPM officials said that they do not conduct trend analysis of dual compensation waiver requests and they provide related guidance only as needed. While OPM is not required to conduct trend analysis, given the increasing number of retirement-eligible federal employees, without such analysis OPM may be missing opportunities to analyze information that can inform decisions about the human capital management tools it develops and provides for agencies government-wide. OPM's ability to conduct trend analysis is limited by its lack of a systematic and reliable process for maintaining dual compensation waiver documentation. The lack of policies and procedures is inconsistent with federal internal control standards and made OPM unable to timely retrieve the documentation for GAO's review. OPM is not required by statute to monitor agencies' implementation of individual dual compensation waivers to determine whether relevant requirements are followed. OPM regulations provide for limited oversight in delegated situations, where waiver authority is delegated to agencies without a time limit. GAO recommends that OPM analyze trends in agencies' use of dual compensation waivers and establish policies and procedures for maintaining waiver documentation. OPM did not concur with the first and partially concurred with the second recommendation. GAO maintains that OPM should implement these actions as discussed in the report.
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In October 1996, GSA acquired a 13.18-acre site, immediately adjacent to the College Park Metrorail station, in College Park, MD, specifically for the new CFSAN facility at a cost of $4 million. Part of the site is located on a Prince George's County-designated floodplain. GSA has subsequently demolished a building that was on the site when it was acquired. When the CFSAN facility is completed, it is to have four stories above ground and a basement; and it is to have about 410,000 square feet of office, laboratory, and support space. The building is scheduled to be ready for occupancy in October 2001. The total cost to design and construct the building, including the cost of the land, is estimated to be about $86 million. The Federal Emergency Management Agency (FEMA) is the federal agency responsible for floodplain management. FEMA has promulgated regulations with floodplain management criteria to be used by state and local governments. In the state of Maryland, the Department of the Environment (MDE) is responsible for floodplain management. As part of FDA's consolidation of its programs in the Washington, D.C. metropolitan area, FDA is to vacate the federal office building at 200 C Street, SW, Washington, D.C. FDA plans to decommission the laboratories in the building--clear the hazardous chemical residue--prior to turning the space back to GSA for reassignment. The Architect of the Capitol has expressed some interest in this building for congressional use. To determine GSA's authority to construct a new CFSAN facility for FDA, we reviewed the legislation that authorized the Secretary of Health and Human Services and the Administrator of GSA to consolidate FDA facilities and reviewed subsequent legislation relating to the appropriation of funds for the project. To determine whether the project had met the state of Maryland requirements for building the facility on a floodplain, we reviewed actions taken by GSA and the project's design consultants to obtain the needed construction authorizations from MDE. We also reviewed the floodplain studies prepared specifically for this project to show the effect the project would have on the floodplain. To determine whether FDA planned to place computers in the basement of the new building, we interviewed GSA and FDA personnel involved in the project. To determine whether steps have been taken to mitigate the risks involved in placing computers in the basement and who was involved in making the decision to place the computers in the basement of the building, we reviewed project documents and interviewed GSA and FDA project management officials, FDA managers responsible for information management resources, and representatives of the firms responsible for designing the new facility. We also obtained from the design consultants a detailed description of the features incorporated into the design of the new facility to protect the building from external flood waters. We reviewed the final construction drawings and construction specifications for the building to assure ourselves that the features described to us had been incorporated into the design of the building. We also visited the construction site to view the constructed basement slab and walls and systems and equipment being installed to mitigate the risk of water entering the building, to confirm that the building will have some of the features described to us. We did our review from May through September 1999, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from GSA's Administrator and FDA's Commissioner. In 1990, the Food and Drug Administration Revitalization Act became law. The act authorized the Secretary of Health and Human Services (HHS) and the Administrator of General Services to enter into contracts for the design, construction, and operation of a consolidated FDA administrative and laboratory facility. In addition, the FDA Revitalization Act expressly authorized the appropriation of $100 million for the project in fiscal year 1991 and authorized the appropriation of such funds as may be necessary for subsequent fiscal years. GSA's fiscal year 1991 appropriations act did not include funds for this project. GSA's fiscal year 1992 appropriations act appropriated $200 million for consolidation, site acquisition, planning and design, and construction of new FDA facilities in Montgomery and Prince George's Counties, MD. The Conference Report accompanying GSA's appropriations act stated that the conferees provided these funds to begin the process of consolidating FDA from its existing 34 buildings and 11 locations to campuses in Maryland's Montgomery and Prince George's Counties. The report further stated that the president and Congress had expressed their support for this project by enacting the FDA Revitalization Act that specifically authorized construction of new administrative and laboratory facilities for FDA. The Conference Report accompanying the fiscal year 1992 appropriations act also contained language directing FDA, GSA, HHS, and the Office of Management and Budget (OMB) to submit a plan for the consolidation project's future funding needs to the appropriations committees by no later than December 31, 1991. The Senate Appropriations Committee Report accompanying the Treasury, Postal Service, and General Government appropriations act for fiscal year 1993 stated that despite clear instructions, the administration had not expended any of the funds already appropriated, and no funding plan had been submitted as previously directed. The Committee stated that it strongly supported the project because, in addition to the inefficiencies resulting from being scattered among so many different buildings, many of FDA's facilities were outmoded and obsolete, even hazardous. The FDA Revitalization Act and subsequent appropriations acts, particularly the act containing GSA's appropriations for fiscal year 1992, authorized GSA to construct the FDA facility in College Park, MD. OMB approved a consolidation plan for the FDA headquarters programs on March 15, 1994. This plan called for CFSAN to be located in Prince George's County. GSA officials knew the construction site was on a Prince George's County- designated floodplain when they bought the land. Before purchasing the property, GSA hired an engineering firm to complete an environmental assessment and floodplain studies to determine the viability of constructing a facility on the site and the effect that the project would have on the site. The preliminary floodplain study, which focused on the viability of constructing on the site, concluded that constructing the proposed facility on the site would not increase the 100- the site was suitable for the proposed development; and because the building would be in the very upper reaches of the watershed, the actual peak 100-year flood elevation would affect the building for only a short period of time before it receded. FEMA has not designated a floodplain on this site. The project director for the firm that did the floodplain study for GSA told us that the County is more conservative in its floodplain designations than FEMA. He said that the County's designations take into account the existing built environment and anticipated future developments--new construction--in the area when calculating the floodplain area, but FEMA takes into account only the existing built environment and open areas. Figure 1 shows the existing 100-year floodplain, as designated by Prince George's County. The floodplain study contained the state of Maryland's and the County's requirements that would have to be met for construction on the floodplain. State and County regulations prohibit a project from increasing the 100- year flood elevations outside the project site. They also require that the lowest floor of any structure be at least 1 foot above the 100-year flood elevation, unless it is in the overall public interest for it to be otherwise. If a variance is granted and a basement is authorized, it must be waterproofed. The State and Prince George's County required specific documentation before GSA could obtain approval to construct the foundation for the building. This documentation had to include the floodplain hydraulic calculations 100-year floodplain evaluations of the impact of the construction on adjacent properties. The required documentation also had to show that the first floor will be at least 1 foot above the 100-year flood elevation; how the basement will be waterproofed; how sump pumps and other drainage systems were to be used; and that the building will be able to withstand the force of the water in event of a flood, i.e., it will not float up. After receiving the required documentation, MDE's Water Management Administration issued an Authorization to Proceed (No. 97-NT- 0711/199766248) on September 11, 1997, which permitted GSA to begin constructing the building foundation and to relocate existing utility lines. Citing the great public benefit from the project and the site constraints that prohibited a taller or wider building, MDE agreed to a variance permitting a basement below the 100-year flood elevation. However, MDE required that the basement be waterproofed to comply with MDE and FEMA regulations. The elevations for the two conditions were compared to determine the effects of the project. This comparison shows that the proposed FDA development would not have any adverse impact on the flood elevations upstream of the site. The computations do indicate that a slight increase (0.1 foot) in the 2-year flood elevation will occur at the downstream end of the site. However, the computations indicate the increase would be dissipated before the upstream end of the site. The 10- and 100-year flood elevations will be lower slightly in some areas for proposed conditions, because the new building will be further away from the stream than the existing building. With the building further away from the stream, the area available to move the flow will increase, causing the flood elevations to decrease. MDE requested that the following three items be submitted to it for review and comment before it would authorize the superstructure of the facility to be built. Final HEC-2 backwater computations of the floodplain: these were to include all new changes made to the floodplain due to the new FDA facility. GSA advised us that this was submitted to MDE on March 2, 1999. Structural design calculations of the basement walls and foundations: these were to show that the design took into account the additional hydrostatic forces that would result when high water tables are experienced. GSA advised us that the structural calculations were submitted to MDE on August 9, 1999. Two sets of final signed construction plans: these were to indicate what will be built on the site as well as what topographic changes will occur on the site. GSA advised us that these construction plans were submitted to MDE on August 27, 1999. On September 7, 1999, MDE approved the construction of the superstructure. Computer operations are to be housed in the basement of the CFSAN facility. There are to be between 15 and 20 servers located in the basement, along with other building support components--e.g., mechanical space, fitness center, health center, and laboratory storage. FDA officials informed us that after an exhaustive review of the related constraints, alternatives, and opportunities, the decision to locate the main computer room in the basement of the new facility was reached by consensus of the project team. This team consisted of the architect-engineering consultants and representatives of GSA and FDA. The FDA representatives were selected from FDA's Division of Facilities Planning, Engineering and Safety and from CFSAN, which is to occupy the new facility. Every kind of data that CFSAN maintains could potentially be stored in these computers. This would include data relating to all CFSAN programs, such as premarket approval, research, industry surveillance, finance, personnel, and any other data generated and/or used by CFSAN. If the computers were damaged by a flood, FDA officials estimated that it would cost about $4 million to replace and install the computers, peripherals, network, and other computer-related equipment; load the software; and retrieve and restore the data. CFSAN currently backs up the data on its servers daily, with a copy transferred to an off-site storage area on a weekly basis. CFSAN officials told us that backup and off-site storage for the new facility will be developed that are appropriate for the nature of the systems installed, the data stored, and the risk factors at the time the new facility is occupied. FDA officials told us that no matter where the computer room is located, there is always the potential for water damage from internal sources. They believe that with the steps that have been taken by the design team to protect the building from an external flood, the likelihood of internal water damage (e.g., broken pipe, leak in the roof, or accidental fire sprinkler activation) will be greater than the likelihood of damage from a flood condition. The new facility will have several different, but complementary, systems to mitigate damage from water entering the building. It has been designed and is being constructed essentially as a hull of a ship, with the top of the basement wall and waterproofing extending to the floor slab of the first floor of the building, which is 1-1/2 feet above the 100-year floodplain level. Initially, the design team intended to construct a building of five stories above grade with no basement. However, as the design process evolved with involvement from the local communities, a height restriction of 84 feet was placed upon the site by the College Park-Riverdale Transit District Development Plan for the area surrounding the College Park Airport. To accommodate this limitation, the building program had to include a basement. GSA and FDA officials told us that if they could have obtained a waiver from the height limitation and were able to build a five-story building, the main computer room would have been located on the first floor. However, because a basement was necessary, they felt the use of the basement space for support areas was consistent with common building design practices, met the needs of the program, and provided better control for the ambient temperature requirements of the computer room. The design team decided to give priority to window space for offices and laboratories. The design consultants and FDA officials told us that putting the computer operations on another floor higher up in the building would have forced program space, either offices or laboratories, into the much less desirable basement space with no windows. The design team explained that with the way the building has been designed, every laboratory and laboratory office will have the benefit of natural daylight. Half of the offices are to have direct natural light, and the other half are to receive indirect natural light through clerestories in the office corridor walls. They told us that they also considered physical security needs to ensure that the computers would not be vulnerable to vandalism or interference from outside sources. During our review, we visited the construction site near the end of the foundation construction phase of the project to observe how the basement was being constructed and verify that some of the design features we were told about had been incorporated into the facility. We also reviewed the final construction drawings and the specifications for the construction of the superstructure of the building to confirm that the plans included the systems and equipment we were told had been designed into the facility to mitigate the risk of water entering the building. This work verified that the following features have been built into the facility, or are included in the construction drawings and specifications to be used to complete the facility. The basement walls and floor slab have been constructed of reinforced concrete. The waterproofing system that has been installed creates a waterproof envelope under the basement slab and up the basement walls to protect the basement from water infiltration. The building has a complete underslab and perimeter drainage system to remove water coming up from below the structure, as well as water approaching the outside of the facility at ground level. The piping system installed to remove water terminates in a pumping station located outside the waterproofed basement and therefore will not bring groundwater into the building. Four pumps capable of pumping 500 gallons per minute each are to be installed in the pumping station. These pumps are to be sequenced to come on as the water inflow increases. The water is to be discharged into the stream located to the south of the site. All pumps are to have emergency power backup in the event of a power failure. Additionally, the main mechanical room, also located in the basement, is 3- 1/3 feet deeper than the rest of the basement floor, resulting in a very large retention area if a catastrophic event took place and water entered the building. Emergency drains are located about 1 inch above the depressed floor. These drains discharge into two sump pumps that discharge into the storm sewer in the parkway at the perimeter of the property. These pumps are also to be on emergency power. The computer room is to have a raised floor. The concrete slab constructed beneath the raised floor is depressed 12 inches below that portion of the basement outside the main mechanical room. Emergency floor drains have been provided in this depressed area that are connected to two sump pumps. Finally, the discharge pipes from all six of the sump pumps in the basement were designed to have check valves and alternate discharge pipes. Should flood waters rise above the level of the discharge pipes, the check valves would prevent this water from entering the pumps and divert the water from the sump pumps to the alternate discharge pipes, which discharge outside the building above the 100-year floodplain level. When we visited the construction site we also observed the structural system being installed to prevent the building from floating as a result of the buoyancy force caused by the hydrostatic pressure of flood waters. FDA officials informed us that the decision on where to place the computers was a part of the decision on the overall design and layout of the building. The representatives from the design consultants told us that this decision was made primarily by the design team on the basis of a thorough analysis of specific program needs, workplace factors, security requirements, and site constraints. The design team made recommendations, which included the basement location for the computers, to GSA, FDA, and CFSAN personnel for a decision. We were told that a number of computer telecommunications personnel from CFSAN and OIRM were involved in periodic meetings to plan the telecommunications space needs in the new building and develop telecommunication design guidelines with the telecommunications consultant and were involved in the decision on the placement of the computers. FDA officials told us that some computer staff expressed concerns in October 1997 about the placement of the computers. They said these concerns were forwarded to GSA and to the design team. Also in October 1997, the telecommunications consultants gave CFSAN and OIRM officials a copy of their College Park Design Guidance for Telecommunications Infrastructure for comment. In December 1997, FDA provided comments. CFSAN's telecommunications representative expressed satisfaction that all items noted in the review documents were discussed and either clarified or modified for inclusion in a revised design for the telecommunications infrastructure. Further, FDA and CFSAN officials told us that the design of the new facility was presented to representative groups of employees during the design process, as well as to the National Treasury Employee's Union stewards from FDA. In March 1999, FDA initiated a series of employee briefings on the new building. These briefings, we were told, were being conducted for employees from one or more of CFSAN offices at each session. They covered such topics as the basic design of the building; the current status and schedule for completion; and features of interest to employees, such as the food service area, library, auditorium, training rooms, employee parking, layout of laboratories, and office sizes. The Director of CFSAN said that the briefing sessions would continue until all of the employees moving to the College Park building have had an opportunity to attend a session. It is also planned that there will be some mock-ups of laboratory and office designs. In addition, the Director of CFSAN said that an e-mail address had been set up to which employees can send questions concerning the new facility, and FDA's Office of Facilities has set up a Web page where progress is to be updated and CFSAN photos are to be archived. He said that employees have access to the Internet and can access this information. Further, once a month the Director is holding 1-hour meetings with all interested employees who are given the opportunity to raise questions and receive answers. A member of the planning team for the College Park facility has been asked to attend each of these latter meetings to answer any questions about the building and move. We provided copies of a draft of this report to the Administrator of General Services and the FDA Commissioner for comment. On December 1, 1999, we received oral comments from GSA's National Capital Region Assistant Regional Administrator for the Public Buildings Service and from the Public Buildings Service's Office of Portfolio Management. They concurred with the report without further comment. On December 2, 1999, we received oral comments from the Directors of CFSAN and FDA's Division of Facilities Planning, Engineering and Safety. They concurred with the information as presented in the report and provided some technical clarifications that we have incorporated where appropriate. We are sending copies of this report to Representative Robert E. Wise, Ranking Democratic Member, House Subcommittee on Economic Development, Public Buildings, Hazardous Materials and Pipeline Transportation; Senator George V. Voinovich, Chairman, and Senator Max S. Baucus, Ranking Minority Member, Senate Subcommittee on Transportation and Infrastructure; Senator Paul S. Sarbanes; Senator Barbara A. Mikulski; Representative Steny Hoyer; the Honorable David J. Barrum, Administrator of General Services; and the Honorable Jane E. Henney, Commissioner, FDA. Copies will be made available to others upon request. If you have any questions about this report, please call me or Ron King on (202) 512-8387. A key contributor to this assignment was Shirley Bates. Bernard L. Ungar Director, Government Business Operations Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO provided information on the construction of the Food and Drug Administration (FDA) facility for its Center for Food Safety and Applied Nutrition (CFSAN) in College Park, Maryland, focusing on: (1) the General Services Administration's (GSA) authority to construct a new facility for FDA in College Park; (2) whether the requirements for building on a floodplain had been met; and (3) the planned placement of computers in the basement of the new building, specifically whether; (a) steps had been taken or will be taken to mitigate the risk of damage from water entering the basement of the building, and (b) CFSAN staff were involved in the decision to place the computer operations in the basement. GAO noted that: (1) GSA's authority to construct the FDA facility in College Park, MD, is derived from the FDA Revitalization Act and subsequent appropriations acts; (2) the design team for the project has satisfactorily met the minimum requirements, set by the state of Maryland, to construct a building with a basement on a floodplain; (3) the basement was necessary because of a local building height restriction due to the proximity of the site to the College Park Airport; (4) although basements are not normally allowed in buildings on a floodplain in Maryland, the state granted a variance, in part because a taller or wider building was prohibited; (5) the new CFSAN facility has been designed with several systems to mitigate the risk of damage from water entering the building; (6) with the steps taken by the design team to protect the building from an external flood, FDA officials believe that the potential for internal water damage is a greater probability than is damage from a flood condition; (7) to protect the data stored on the computers, CFSAN officials plan to develop a mitigation plan for the new facility that they say will be appropriate to the nature of the systems installed, the data stored, and risk factors at the time the building is occupied; (8) the decision to locate the main computer room in the basement of the building was reached by consensus of the project team - the design team consultants and representatives from GSA and FDA; and (9) the FDA representatives included CFSAN telecommunications personnel and staff from FDA's Office of Information Resources Management.
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U. S. Attorneys serve as the nation's principal litigators under the direction of the Attorney General. U.S. Attorneys conduct most of the trial work in which the United States is a party. Under Title 28 U.S.C. 547, U.S. Attorneys have three statutory responsibilities: prosecute criminal cases brought by the federal government prosecute and defend civil cases in which the United States is a party, collect debts owed the federal government that are administratively uncollectible. EOUSA was established to provide a liaison between DOJ in Washington, D.C., and the 93 U.S. Attorneys. EOUSA provides each U.S. Attorney and the 94 U.S. Attorneys Offices general executive assistance and direction, policy development, administrative management and oversight, operational support, and coordination with other components of DOJ and other federal agencies. In fiscal year 2002, U.S. Attorneys', and EOUSA's budgets were about $1.5 billion and $64.6 million, respectively. OJP, the grant making arm of DOJ, provides grants to various organizations, including state and local governments, universities, and private foundations, that are intended to develop the nation's capacity to prevent and control crime, administer justice, and assist crime victims. OJP's Assistant Attorney General is responsible for overall management and oversight of OJP through setting policy and for ensuring that OJP policies and programs reflect the priorities of the President, the Attorney General, and the Congress. The Assistant Attorney General promotes coordination among the various bureaus and offices within OJP. Staff of the bureaus and program offices develop OJP grant programs, accept and review applications, make grant awards, and manage and monitor grantees until the award is closed out. In fiscal year 2002, OJP's budget was about $4.3 billion. According to OJP and EOUSA officials, U.S. Attorneys and their staff currently are involved in two DOJ programs involving OJP grants--PSN and Weed and Seed. As mentioned earlier, BJA is responsible for national administration and management of grants awarded under the PSN initiative. PSN, which was initiated in fiscal year 2001 by the President and the Attorney General, was designed to commit more than $900 million over a 3-year period to hire new federal and state prosecutors, support investigators, provide training, and develop and promote community outreach efforts all with the goal of focusing community attention and energy on reducing gun violence. Under the program, U.S. Attorneys were to take the lead in mobilizing federal, state, and local officials in their districts by establishing PSN task forces to develop comprehensive gun violence reduction strategies or review and enhance existing strategies. PSN task forces are to implement these strategies, in part, through the use of various OJP grants awarded in each U.S. Attorney's district. These OJP grants are the (1) Research Partner/Crime Analyst Grants to support the strategic planning and accountability portion of PSN, (2) Media Outreach and Community Engagement Grants to help task forces in their community outreach initiatives, (3) Project Sentry Grants to help task forces address local juvenile related gun crimes, and (4) Open Solicitation Grants to support comprehensive and innovative approaches to reduce gun violence in local communities. EOWS is responsible for providing national leadership as well as management and administration of the Weed and Seed Program, which in fiscal year 2002 had a budget of about $59 million. Under the program, U.S. Attorneys are to serve as both the main contact to Weed and Seed sites for EOWS and as facilitator of the program's community based coordination efforts. Accordingly, U.S. Attorneys are to work with local stakeholders to develop and implement a community based, multiagency strategy that proposes to "weed out" crime from targeted neighborhoods, then "seed" the site with a variety of programs and resources to prevent crime from recurring. In fiscal year 2002, there were about 229 Weed and Seed sites and the average grant awarded per site was about $200,000. Guidelines first established by the Attorney General in 1994 stated that U.S. Attorneys and their staff may be involved in their community's crime prevention and control efforts--including efforts to secure DOJ grant funds and work with grantees--as long as they subscribe to legal and ethical considerations. DOJ components have recently issued related guidelines for U.S. Attorneys and their staff that, among other things, focuses specifically on their dealings with grant applicants and grantees under the PSN and Weed and Seed Programs. According to EOUSA officials, DOJ issued program specific guidelines in response to the numerous questions by U.S. Attorneys and their staff concerning their role in relation to PSN and Weed and Seed. U.S. Attorneys are encouraged to be involved in community based activities that seek and secure DOJ grant funds as long as they and their staff subscribe to legal and ethical considerations commensurate with being a government employee, an attorney, and U.S. Attorney. According to guidelines established by the Attorney General in 1994 and revised in January 2001, U.S. Attorneys are encouraged to engage in community based crime prevention and control activities and form coalitions with nonfederal, community based organizations, private entities, and law enforcement because "promoting crime prevention initiatives enhances the presence of the Department of Justice in communities around the country and has proven effective in reducing crime." The guidelines state that, when working with nonfederal entities in implementing crime prevention initiatives, U.S. Attorneys and their staff are to remain impartial in carrying out their official duties and be careful to avoid the appearance of partiality; consider conflicts of interest statutes when crime prevention activities involve persons or organizations with whom they have a personal, financial, or business relationship; and avoid participation in coalitions that include individuals and nonfederal organizations that may be victims, witnesses, subjects, or targets in matters pending in their districts. Thus, under the Attorney General's guidelines, U.S. Attorneys may convene meetings with other potential coalition participants to discuss operating needs, program initiatives, event planning, and other related matters, but they are to avoid participating in budget decisions of a coalition, including decisions regarding the expenditure of funds that could create the appearance that the U.S. Attorney is managing an entity outside of DOJ. Also, according to the guidelines, U.S. Attorneys may endorse specific coalition-based program initiatives as long as they refrain from endorsing specific organizations; give presentations about coalition initiatives at fund-raising events as long as the presentation addresses official DOJ issues and does not solicit contributions; and participate in public service announcements with other coalition members when the purpose of the announcement is to further DOJ's mission and coalition initiatives. With regard to grants, the guidelines state that U.S. Attorneys may provide potential grant applicants with public information regarding sources of federal funding and respond to inquiries regarding the grant application process. Furthermore, they may draft a letter of recommendation to OJP supporting a grant application. According to the guidelines, this letter can identify the applicant's accomplishments and may express the U.S. Attorney's views on whether government program funds should or should not be granted to a particular applicant. However, U.S. Attorneys' names are not to appear on grant applications unless required by law, and U.S. Attorneys are not to otherwise contact federal agencies on behalf of an applicant seeking federal grant monies. DOJ components involved in the PSN and Weed and Seed Programs have taken steps to provide specific guidance to U.S. Attorneys and their offices in carrying out their grant-related responsibilities. In May 2002, EOUSA told U.S. Attorneys and their staff that BJA had published Web based guidelines for U.S. Attorneys Offices and PSN task forces to instruct them about their role in the process to solicit, review, and select grant proposals. According to the memorandum issued by EOUSA's Director, the guidance was designed to provide step-by-step instructions on the grant process that included guidance about specific ethics issues. In December 2002, EOUSA told U.S. Attorneys and their staff about new PSN guidelines--again including guidance about ethics issues--designed to cover grants to be awarded in fiscal year 2003. During the same month, the EOUSA Director sent a memorandum to all U.S. Attorneys, their senior staff, and Law Enforcement Coordinating Committee (LECC) Coordinators about U.S. Attorneys Offices' responsibilities in implementing the Weed and Seed Program, including how to deal with ethics concerns related to Weed and Seed grant activities. Appendix I provides greater detail on the guidelines DOJ components issued for U.S. Attorneys Offices on PSN and Weed and Seed during calendar year 2002. According to EOUSA officials, the decision to issue guidelines for each program resulted from DOJ's overall effort to develop the PSN Program. EOUSA's Deputy Legal Counsel in EOUSA's Office of Legal Counsel said that the PSN guidance was not prompted by any particular incident; rather, it was developed in response to numerous questions about PSN- related ethics issues from U.S. Attorneys and their staff as the program was being developed. The Deputy Legal Counsel said the exercise, combined with similar questions by U.S. Attorneys and their staff subsequently prompted EOUSA to develop the December 2002 guidance for the Weed and Seed Program. EOUSA's Deputy Legal Counsel also said that EOUSA has provided ethics training to U.S. Attorneys and their staff on their roles and responsibilities as it relates to grants offered and awarded under both programs. In January 2002, EOUSA provided a presentation to U.S. Attorneys at the first national PSN conference and in April 2002, EOUSA provided the same presentation for each districts' LECC Coordinators at a similar conference. The presentation included a discussion of what U.S. Attorneys and their staff can and cannot do when participating in the grant process. The Deputy Legal Counsel said that ethics training pertinent to the Weed and Seed Program was also provided to LECCs during October 2002. Also, in December 2002, EOUSA produced and disseminated a video that discussed the process U.S. Attorneys are to follow when working with PSN task forces during the grantee selection and application process. EOUSA's Legal Counsel and Deputy Legal Counsel also indicated that they believe that training, available guidance on ethics issues, and staff awareness about standards of conflicts and actual or apparent conflicts of interest are sufficient to ensure that ethical lapses will not occur. They said that they were unaware of any ethical lapses and said that if questions were raised, DOJ's Office of Inspector General (OIG) would investigate them. OIG staff we contacted who were responsible for dealing with ethical issues at DOJ said they were aware of only one complaint involving a U.S. Attorney and the Weed and Seed Program and none regarding PSN. An effective internal control process is one that provides management with a reasonable level of assurance that agency operating, financial, and compliance objectives are being achieved on a systematic basis. EOUSA has an evaluation program to assess and oversee the overall operations of each U.S. Attorneys Office--including operations associated with the management of the PSN and Weed and Seed Programs--but the evaluations are not designed to assess compliance with the PSN and Weed and Seed guidelines recently issued. Similarly, federal regulations and procedures call for systematic financial disclosure reporting to, among other things, facilitate the review of possible conflicts of interest to guarantee the efficient and honest operation of the government. However, DOJ has not established a financial disclosure reporting mechanism for certain individuals--employees of U.S. Attorneys Offices that work with grantees and potential grantees and nonfederal appointees to PSN grant selection committees--to provide management assurance that these individuals are free from actual or apparent conflicts of interest. According to the Comptroller General's Standards for Internal Control in the Federal Government, internal control activities are the policies, procedures, techniques, and mechanisms that enforce management's directives. They include, for example, steps to set the specific standards or criteria to be achieved by staff as well as steps that provide management the information to determine on a routine basis whether the standards are being met and to take corrective action when they are not. EOUSA has an evaluation program to assess and oversee the overall operations of each U.S. Attorneys Office that includes an assessment of the office's involvement in and performance related to the Weed and Seed and PSN Programs. However, the evaluations are not designed to assess compliance with the Weed and Seed and PSN guidance related to ethical concerns that EOUSA recently issued. Under 28 C.F.R. Part 0.22, EOUSA is to evaluate the performance of the U.S. Attorneys Offices, make appropriate reports, and take corrective actions if necessary. EOUSA's Evaluation and Review Staff (EARS) is responsible for the evaluation program, which, according to EOUSA, is an internal review program designed, among other things, to examine management controls and prevent waste, loss, unauthorized use, or misappropriation in federal programs, as required under the Federal Manager's Financial Integrity Act. EARS evaluations are conducted in each of the 94 U.S. Attorneys Offices every 3 years by teams of experienced Assistant U.S. Attorneys, and administrative and financial litigation personnel from other U.S. Attorneys Offices. According to EOUSA's Assistant Director for EARS, these assessments focus on personnel, management, and workload issues in individual U.S. Attorneys Offices and include, among other things, an assessment of the management and operations of the local Weed and Seed and PSN Programs. Our review of EARS guidelines show that when evaluating the management of the PSN and Weed and Seed Programs in U.S. Attorneys Offices, review teams were to focus on task force or committee management issues rather than compliance with the guidelines recently published. For example, the template for the PSN part of the EARS review instructs EARS reviewers to examine, among other things, whether the PSN strategy had been implemented. If so, evaluators were instructed to provide information on a variety of matters, including the names of the PSN coordinators and the litigation units, sections, or branch offices where they serve; the nature of the partnerships that have been developed with federal, state, and local law enforcement and whether the partnerships are districtwide or tailored to meet the individual needs or problems facing branch offices; the community outreach activities associated with PSN; the number of specially allocated attorney and support staff positions allocated to the office and whether they have been filled; and examples of successes achieved under the program. For the Weed and Seed Program, the template instructs review teams to respond to the following five questions: Does the district have a funded Weed and Seed Program? If so, describe the site, its organization, committees, management, programs, and initiatives. Who in the U.S. Attorneys Offices supervises and works with the Weed and Seed Program? What is the U.S. Attorneys' role in the Weed and Seed Program? What other U.S. Attorneys Offices staff, such as the LECC or Assistant U.S. Attorneys have a role in the Weed and Seed Program? Do you know of any problems or concerns with the Weed and Seed Program? EOUSA's Assistant Director for EARS said that reviews for both programs were broad based management reviews and were not designed to be audits of the programs. The Assistant Director also said that there are plans to revise the PSN part of EARS to include an evaluation of gun-crime data that is to be reported to the Attorney General twice yearly, but there are no similar plans to revise the Weed and Seed part of EARS. Regarding the recently issued PSN and Weed and Seed guidelines, the Assistant Director said that there are no plans to revise EARS to assess compliance with the guidelines and determine whether they are working as intended. Staff in U.S. Attorneys Offices can be delegated responsibility to lead or work with community organizations that receive Weed and Seed grant funds, but these staff are not required to file disclosure forms. These forms might reveal relationships that could be actual or potential conflicts of interest. According to 5 C.F.R. 2634.904, each officer or employee whose position is classified at GS-15 or below or at a rate of pay that is less than 120 percent of the minimum rate of pay for GS-15, is required to file a confidential financial disclosure report if the agency concludes that the duties and responsibilities of the employee's position require the employee to: participate personally and substantially through decision or exercise of judgment, in taking a government action regarding contracting or procurement; administering or monitoring grants, subsidies, licenses, or other federal conferred financial or operational benefits; regulating or auditing any nonfederal entity; or other activities in which the final decision or action will have a direct and substantial economic effect on the interests or nonfederal entity or avoid involvement in a real or apparent conflict of interest, and to carry out the purpose behind any statute, executive order, rule, or regulation applicable or administered by that employee. According to 5 C.F.R. 2634.901, these reports are designed to (1) assist an agency in administering its ethics program and counseling its employees and (2) facilitate the review of possible conflicts of interest to guarantee the efficient and honest operation of the government. During our review, we examined the most recent summary of EARS reports dated between June 1997 and April 2000, for the 10 U.S. Attorneys Offices we visited. In some of these districts, U.S. Attorneys participated on the Weed and Seed steering committee, while in others, Assistant U.S. Attorneys or LECC Coordinators were delegated responsibility for working with Weed and Seed committees, and according to one report, "run" the Weed and Seed Program. None of the EARS reports addressed any involvement with the PSN program because when the reviews were completed, PSN had not been implemented. Our work in the 10 districts also showed that 9 of the districts had active Weed and Seed sites in place, and in some districts, new Weed and Seed sites were under consideration. Among the districts that had active Weed and Seed sites, some of the U.S. Attorneys told us that they actively worked with Weed and Seed committees, whereas others delegated responsibility to an Assistant U.S. Attorney or to LECC Coordinators. For example, in one district the LECC Coordinator represented the U.S. Attorney on the Weed and Seed committee, while in another district the LECC Coordinator helped manage the Weed and Seed sites day-to-day operations. Given recent EOUSA, BJA, and EOWS efforts to publish PSN and Weed and Seed guidelines and train U.S. Attorneys and their staff about ethical concerns, we asked if U.S. Attorneys and their staff that deal with potential grant applicants and grantees were required to file financial disclosure statements. They provided information, published on DOJ internal Web pages, which showed that under current DOJ guidelines: U.S. Attorneys, Assistant U.S. Attorneys in supervisory positions, Senior Litigation Counsels, Special Government Employees, and Schedule C employees are required to file a Public Financial Disclosure Report within 30 days of assuming their covered position and annually thereafter. All line Assistant U.S. Attorneys and special Assistant U.S. Attorneys are required to file a Confidential Conflict of Interest Certification Form to certify that they have no conflict of interest in each matter they undertake. Employees occupying positions in which they exercise significant judgment on matters that have an economic effect on the interests of a nonfederal entity are required to file a confidential financial disclosure report within 30 days on entering a covered position and every year by October 31, including positions where duties involve contracting, procurement, administering grants, regulating, or auditing a nonfederal entity or other activities in which the final decision or action will have a direct and substantial economic effect on the interests of any nonfederal entity. EOUSA's Deputy Legal Counsel also told us that LECC Coordinators and Assistant U.S. Attorneys that work with organizations involving grantees are not required to file confidential disclosure forms because they are not responsible for administering or monitoring grants. The Deputy Legal Counsel pointed out that employees in U.S. Attorneys Offices are not supposed to monitor grants. The Deputy Legal Counsel said that the Weed and Seed guidelines instruct employees to not act on behalf of EOWS; rather, they are to notify EOWS of any issues that may arise during the course of the grant relationship and EOWS is to handle the matter under its own procedures. Nonetheless, the Deputy Legal Counsel acknowledged that U.S. Attorneys Office staff that work with grantees under the Weed and Seed Program might encounter situations that could be perceived as real or apparent conflicts of interest. Furthermore, the Deputy Legal Counsel and EOUSA's Deputy Director said that, based on our inquiry, it might be worthwhile considering a change to procedures so that LECC Coordinators would be required to file confidential disclosure statements. The Deputy Legal Counsel added that Assistant U.S. Attorneys are already required to file the confidential certification form for each matter they are involved with and was not clear whether involvement in a community Weed and Seed activity related to grants would constitute a matter covered by the certification form. In developing the PSN grant program, BJA modeled the PSN selection committee process after its peer review process, where peer review committees are used to assess the merits of the grant application and make recommendations about worthy grant applications. However, whereas BJA has established a process to screen peer reviewers for actual or apparent conflicts of interest before they are appointed to peer review committees, it has not established a similar process for members of PSN selection committees. According to a BJA project manager, BJA uses a multistep process to screen potential peer reviewers for conflict of interest in reviewing applications for grants. BJA hires a peer review contractor who is responsible for conducting a preliminary screening of potential peer reviewers for conflicts of interest based on guidelines established by BJA. Once past the preliminary screening, peer reviewers are asked to self- identify any conflicts of interest by signing a certification statement. EOUSA's PSN coordinator told us that BJA has delegated its peer review authority to U.S. Attorneys and, as discussed earlier, BJA has issued guidance that includes the steps the U.S. Attorneys are to follow when appointing members of the selection committee--peer reviewers for PSN grants. BJA's guidance states that the selection committee can include any or all of the other members of the PSN task force, except the U.S. Attorney, a member of his or her staff, or any federal employee, as long as their participation does not represent an actual or apparent conflict of interest. The guidance further reminds the U.S. Attorneys that the Standards of Conduct and Conflict of Interest Rules that apply to him or her and their staff also apply to members of the selection committee. However, unlike the peer review process employed by BJA for other grant programs, U.S. Attorneys are not required to screen the selection committee members they appoint for actual or apparent conflicts of interests, nor are committee members asked to self-identify any actual or apparent conflicts of interest. Our discussions with BJA and EOUSA officials responsible for PSN indicated that the lack of a mechanism for identifying actual or apparent conflicts of interest among selection committee members was not a problem because they believe (1) appointees from these organizations would likely be covered by their own ethical guidance governing their capacity as a selection committee member and (2) the geographic area covered by individual PSN grants is so small that local jurisdictions would not select someone to serve on the selection committee that has a vested interest in who the grants are awarded to. BJA's Director of the Programs Division told us that, when BJA developed the guidelines for PSN selection committees, BJA had not thought of including a requirement that selection committee members submit a signed self-disclosure conflict of interest statement. The Director of the Programs Division said that, based on our inquiry it might be useful to include some type of requirement for conflict of interest reporting to add an additional level of assurance about the integrity of the PSN Program. Accordingly, in April 2003, the Director, BJA Programs Division, said that BJA would issue a directive requiring PSN fiscal agents to collect a signed self-certified conflict of interest statement from PSN selection committee members. Fiscal agents would be required to maintain the statements on file subject to BJA review in their capacity as grant monitors. DOJ efforts to provide guidance to U.S. Attorneys Offices regarding their involvement in activities associated with grants awarded under the PSN and Weed and Seed Programs are notable. However, as U.S. Attorneys and their staff become more heavily involved in these grant programs, they could increasingly encounter actual or apparent conflicts of interest that could undermine the integrity of the programs both within districts and nationwide. Without a mechanism for monitoring U.S. Attorneys Offices' compliance with available guidance, DOJ does not have reasonable assurance that its steps taken to date--such as the issuance of guidance, ethics training, and video presentations--are adequately understood and have reached all those who are covered by this guidance. DOJ components, such as EOUSA and BJA, are also not positioned to determine (1) if the guidelines are correctly applied and actually and systematically achieving the end result of preventing actual or apparent ethical conflicts or (2) whether guidelines related to grant activities could be clarified, strengthened, or improved. In addition, the absence of confidential financial disclosure reporting for U.S. Attorneys Office employees that work with grantees hinders the U.S. Attorneys ability to (1) fully administer these programs in the context of ethics considerations and (2) identify possible conflicts of interest to guarantee the efficient and honest operation of the government. We recommend that the Attorney General instruct the Director of EOUSA and U.S. Attorneys to take steps to further mitigate the risk associated with U.S. Attorneys Offices' involvement in the grant components of the PSN and Weed and Seed Programs. Specifically, we recommend that EOUSA and U.S. Attorneys (1) establish a mechanism to assess and oversee compliance with recently issued guidelines pertaining to the grant activities of U.S. Attorneys Offices and ensure that the guidelines are working as intended and (2) require that U.S. Attorneys' staffs who work with community organizations on grant-related matters be required to file financial disclosure reports certifying that they are free from conflicts of interest. On May 13, 2003, we requested comments on a draft of this report from the Attorney General. On May 19, 2003, Department of Justice officials informed us that they had no comments on the report. Copies of this report will be made available to other interested parties. This report will also be available on the GAO Web site at http://www.gao.gov. If you have any questions, please contact my Assistant Director, John F. Mortin, or me at (202) 512-8777. You may also contact Mr. Mortin at [email protected], or me at [email protected]. Key contributors to this report were Daniel R. Garcia, Grace Coleman, and Maria Romero. The following paragraphs summarize the guidelines the Department of Justice (DOJ) issued for U.S. Attorneys and their staff during calendar year 2002 regarding their role in working with grants and grantees awarded under the Project Safe Neighborhoods (PSN) and Weed and Seed Programs. During 2002, DOJ issued two sets of guidelines for U.S. Attorneys and PSN task forces in carrying out their responsibilities under PSN. Under the May 2002 PSN guidelines, each U.S. Attorneys Office was instructed to work with interested federal, state, and local officials to form a PSN task force, chaired or co-chaired by the U.S. Attorney, to develop a comprehensive strategic plan. As part of this process, the task force was to formulate its overall mission and goals after which the U.S. Attorney was instructed to designate a selection committee to (1) review eligible grant proposals and (2) select a single grantee for Research Partner/Crime Analyst and Media Outreach and Community Engagement grants funded in fiscal year 2002. The guidelines stated that the selection committee was not to include members of the U.S. Attorneys' staff, but could include other members of the task force as long as their participation did not represent an actual or apparent conflict of interest. In addition, the guidelines instructed the U.S. Attorney to certify to the selection committee, based on the recommendations of the task force, whether potential grantees are suitable candidates for federal funding and convey the committee's choice to the Bureau of Justice Assistance (BJA), along with a letter from the U.S. Attorney, certifying that (1) the potential grant recipient is free from allegations of criminal misconduct and current investigation and (2) the applicant's proposal supports the PSN task force activities, missions, and goals. In December 2002, the Executive Office for U.S. Attorneys (EOUSA) announced that BJA had issued similar guidelines for reviewing and selecting applicants for grants funded in fiscal year 2003. As before, U.S. Attorneys and their staff were instructed to work with the PSN task force and, among other things, the U.S. Attorney was to designate a selection committee--not comprised of the U.S. Attorneys' staff or federal employees--to choose a grantee. Unlike the earlier guidelines, the selection committee was to (1) choose a single grantee to act as fiscal agent for the PSN strategy and (2) determine what portions of the PSN strategy should be funded and to whom after the grant proposal had been approved by BJA. BJA's guidelines for both fiscal years also included hyperlinks to guidance EOUSA had issued for U.S. Attorneys and their staff earlier in the year. EOUSA's guidelines were similar to the Attorney General's guidelines, but they focused specifically on numerous ethics and legal issues they need to consider in relation to their involvement with the PSN Program. For example, similar to the Attorney General's guidelines discussed earlier, U.S. Attorneys are expected to express their views if there is any reason why a particular applicant is an inappropriate candidate for PSN funds, but they are prohibited from appearing before the Office of Justice Programs on behalf of an applicant seeking grant monies associated with PSN. In December 2002, EOUSA also issued guidance that outlined the roles and responsibilities of U.S. Attorney's and their staff regarding the Weed and Seed Program. Similar to the Attorney General's and EOUSA's PSN ethics guidelines, EOUSA's Weed and Seed guidance covered topics ranging from working with nonprofit organizations to prohibitions against fundraising and listed what activities U.S. Attorneys and their staff can perform in support of the Weed and Seed Program. In regard to grants, the guidance stated that U.S. Attorneys and their staff may, among other things serve as that chair or co-chair of the Weed and Seed Steering certify to the Executive Office for Weed and Seed (EOWS) via a "letter of intent" that a potential Weed and Seed site can receive "official recognition;" that is the site has developed a strategy sufficient to make them eligible to apply for a Weed and Seed grant; review Official Recognition applications and prepare a cover letter for submission to EOWS supporting the site and its strategy; review funding applications to ensure technical accuracy and consistency with the Weed and Seed strategy; sign a statement of support for the Weed and Seed strategy; and supervise the site, as chair or co-chair of the steering committee, throughout the life of the initiative. The Weed and Seed guidelines also instructed U.S. Attorneys that, among other things, they may not become advocates for individual grant applicants; communicate with or appear before any federal agency on behalf of a nonprofit organization; or draft grant proposals or applications. Furthermore, U.S. Attorneys were told that they are authorized to assist EOWS in monitoring the performance of the project under the grant to ensure federal grant dollars are not misused, but they are not to act on EOWS' behalf. The guidelines stated that U.S. Attorneys are to inform EOWS of site implementation problems or irregularities to enable EOWS to take appropriate action.
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Ninety-three U.S. Attorneys serve 94 judicial districts (the same U.S. Attorney serves the District of Guam and the District of the Northern Mariana Islands) under the direction of the Attorney General. Among other things, the Attorney General expects U.S. Attorneys to lead or be involved with the community in preventing and controlling crime including efforts to secure Department of Justice (DOJ) grant funds and work with grantees. This report provides information about the guidance U.S. Attorneys are given in carrying out their responsibilities with regard to DOJ grants. It makes recommendations to assess compliance with guidance and to reduce the potential for conflicts of interest. U.S. Attorneys' grant activities are guided by legal and ethical considerations. General guidelines established by the Attorney General in 1994 and revised in 2001 outline how U.S. Attorneys and their staff can be involved in their community's crime prevention and control efforts, including DOJ grant activities. Last year, DOJ issued guidance in response to U.S. Attorneys' questions about their role in relation to two DOJ grant programs--Project Safe Neighborhoods and Weed and Seed. In addition, through its Executive Office for U.S. Attorneys (EOUSA), DOJ provided training on ethical considerations in dealing with grant applicants and grantees under both grant programs. Although EOUSA has an evaluation program to assess and oversee the overall operations of each U.S. Attorney's Office, the evaluations are not designed to assess whether U.S. Attorneys and their staffs are following the recently established guidelines. Without a mechanism to make this assessment, EOUSA does not have assurance that DOJ guidance is adequately understood, has reached all those who are covered by it, and is correctly applied. In addition, federal regulations and procedures call for systematic financial disclosure reporting to facilitate the review of possible conflicts of interest and ensure the efficient and honest operation of the government. However, while GAO did not identify any incidences of conflicts of interest, certain individuals--staff in U.S. Attorneys Offices that work with grantees and nonfederal members of committees that are appointed by each U.S. Attorney to, among other things, assess the merits of grant proposals--are not required to disclose whether they are free from actual or apparent conflicts of interest. Based on the merits of GAO's work, DOJ officials stated that they would issue a directive to require members of these committees to sign a self-certified conflict of interest statement that is to be held on file subject to DOJ grant monitoring.
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The process for developing and issuing RAIs begins with either pre- application activities or the submission of an application (see fig. 1), and is generally consistent across the NRC offices that use RAIs. Pre-application activities occur before NRC receives an application; these activities may include a meeting between the licensee and NRC staff, or communication between parties via phone or e-mail. NRC offices assign each licensee a project manager or license reviewer who is responsible for overseeing the licensing process and coordinating with review staff. Pre-application activities provide an opportunity for licensees to ask clarifying questions of NRC staff and for NRC staff to prepare for the review of an incoming application. Not all license applications or NRC offices include this step, as pre-application activities vary based on the complexity of the application. All licensing actions across NRC offices, however, include the submission of an application. After NRC receives an application, officials may conduct an acceptance review to ensure there is enough information contained in the application to perform a technical review. NRC considers submitted applications "tendered" until the acceptance review is complete. If it is found during acceptance review that the application does not contain sufficient information, the application may remain tendered while the applicant submits supplemental information, or may be denied. The process of developing and issuing RAIs begins after either the submission of the application or acceptance review and culminates in a licensing decision. NRC reviewers have to make a conclusion that what the licensee is proposing provides a reasonable assurance of safety; this allows reviewers to complete a safety evaluation report and conduct both a technical review and a regulatory review. If NRC's reviewers are able to arrive at a conclusion with the information that the licensee provided in the application, then there is no need for NRC to issue an RAI. However, if there are areas where the information the licensee has submitted appears incomplete, then NRC staff will address these areas by developing and preparing RAIs for management review. After management review, NRC issues RAIs to licensees. Prior to issuance, NRC staff may also send draft RAIs to the licensee and reach out to the licensee via telephone to ensure that the information that NRC needs is understood and that the RAI language is clear. In such cases, NRC would issue the formal RAIs after this outreach. The licensee is then expected to submit responses to the RAIs within a specified period of time, typically within 30 or up to 60 days. The NRC review team may develop and issue additional, follow-up questions to the original RAIs--also known as "additional rounds"--if the review staff requires more information than the licensee's initial response contained. When the NRC review team has the information needed to ensure a fully informed, technically correct, and legally defensible decision, it will either approve or deny the license application. Each NRC office that issues RAIs has its own guidance, and the Office of Nuclear Reactor Regulation, the Office of New Reactors, and some divisions in the Office of Nuclear Material Safety and Safeguards have efforts underway to update guidance intended to improve oversight of RAIs. Guidance for developing and issuing RAIs is generally the same across individual offices that issue them but also reflects each office's own specific responsibilities and procedures. NRC offices that issue RAIs each have their own guidance, and some offices have been updating their guidance over the past year in an effort to improve the RAI process. This updated guidance includes an increased focus on ensuring staff compliance with the process through managerial review. The Office of Nuclear Reactor Regulation's guidance on RAIs is contained in an office instruction document for license amendment-review procedures called LIC-101. In April 2016, the Office of Nuclear Reactor Regulation issued an expectations memorandum to staff intended to provide additional guidance and clarity to expectations addressed in existing office guidance and practice. For example, the expectations memorandum elevates the issuance of additional questions on the same topic to divisional management to discuss the need for an additional round of RAIs before submitting them to a licensee. The memorandum also calls for the branch chief to review the draft safety evaluation report and confirm that the holes in the draft report align with RAIs. This is a change from the version of LIC-101 that officials had been using. NRC incorporated changes contained in the April 2016 expectations memorandum into a new edition--version five--of LIC-101 in January 2017. The Office of Nuclear Reactor Regulation's management also issued a memorandum in August 2016 to all operating reactor licensees that stated, among other things, that staff will actively seek opportunities to conduct an on-site audit or a public meeting in order to reduce the number of rounds of RAIs. In the Office of New Reactors, office instruction document NRO-REG-101 provides information to guide staff in the processing of RAIs. In 2008, the office also produced a detailed pamphlet on the RAI process--called a job aid--intended to help standardize office practices, ensure proper focus in the reviews, and enhance efficiency. In October 2016, management in the Office of New Reactors issued a memorandum to staff on the effective use of RAIs in new reactor licensing reviews. According to the memorandum, all RAIs in the Office of New Reactors will be reviewed up through division management, and the office director will review samples of RAIs in an effort to keep informed of issues deemed high priority identified in reviews. This memorandum accompanied an updated RAI job aid to replace the earlier version, as well as two other job aids focused on carrying out audits and confirmatory analysis, in which NRC staff conduct an independent assessment of a licensee's calculation. The updated RAI job aid contains some modifications to the text from the 2008 version that include, for example, instruction to division management to audit draft RAIs to assure conformance with office expectations for quality. RAI guidance for the Office of Nuclear Material Safety and Safeguards' Division of Spent Fuel Management is contained in an instruction document referred to as SFM-3. The division issued a new instruction document in August 2016--referred to as Office Instruction 26--that is intended to provide management expectations and guidance to employees. The document calls for staff to follow the existing division guidance for RAIs and outlines new guidance that staff are required to follow as well. This new guidance includes preparing, for supervisory review, a draft safety evaluation report showing the regulatory holes that call for RAIs. The new guidance also calls for notifying management of additional rounds of RAIs and receiving management concurrence before issuance. The office's Division of Material Safety, State, Tribal and Rulemaking Programs relies on guidance contained in Volume 20 of a multi-volume series of guidance documents on materials licenses called NUREG-1556. Volume 20 provides guidance on administrative licensing procedures and, according to officials, is currently being updated along with the other volumes in the series. Officials told us that Volume 20 is expected to be published as a draft report for comment in spring 2017 and published as a final report sometime that year. According to officials, procedures to process RAIs in the Division of Decommissioning, Uranium Recovery, and Waste Programs were first issued in 2000. These procedures include the requirement that a draft safety evaluation report be used to support RAIs, calls for RAIs to refer to specific portions of regulation, guidance, or both when issued to licensees, and encourages staff to conduct telephone conferences to discuss technical issues and possible resolution. The instruction document covers licensing as it applies to all project managers, technical reviewers, and staff within the Division of Decommissioning, Uranium Recovery, and Waste Programs. According to officials, the most recent revision to the procedures in 2009 did not include changes to specific procedures guiding the development of RAIs. In addition to guidance, NRC's offices have practices in place intended to ensure management and staff continue to focus on improving RAIs. Officials from each of the NRC offices that issue RAIs said that their management is continually focused on improving RAIs. For example, officials from the Office of New Reactors told us there are plans to assess the revised process for developing and issuing RAIs throughout upcoming license reviews to look for additional opportunities for improvement. In the Office of Nuclear Material Safety and Safeguards, officials told us that RAIs receive attention from the management of all divisions and that office leadership is working with licensee representatives to identify ways to improve the RAI process. Officials also told us that because most of the staff are involved in the process to develop and issue RAIs, it is an essential component of their work. As a result, their work on RAIs will factor into their performance review. According to officials, NRC's standards for employee assessments are written at a general level for almost all staff at NRC. Technical staff are evaluated against four standards: planning and implementation, problem solving and analysis, communication, and professional development and organizational effectiveness. According to NRC officials, the individual guidance developed by each office reflects the office's own responsibilities and procedures. Guidance may differ across offices when a license application requires review by multiple technical branches; one office may issue RAIs to the licensee as they are completed by a technical branch, while another may wait to issue RAIs until all relevant technical branches have completed the initial review. For example, the Fuel Cycle Licensing Review Handbook used by the Division of Fuel Cycle Safety, Safeguards and Environmental Review in the Office of Nuclear Material Safety and Safeguards notes that if the same regulatory issue occurs in more than one technical section, the issue should be addressed in a general section rather than multiple times in each section. The handbook also encourages reviewers to issue one set of RAIs, as opposed to multiple sets. Guidance on the response times given to licensees also differs among NRC offices. Consequently, the Office of Nuclear Reactor Regulation's guidance document, LIC-101, calls for licensees to respond to RAIs in 30 days or within a timeframe specified by the review team. Updates intended to align LIC-101 with the office's expectations memorandum include guidance for a default response period of 30 days, an extended response period of 60 days, and approval for a longer response period if the review schedule allows. However, the Office of Nuclear Material Safety and Safeguards' Fuel Cycle Licensing Review Handbook calls for the project manager to set a response date of 30 to 60 days. The Office of New Reactors' guidance for RAIs references NRC regulations calling for responses within 30 days of the date of the request, and states that applicants will be encouraged to respond to questions once they have prepared their responses, rather than respond to packages of multiple questions on a set date. The Office of New Reactors' guidance also requires that officials use email to transmit RAIs. In addition, guidance on the level of management's review given to RAIs varies by NRC office. RAIs issued for combined license applications and early site permits in the Office of New Reactors are automatically sent to branch managers and are reviewed by both division management and the Office of General Counsel. Guidance for the Office of Nuclear Reactor Regulation states that RAIs should be reviewed by branch managers. It also calls for branch managers and staff to discuss the need for a second round of RAIs and whether alternative methods to obtain information-- such as a public meeting or an audit--may be more effective and efficient. In the Office of Nuclear Material Safety and Safeguards, the level of management review is determined by the guidance of each division. For example, in the Division of Spent Fuel Management, RAIs must be submitted to branch management for review, and divisional management must be notified of additional rounds of RAIs. Nevertheless, based on our review of the guidance, the guidance is generally the same across the offices. Specifically, guidance for the different offices describes similar processes for issuing RAIs, including the reason for issuing an RAI, the procedures undertaken to develop RAIs, and time frames during the process. Guidance for all offices states that RAIs should be used to gain the information needed for making a licensing decision, and due to recent updates, most office guidance also states that RAIs be used to fill gaps in a safety evaluation report. The process for developing and issuing an RAI is also similar across all offices, and includes: (1) the development of RAIs by technical reviewers based on information contained in an application, (2) the review of proposed RAIs by management, (3) the issuance of RAIs to licensees for response, and (4) the incorporation of information received through RAIs into the safety evaluation report and final licensing decision. Additionally, guidance across all offices includes direction on setting time frames for issuing RAIs and receiving responses from licensees. NRC offices do not track the number of RAIs and do not know how many they have issued over the past 5 years, and there is no legal requirement for NRC to track the number of RAIs it issues. According to NRC officials and some licensees we interviewed, certain activities and circumstances often elicit RAIs, such as complex licensing actions and activities for which regulations are unclear. NRC offices that issue RAIs do not specifically track the number of RAIs that they issue, and there is no legal requirement for the agency to track the number of RAIs. An official from the Office of New Reactors estimated that a combined license application could have 1,000 RAIs, while a license amendment request could have few, if any, RAIs. Officials added that the number of RAIs issued in a given review varies depending on the complexity and size of the requested licensing action. Officials also said the number of RAIs per year depends on how many license applications the office receives; it can take 5 years or more to review and make a decision on a combined license application. In contrast, for plants that are licensed, officials said that NRC typically reviews 20 to 25 license amendments per year. According to officials, the Office of Nuclear Reactor Regulation reviews about 700 licensing actions per year, and officials also estimated that on average, each licensing action has 5 to 10 RAIs. Officials added that the Office of Nuclear Material Safety and Safeguards reviews about 1,800 license applications or amendments per year, with varying numbers of RAIs per action. NRC officials cannot say with certainty how many RAIs they have issued over the past 5 years, in part because the current internal tracking systems used by the Office of Nuclear Reactor Regulation and the Office of Nuclear Material Safety and Safeguards do not track the number of RAIs. Officials in the Office of Nuclear Reactor Regulation told us that they do not track the number of RAIs because RAIs are only one component in the broader licensing process. Instead, officials said, they focus more on whether the office is carrying out licensing activities in an efficient, effective manner. The Office of New Reactors has an internal tracking system, called eRAI, which is specifically configured to manage RAIs and is capable of tracking the number of RAIs per year. However, according to an official, the office does not use eRAI to track the number of RAIs. Instead, the Office of New Reactors uses eRAI to monitor RAIs associated with applications that can be up to 12,000 pages long, identify related questions, and track RAIs by regulatory issue area. Some NRC offices have been working to update their internal tracking systems for licensing actions. These updates are intended to, among other things, allow officials to better track milestone dates in the licensing action process, such as the date that an RAI response is due. For example, the Office of Nuclear Reactor Regulation is changing to a new system called the Replacement Reactor Program System, which tracks major milestones within each of the licensing reviews. Unlike the previous system, the new system can track multiple rounds of RAIs. In addition, according to NRC officials, the Division of Spent Fuel Management in the Office of Nuclear Material Safety and Safeguards is moving to a web- based tracking system from a system that only tracked milestone dates. The new system is intended to track RAIs and to help identify issues early in the process that may influence the timeliness of the review. Elsewhere in the Office of Nuclear Material Safety and Safeguards, officials in the Division of Fuel Cycle Safety, Safeguards and Environmental Review told us that they are upgrading their tracking system and will use the same one as the Division of Spent Fuel Management. Further, the office's Division of Material Safety, State, Tribal, and Rulemaking Programs is also in the process of enhancing its tracking system by streamlining the process to allow the staff to issue licensing actions directly from the system. NRC officials told us that tracking the number of RAIs is challenging and may not reflect the role that RAIs play in the licensing process. According to officials, counting the number of RAIs may be challenging because different reviewers can refer to an RAI as a single question, or as a letter to a licensee containing several questions. Officials also told us that the number of RAIs does not capture the variance in size and complexity of RAIs; for example, NRC may request simple editorial changes that require little effort and time on the part of the licensee, or RAIs may request additional technical analyses that require more effort and time to address. NRC officials told us that receiving RAIs as part of a licensing action is not unusual, and officials and licensees we interviewed said that RAIs are often issued for the following activities and circumstances: complex licensing actions, activities for which regulations are unclear, new activities, and when the initial application does not contain adequate information or detail. Complex licensing actions: NRC officials told us that licensing actions and the associated RAIs vary greatly in complexity, and the number of RAIs issued may vary depending on the complexity of the review. Some actions are simple and may take 40 to 80 hours to review, while others are more complex and may take more than 5,000 hours for review. Many licensees we interviewed stated that they would expect to receive more RAIs for more complex licensing actions. For example, a licensee we interviewed told us that most of the RAIs the company receives are related to technical specifications, which are NRC's standardized requirements for its approved reactor types. Officials from this licensee said they may receive additional questions for technical specifications and issues that are plant-specific, such as differences in equipment when compared to other plants with the same reactor type, and more detailed drawings and information about the plant's equipment. Conversely, another licensee told us that a simple license amendment request for a name change on a license did not elicit any RAIs. Unclear regulatory guidance: Some licensees we interviewed also said that they would expect to receive more RAIs for activities for which regulations are unclear and may require increased coordination between NRC and the licensee. One licensee described an instance where guidelines pertaining to the licensing action were not clear, and it took several years and additional RAIs to try to reach agreement with NRC. NRC officials told us that licensees are most likely to receive RAIs in cases where they request an exception to regulatory guidance. NRC officials and licensees said that a request for an exception can occur, for example, when a licensee asks NRC for a license to use a construction material that is not referenced in regulatory guidance. Further, NRC officials said that applications for new reactors typically elicit RAIs, particularly when technology proposed by licensees does not align with regulations, such as the shift from analog instrumentation and controls used in most operating reactors to digital instrumentation and controls proposed for new reactors. First-of-its-kind activities: NRC officials told us that a new type of licensing action may require more RAIs. Half of the licensees we interviewed told us that they received RAIs when requesting a license for an activity that is the first of its kind or is setting a precedent. For example, a licensee stated that the company received RAIs for a license amendment that was one of the first submitted to NRC for a particular activity. Quality of the application: Officials told us that the number of RAIs associated with each license application often depends on the quality of the application. For example, a license application or response to an RAI that does not contain adequate information can result in more than one round of RAIs. Conversely, an application that is comprehensive and addresses all of the requirements outlined in NRC guidance is less likely to receive RAIs, and if RAIs are issued, they are less likely to receive more than one round of RAIs. Some licensees told us that they may receive RAIs for issues that may have been addressed in another application or, as one licensee stated, were otherwise obvious; licensees noted that this was likely because NRC wanted that information included as part of the docket. The nongeneralizable sample of licensing actions that we reviewed reflected several different types of licensing actions and contained RAIs that varied in format. We reviewed three licensing actions that contained RAIs--each one representing one of the three offices that issue RAIs. One action was for a license renewal, another was for a license amendment request, and the third was for a relief request. One of the licensing actions received four RAIs sent in two separate e-mails several weeks apart. NRC officials described these as "official" RAIs, which they followed with an email identifying apparent editorial errors in the application. In another example, NRC sent a licensee two draft RAIs in advance of the formal RAI submission. With regard to the types of information that NRC asked in its RAIs, one RAI asked for clarification on technical specifications the licensee used to support its request. Another asked for specific information about the equipment used, including name and model number, as well as details concerning maintenance. In the third example, NRC asked for clarification about testing completed for a particular piece of equipment in order to approve a license renewal. Because this was a nongeneralizable sample, our results are not generalizable to all licensing actions but provide illustrative examples of the types of information included in RAIs. Many of the licensees we interviewed were generally satisfied with the current process to develop and issue RAIs and identified certain strengths. NRC officials and licensees also identified two common weaknesses in the process to develop and issue RAIs, weaknesses that NRC has made recent efforts to address. Many of the licensees we interviewed expressed satisfaction with NRC's current process to develop and issue RAIs and acknowledged the role of RAIs in the licensing process. Some said that they viewed them as a natural part of interacting with a regulator. For example, one licensee said that RAIs are needed to allow for formal communication between NRC and licensees on issues that may arise again in future licensing actions. Some licensees said that the experience with NRC had been positive, and another stated that the RAI process worked well for completing licensing actions. Licensees identified NRC guidance as a strength of the RAI process. Most licensees we interviewed told us that they found NRC guidance to be helpful; such guidance includes regulatory documents, procedural documents, and memorandums. For example, the majority of the licensees we interviewed that worked with the Office of Nuclear Reactor Regulation said that the office's April 2016 expectations memorandum was a positive step by the agency and an improvement in the RAI process. Specifically, one licensee told us that the policy of ensuring that RAIs ask for information needed to fill a gap in the safety evaluation report--as outlined in the memorandum--was an appropriate procedure. Some licensees also said that they found it particularly useful when NRC reviewers identified for them specific passages of a guidance document relevant to the licensing action or RAI. Licensees we interviewed also identified NRC's openness to communication and engagement as a strength of the RAI process. Most licensees we interviewed said that communication with NRC staff during the process to develop and issue RAIs was helpful, including pre- application meetings, informal interactions via phone or e-mail, and coordination with project managers. As mentioned above, pre-application meetings provide an opportunity for the licensee and NRC to clarify potential issues or questions before the initial license application is submitted and RAIs are issued. Of those licensees we interviewed who participated in a pre-application meeting, the majority said that the meeting helped to either resolve or clarify issues before the acceptance review. Some licensees said that pre-application meetings were particularly helpful when NRC staff assigned to the review participated, with one licensee stating that it was critical for the staff member who develops RAIs to be present. A licensee also stated that participating in a pre-application meeting significantly reduced the number of RAIs issued later in the process. Additionally, some licensees told us that informal interactions via phone or e-mail with NRC staff also helped to resolve issues quickly, as opposed to clarifying or resolving issues through formal correspondence. Similarly, several licensees noted that the active engagement of project managers in the review process improved the efficiency of the review and the quality of RAI questions. For example, officials from one licensee said that in recent years NRC's project manager e-mailed draft RAIs to them, which allows the licensee to review them in advance, ask clarifying questions, and propose response times. In another case, a licensee told us that a project manager included divisional management in a conference call to discuss RAIs, which resulted in NRC withdrawing some RAIs. In addition, several licensees we interviewed noted NRC's responsiveness to industry operational issues and time constraints in the review process as a strength. Several licensees described instances in which operational issues or time constraints required flexibility from NRC, and they told us that NRC worked with them to ensure uninterrupted operation or service. Some licensees told us that NRC extended the response time required for RAIs when licensees asked for additional time. In another instance, a licensee described a case where NRC expedited the review process to prevent a disruption in patient medical care that relies on radiological material. An industry interest group representative we interviewed told us that both industry and NRC should take steps to ensure that the recent improvements to the process to develop and issue RAIs are maintained going forward. Licensees and NRC officials that we interviewed identified weaknesses in the RAI process, including two commonly mentioned ones: (1) a gap between NRC's expectations and licensees' understanding of what should be included in a license application and (2) staff departure from guidance that leads to RAI questions that appear to be redundant or beyond the scope of the review. Gap in expectations and understanding: NRC officials and licensees whom we interviewed told us that a gap between NRC's expectations and licensees' understanding of license application content can be a weakness of the RAI process. Both NRC officials and licensees stated that inconsistencies may exist between NRC's expectations and licensees' understanding of what should be included in a licensing application, especially in cases of complex or new activities. According to NRC officials, such inconsistencies can lead to reviewers' using RAIs to gather the information needed to make a licensing decision. NRC officials said that varying levels of understanding regarding expectations may result in confusion for licensees and may incentivize them to exert fewer resources when developing an initial application. According to one NRC official, licensees may submit an application containing enough technical information to pass the acceptance review with the understanding that NRC will develop RAIs to address unresolved issues in the application. Officials added that the standard and level of detail required for issuing a licensing action is more stringent than that for an acceptance review. For half of the licensees, expectations have become clearer in the last several years as a result of increased communication with NRC. However, several licensees we interviewed identified unclear or inconsistent expectations as a current concern. For example, one licensee described a case where a license amendment received RAIs on a new activity for which NRC did not have permanent guidance in place. The licensee rescinded the license amendment request rather than expend the resources needed to answer RAIs according to NRC's interim guidance. The Office of New Reactors, the Office of Nuclear Reactor Regulation, and the Division of Spent Fuel Management in the Office of Nuclear Material Safety and Safeguards have made recent efforts to address inconsistencies between NRC's expectations and licensees' understanding by emphasizing greater communication between review staff and licensees. The Office of New Reactors placed more emphasis on the pre-application period in which the NRC review team works with licensees to resolve questions and potential issues that otherwise may necessitate formal RAIs. In addition, through its April 2016 expectations memorandum, the Office of Nuclear Reactor Regulation's management is encouraging project managers and review staff to engage in increased communication with licensees to resolve questions, in addition to placing increasing emphasis on acceptance review. Division of Spent Fuel Management leadership has also made recent efforts to encourage more frequent conversations through updated guidance. Some licensees we interviewed recognized NRC's efforts, and one licensee told us that NRC officials have recently been more receptive to discussing RAIs over e- mail, a practice which has helped to make the process more efficient. It is too soon to tell whether these initiatives will address the gap in expectations between NRC and licensees in the long term. Staff departure from guidance: NRC officials and licensees both told us that some staff may depart from guidance by issuing redundant or unrelated RAIs, which may require additional time and resources for the licensee to address. According to officials and licensees, an RAI is redundant if the information requested is contained in or could be inferred from information contained in the original license application, other correspondence, or a response to a previous RAI. Likewise, an RAI is unrelated to the application if the information requested is not necessary for making a regulatory decision or filling a gap in the safety evaluation report. NRC officials said that ensuring staff adherence to internal guidance regarding appropriate RAIs can be challenging, and many of the licensees we interviewed identified the influence of individual staff reviewers as a weakness of the process to develop and issue RAIs. Half of the licensees we interviewed said that they noticed questions that were either redundant or seemed to appear unrelated to a regulatory requirement, but which may have been intended to satisfy the individual reviewer's curiosity. Some licensees also said that inexperienced reviewers may ask redundant questions or revisit issues that have already been resolved and codified in the licensing document through prior communication with NRC. According to licensees, redundant or out- of-scope RAIs create additional work for them, and most of the licensees interviewed identified the impact of RAIs on resources as a related weakness of the RAI process. For example, one licensee reported receiving questions outside of the scope of the license application that required additional analyses and work--nearly doubling the length of the review and costing the licensee almost double the amount in fees budgeted for the review. In an effort to mitigate concern over the influence of individual staff reviewers, the Office of New Reactors, Office of Nuclear Reactor Regulation, and the Division of Spent Fuel Management in the Office of Nuclear Material Safety and Safeguards recently updated guidance and introduced more management review of RAIs. As mentioned above, updated NRC guidance includes an increased focus on ensuring staff compliance with the RAI process. For example, the offices and division cited above have recently updated internal guidance to clarify the expectation that staff reviewers use RAIs to fill holes in a draft safety evaluation report. Guidance updated by all three offices also includes calls for elevating questions at least to divisional management: in the Office of Nuclear Reactor Regulation and the Division of Spent Fuel Management, all second-round RAIs require division management approval; and in the Office of New Reactors, all RAIs require divisional management approval and the office director reviews samples of RAIs on high priority issues. Half of the licensees we interviewed expressed that these efforts represent an improvement in the RAI process. Several licensees specifically described the expectations memorandum issued by the Office of Nuclear Reactor Regulation as an improvement, and officials from one licensee noted that they have seen progress with NRC's management intervening when potential unnecessary questions are identified. Because these efforts were made recently, it is too early to assess the effectiveness of such approaches to mitigating the influence of individual staff reviewers. We provided a draft of this product to NRC for comment. NRC generally agreed with our findings and provided technical comments, which we incorporated as appropriate. NRC's comments are reprinted in Appendix I. 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 appropriate congressional committees and the Chairman of the Nuclear Regulatory Commission. 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) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the individual named above, Hilary Benedict (Assistant Director), Bridget Grimes, and Rachel Rhodes made key contributions to this report. Tim Bober, Kevin Bray, Antoinette Capaccio, Cindy Gilbert, Timothy M. Persons, and Dan Royer also made important contributions.
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NRC issues RAIs to obtain information in licensing requests to ensure that officials can make a fully informed, technically correct, and legally defensible regulatory decision. RAIs are necessary when the information was not included in an applicant's initial submission, is not contained in any other docketed correspondence, or cannot reasonably be inferred from the information available to agency staff. NRC's use of RAIs has come under scrutiny in the past. For example, NRC's Inspector General, in a 2015 report, cited concerns about RAIs, including the amount of time it took to complete the RAI process and the resources required to do so. GAO was asked to review how NRC uses RAIs. This report examines (1) NRC's guidance for developing and issuing RAIs and how it differs across offices; (2) how many RAIs NRC has issued over the past 5 years and the kinds of activities that elicit RAIs; and (3) strengths and weaknesses of NRC's processes to develop RAIs identified by NRC and licensees and the actions NRC is taking to address concerns. GAO examined agency guidance documents and selected licensing actions containing RAIs. GAO interviewed NRC officials and selected licensees. GAO randomly selected licensing actions and licensees from a sample of recent licensing actions that included cases from each of NRC's RAI-issuing offices. At the Nuclear Regulatory Commission (NRC), individual offices that issue requests for additional information (RAI) each have their own guidance that is generally the same across the offices. NRC offices have some efforts underway to update their guidance. These efforts are intended to improve oversight of RAIs and include an increased focus on oversight of RAIs and on staff compliance through managerial review. For example, one of the offices that issues RAIs calls for management to discuss the need to send a licensee additional questions on the same topic before doing so. NRC offices that issue RAIs do not specifically track the number of RAIs that they have issued and do not have a comprehensive accounting for the last 5 years, although one office has a system capable of tracking the number of RAIs. Information from NRC officials and licensees GAO interviewed suggests that certain activities and circumstances often elicit RAIs. There is no legal requirement for the agency to track the number of RAIs; however, offices are updating their internal tracking systems in order to improve information on their licensing activities. Receiving RAIs is not unusual, particularly for certain activities such as complex licensing actions and activities for which regulations are unclear, according to officials. In such cases, increased coordination between NRC and the licensee may be required to resolve certain issues. Licensees GAO interviewed were generally satisfied with the RAI process, identifying strengths and two common weaknesses, and NRC has made recent efforts intended to address these weaknesses. Some licensees noted that they see RAIs as a natural part of interacting with a regulator and identified NRC's openness to communication and engagement as a strength of the RAI process. Two common weaknesses that licensees cited are a gap between NRC's expectations and licensees' understanding of what to include in their applications, and staff departure from guidance. NRC offices have made recent efforts to address these issues. For example, to address inconsistencies between NRC's expectations and licensees' understanding, NRC offices are emphasizing greater communication between review staff and licensees. GAO is not making any recommendations. NRC generally agreed with GAO's findings.
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Flaws in software code that could cause a program to malfunction generally result from programming errors that occur during software development. The increasing complexity and size of software programs contribute to the growth in software flaws. For example, Microsoft Windows 2000 reportedly contains about 35 million lines of code, compared with about 15 million lines for Windows 95. As reported by the National Institute of Standards and Technology (NIST), based on various studies of code inspections, most estimates suggest that there are as many as 20 flaws per thousand lines of software code. While most flaws do not create security vulnerabilities, the potential for these errors reflects the difficulty and complexity involved in delivering trustworthy code. By exploiting software vulnerabilities, hackers and others who spread malicious code can cause significant damage, ranging from Web site defacement to taking control of entire systems, and thereby being able to read, modify, or delete sensitive information, destroy systems, disrupt operations, or launch attacks against other organizations' systems. Between 1995 and the first half of 2003, the CERT Coordination Center (CERT/CC) reported 11,155 security vulnerabilities that resulted from software flaws. Figure 1 illustrates the dramatic growth in security vulnerabilities over these years. The growing number of known vulnerabilities increases the number of potential attacks created by the hacker community. As vulnerabilities are discovered, attackers may attempt to exploit them. Attacks can be launched against specific targets or widely distributed through viruses and worms. Worms and viruses are commonly used to launch denial-of-service attacks, which generally flood targeted networks and systems with so much transmission of data that regular traffic is either slowed or completely interrupted. Such attacks have been utilized ever since the groundbreaking Morris worm, which brought 10 percent of the systems connected to Internet systems to a halt in November 1988. In 2001, the Code Red worm used a denial-of-service attack to affect millions of computer users by shutting down Web sites, slowing Internet service, and disrupting business and government operations. This type of attack continues to be used by recent worms, including Blaster, which I will discuss further later in my testimony. The sophistication and effectiveness of cyber attack have steadily advanced. Because automated tools now exist, CERT/CC has noted, attacks that once took weeks or months to propagate over the Internet now take just hours, or even minutes. Code Red achieved an infection rate of over 20,000 systems within 10 minutes, foreshadowing more damaging and devastating attacks. Indeed, earlier this year, the Slammer worm, which successfully attacked at least 75,000 systems, became the fastest computer worm in history, infecting more than 90 percent of vulnerable systems within 10 minutes. Frequently, skilled hackers develop exploitation tools and post them on Internet hacking sites. These tools are then readily available for others to download, allowing even inexperienced programmers to create a computer virus or to literally point and click to launch an attack. According to a NIST publication, 30 to 40 new attack tools are posted to the Internet every month. The threat to systems connected to the Internet is illustrated by the increasing number of computer security incidents reported to CERT/CC. This number rose from just under 10,000 in 1999 to over 52,000 in 2001, to about 82,000 in 2002, and to over 76,000 for the first and second quarters of 2003. And these are only the incidents that are reported. According to the Director of CERT/CC, as much as 80 percent of actual incidents go unreported, in most cases because the organization was either unable to recognize that its systems had been penetrated (because there were no indications of penetration or attack) or because it was reluctant to report an incident. Figure 2 illustrates the number of incidents reported to CERT/CC from 1995 through the second quarter of 2003. According to CERT/CC, about 95 percent of all network intrusions could be avoided by keeping systems up to date with appropriate patches; however, such patches are often not quickly or correctly applied. Maintaining current patches is becoming more difficult, as the length of time between the awareness of a vulnerability and the introduction of an exploit is shrinking. For example, the Blaster worm was released almost simultaneously with the announcement of the vulnerability it exploited. Successful attacks on unpatched software vulnerabilities have caused billions of dollars in damage. Following are examples of significant damage caused by worms that could have been prevented had available patches been effectively installed: In September 2001 the Nimda worm appeared, reportedly infecting hundreds of thousands of computers around the world, using some of the most significant attack methods of Code Red II and 1999's Melissa virus that allowed it to spread widely in a short amount of time. A patch had been made publicly available the previous month. On January 25, 2003, Slammer triggered a global Internet slowdown and caused considerable harm through network outages and other unforeseen consequences. As we discussed in our April testimony, the worm reportedly shut down a 911 emergency call center, canceled airline flights, and caused automated teller machine (ATM) failures. According to media reports, First USA Inc., an Internet service provider, experienced network performance problems after an attack by the Slammer worm, due to a failure to patch three of its systems. Additionally, the Nuclear Regulatory Commission reported that Slammer also infected a nuclear power plant's network, resulting in the inability of the computers to communicate with each other, disrupting two important systems at the facility. In July 2002, Microsoft had released a patch for its software vulnerability that was exploited by Slammer. Nevertheless, according to media reports, some of Microsoft's own systems were infected by Slammer. In addition to understanding the threat posed by security vulnerabilities, it is useful to understand the process of vulnerability identification and response. In general, when security vulnerabilities are discovered, a process is initiated to effectively address the situation through appropriate reporting and response. Typically, this process begins when security vulnerabilities are discovered by software vendors, security research groups, users, or other interested parties, including the hacker community. When a software vendor is made aware of a vulnerability in its product, the vendor typically first validates that the vulnerability indeed exists. If the vulnerability is deemed critical, the vendor may convene a group of experts, including major clients and key incident-response groups such the Federal Computer Incident Response Center (FedCIRC) and CERT/CC, to discuss and plan remediation and response efforts. After a vulnerability is validated, the software vendor develops and tests a patch and/or workaround. A workaround may entail blocking access to or disabling vulnerable programs. The incident response groups and the vendor typically prepare a detailed public advisory to be released at a set time. The advisory often contains a description of the vulnerability, including its level of criticality; systems that are affected; potential impact if exploited; recommendations for workarounds, and Web site links where a patch (if publicly available) can be downloaded. Incident-response groups as well as software vendors may continue to issue updates as new information about the vulnerability is discovered. When a worm or virus is reported that exploits a vulnerability, virus detection software vendors also participate in the process. Such vendors develop and make available to their subscribers downloadable "signature files" that are used, in conjunction with their software, to identify and stop the virus or worm from infecting systems protected by their software. The Organization for Internet Safety (OIS), which consists of leading security researchers and vendors, recently issued a voluntary framework for vulnerability reporting and response. Recently, two critical vulnerabilities were discovered in widely used commercial software products. The federal government and the private- sector security community took steps, described below in chronological order, to collaboratively respond to the threat of potential attacks against these vulnerabilities. Last Stage of Delirium Research Group discovered a security vulnerability in Microsoft's Windows Distributed Component Object Model (DCOM) Remote Procedure Call (RPC) interface. This vulnerability would allow an attacker to gain complete control over a remote computer. On June 28, 2003, the group notified Microsoft about the RPC vulnerability. Within hours of being notified, Microsoft verified the vulnerability. On July 16, Microsoft issued a security bulletin publicly announcing the critical vulnerability and providing workaround instructions and a patch. The following day, CERT/CC issued its first advisory. Nine days after Microsoft's announcement, on July 25, Xfocus, an organization that researches and demonstrates security vulnerabilities, released code that could be used to exploit the vulnerability. On July 31, CERT/CC issued a second advisory reporting that multiple exploits had been publicly released, and encouraged all users to apply the patches. On August 11, 2003, the Blaster worm (also known as Lovsan) was launched to exploit this vulnerability. When the worm is successfully executed, it can cause the operating system to crash. Experts consider Blaster, which affected a range of systems, to be one of the worst exploits of 2003. Although the security community had received advisories from CERT/CC and other organizations to patch this critical vulnerability, Blaster reportedly infected more than 120,000 unpatched computers in the first 36 hours. By the following day, reports began to state that many users were experiencing slowness and disruptions to their Internet service, such as the need to frequently reboot. The Maryland Motor Vehicle Administration was forced to shut down, and systems in both national and international arenas have also been affected. The worm was programmed to launch a denial-of-service attack on Microsoft's Windows Update Web site www.windowsupdate.com (where users can download security patches) on August 16. Microsoft preempted the worm's attack by disabling the Windows Update Web site. On August 14, two variants to the original Blaster worm were released. Federal agencies reported problems associated with these worms to FedCIRC. On August 18, Welchia, a worm that also exploits this vulnerability, was reported. Among other things, it attempts to apply the patch for the RPC vulnerability to vulnerable systems, but reportedly creates such high volumes of network traffic that it effectively denies services in infected networks. Media reports indicate that Welchia affected several federal agencies, including components of the Departments of Defense and Veterans Affairs. The federal government's response to this vulnerability included coordination with the private sector to mitigate the effects of the worm. On July 17, FedCIRC issued an advisory to encourage federal agencies to patch the vulnerability, followed by several advisories from the Department of Homeland Security (DHS). The following week, on July 24, DHS issued its first advisory to heighten public awareness of the potential impact of an exploit of this vulnerability. On July 28, on behalf of the Office of Management and Budget (OMB), FedCIRC requested that federal agencies report on the status of their actions to patch the vulnerability. From August 12 to August 18, DHS's National Cyber Security Division hosted several teleconferences with federal agencies, CERT/CC, and Microsoft. Figure 3 is a timeline of selected responses to the Blaster Internet worm. Based on an analysis of the agencies reported actions, as requested on July 28, FedCIRC indicated that many respondents had completed patch installation on all systems at the time of their report and that only a minimal number of infections by the Blaster worm were reported. Cisco Systems, Inc., which controls approximately 82 percent of the worldwide share of the Internet router market, discovered a critical vulnerability in its Internet operating system (IOS) software. This vulnerability could allow an intruder to effectively shut down unpatched routers, blocking network traffic. Cisco had informed the federal government of the vulnerability prior to public disclosure, and worked with different security organizations and government organizations to encourage prompt patching. On July 16, 2003, Cisco issued a security bulletin to publicly announce the critical vulnerability in its IOS software, and provide workaround instructions and a patch. Cisco had planned to officially notify the public of the vulnerability on July 17, but early media disclosure led them to announce the vulnerability a day earlier. In addition, FedCIRC issued advisories to federal agencies and DHS advised private-sector entities of the vulnerability. In the week that the vulnerability was disclosed, FedCIRC, OMB, and DHS's National Cyber Security Division held a number of teleconferences with representatives from the executive branch. On July 17, OMB requested that federal agencies report to CERT/CC on the status of their actions to patch the vulnerability by July 24. On July 18, DHS issued an advisory update in response to an exploit that was posted online, and OMB moved up the agencies' reporting deadline to July 22. CERT/CC has received reports of attempts to exploit this vulnerability, but as of September 5, no incidents have yet been reported. Patch management is a process used to help alleviate many of the challenges involved with securing computing systems from attack. It is a component of configuration management that includes acquiring, testing, and applying patches to a computer system. I will now discuss common patch management practices, federal efforts to address software vulnerabilities in agencies, and services and tools to assist in carrying out the patch management process. Effective patch management practices have been identified in security- related literature from several groups, including NIST, Microsoft, patch management software vendors, and other computer-security experts. Common elements identified include the following: Senior executive support. Management recognition of information security risk and interest in taking steps to manage and understand risks, including ensuring that appropriate patches are deployed, is important to successfully implementing any information security-related process and ensuring that appropriate resources are applied. Standardized patch management policies, procedures, and tools. Without standardized policies and procedures in place, patch management can remain an ad-hoc process--potentially allowing each subgroup within an entity to implement patch management differently or not at all. Policies provide the foundation for ensuring that requirements are communicated across an entity. In addition, selecting and implementing appropriate patch management tools is an important consideration for facilitating effective and efficient patch management. Dedicated resources and clearly assigned responsibilities. It is important that the organization assign clear responsibility for ensuring that the patch management process is effective. NIST recommends creating a designated group whose duties would include supporting administrators in finding and fixing vulnerabilities in the organization's software. It is also important that the individuals involved in patch management have the skills and knowledge needed to perform their responsibilities, and that systems administrators be trained regarding how to identify new patches and vulnerabilities. Current technology inventory. Creating and maintaining a current inventory of all hardware equipment, software packages, services, and other technologies installed and used by the organization is an essential element of successful patch management. This systems inventory assists in determining the number of systems that are vulnerable and require remediation, as well as in locating the systems and identifying their owners. Identification of relevant vulnerabilities and patches. It is important to proactively monitor for vulnerabilities and patches for all software identified in the systems inventory. Various tools and services are available to assist in identifying vulnerabilities and their respective patches. Using multiple sources can help to provide a more comprehensive view of vulnerabilities. Risk assessment. When a vulnerability is discovered and a related patch and/or alternative workaround is released, the entity should consider the importance of the system to operations, the criticality of the vulnerability, and the risk of applying the patch. Since some patches can cause unexpected disruption to entities' systems, organizations may choose not to apply every patch, at least not immediately, even though it may be deemed critical by the software vendor that created it. The likelihood that the patch will disrupt the system is a key factor to consider, as is the criticality of the system or process that the patch affects. Testing. Another critical step is to test each individual patch against various systems configurations in a test environment before installing it enterprisewide to determine any impact on the network. Such testing will help determine whether the patch functions as intended and its potential for adversely affecting the entity's systems. In addition, while patches are being tested, organizations should also be aware of workarounds, which can provide temporary relief until a patch is applied. Testing has been identified as a challenge by government and private-sector officials, since the urgency in remediating a security vulnerability can limit or delay comprehensive testing. Time pressures can also result in software vendors' issuing poorly written patches that can degrade system performance and require yet another patch to remediate the problem. For instance, Microsoft has admittedly issued security patches that have been recalled because they have caused systems to crash or are too large for a computer's capacity. Further, a complex, heterogeneous systems environment can lengthen this already time-consuming and time-sensitive process because it takes longer to test the patch in various systems configurations. Distributing patches. Organizations can deploy patches to systems manually or by using an automated tool. One challenge to deploying patches appropriately is that remote users may not be connected at the time of deployment, leaving the entity's networks vulnerable from the remote user's system because they have not yet been patched. One private- sector entity stated that its network first became affected by the Microsoft RPC vulnerability when remote users plugged their laptops into the network after being exposed to the vulnerability from other sources. Monitoring through network and host vulnerability scanning. Networks can be scanned on a regular basis to assess the network environment, and whether patches have been effectively applied. Systems administrators can take proactive steps to preempt computer security incidents within their entities by regularly monitoring the status of patches once they are deployed. This will help to ensure patch compliance with the network's configuration. The federal government has taken several steps to address security vulnerabilities that affect federal agency systems, including efforts to improve patch management. NIST has taken a number of steps, including, as I previously mentioned, providing a handbook for patch management. In addition, NIST offers a source of vulnerability data, which I will discuss later in this testimony. Further, in accordance with OMB's reporting instructions for the first year implementation of the Federal Information Security Management Act (FISMA), maintaining up-to-date patches is a part of FISMA's system configuration requirements. As such, OMB requires that agencies report how they confirm that patches have been tested and installed in a timely manner. In addition, certain governmentwide services are offered to federal agencies to assist them in ensuring that software vulnerabilities are patched. For example, FedCIRC was established to provide a central focal point for incident reporting, handling, prevention, and recognition for the federal government. Its purpose is to ensure that the government has critical services available in order to withstand or quickly recover from attacks against its information resources. In addition, for the two recent vulnerabilities just discussed in my testimony, OMB and FedCIRC held teleconferences with agency Chief information officers to discuss vulnerabilities and request that agencies report on the status of their actions to patch them. An OMB official indicated that they planned to hold meetings with agencies to discuss ways to improve communication of and followup on critical vulnerabilities, including addressing some of the challenges identified in the two recent exercises, such as delays in reaching key security personnel in certain instances. FedCIRC also initiated PADC to provide users with a method of obtaining information on security patches relevant to their enterprise and access to patches that have been tested in a laboratory environment. The federal government offers PADC to federal civilian agencies at no cost. According to FedCIRC, as of last month, 41 agencies were using PADC. Table 2 lists its features and benefits, as reported by FedCIRC. OMB reported that while many agencies have established PADC accounts, actual usage of those accounts is extremely low. To participate in PADC, subscribers (who could be one or more individuals within an agency) receive an account license that allows them to receive notifications and log into the secure Web site to download the patch. To establish an account, each subscriber must set up a profile defining the technologies that they use. The profiles act much like a filtering service and allow PADC to notify agencies of only the patches that pertain to their systems. The profiles do not include system-specific information because of the sensitivity of that information. Subscribers using PADC receive notification of threats, vulnerabilities, and the availability of patches on the basis of the submitted profiles. They are notified by E-mail or pager message that a vulnerability or patch has been posted to a secure Web site that affects one or all of their systems. When a patch is identified, FedCIRC, through contractor support, ensures that it originates from a reliable source. The patch is then tested on a system to which it applies. The installation of the patch and the operation of the system are monitored to ensure that the patch causes no problem. Next, if an exploit had been developed, exploit testing is performed to ensure that the patch fixes the vulnerability. Any issues identified with a patch are summarized and provided to the users. The validated patch is then uploaded to PADC servers and made available to users. A patch is considered validated when it has been downloaded from a trusted source, authenticated, loaded onto an appropriate system, tested, exploit-tested, verified, and posted to the PADC server. This type of testing and validation is performed for over 60 technologies that, according to FedCIRC officials, account for approximately 80 percent of the technologies used by federal agencies. Also available is notification of patches that are not validated for over 25,000 additional technologies. According to FedCIRC officials, high-priority patches are to be tested and posted on the PADC server within the same business day of availability. Medium- and low-priority patches are to be completed by the following business day, but are generally available sooner. However, because PADC has several early warning mechanisms in place and arrangements with software vendors, some patches may be available as soon as a vulnerability is made public. FedCIRC officials emphasize that although the contractor tests the security patches, these tests do not ensure that the patch can be successfully deployed in another environment; therefore, agencies still need to test the patch for compatibility with their own business processes and technology. PADC offers a reporting capability that is hierarchical. Senior managers can look at their complete system and see which subsystems have been patched. These enterprisewide reports and statistics can be generated for a "reporting user" subscriber who has read-only capability within the system. According to agency officials, there are limitations to the PADC service. Although it is free to agencies, only about 2,000 licenses or accounts are available because of monetary constraints. According to FedCIRC officials, this requires them to work closely with participating agencies to balance the number of licenses that a single agency requires with the need to allow multiple agencies to participate. For example, the National Aeronautics and Space Administration initially requested over 3,000 licenses--one for each system administrator. Another agency, NIST, thought that each of its users should have his or her own PADC account. Another limitation is the level of services currently provided by PADC. At present, the government is considering broadening the scope of these services and capabilities, along with the number of users. Several services and automated tools are available to assist entities in performing the patch management function, including tools designed to be stand-alone patch management systems. In addition, systems management tools can be used to deploy patches across an entity's network. Some of the features in services and tools typically include methods to inventory computers and the software applications and patches installed; identify relevant patches and workarounds and gather them in one location; group systems by departments, machine types, or other logical divisions to easily manage patch deployment; scan a network to determine the status of the patches and other corrections made to network machines (hosts and/or clients); assess the machines against set criteria; access a database of patches; deploy effective patches; and report information to various levels of management about the status of the network. Patch management vendors also offer central databases of the latest patches, incidents, and methods for mitigating risks before a patch can be deployed or a patch has been released. Some vendors provide support for multiple software platforms, such as Microsoft, Solaris, Linux, and others, while others focus on certain platforms exclusively, such as Microsoft. Patch management tools can be either scanner-based (non agent) or agent-based. While scanner-based tools can scan a network, check for missing patches, and allow an administrator to patch multiple computers, these tools are best suited for smaller organizations due to their inability to serve a large number of users without breaking down or requiring major changes in procedure. Another difficulty with scanner-based tools is that part-time users and turned-off systems will not be scanned. Agent-based products place small programs, or agents, on each computer, to periodically poll a patch database--a server on the network--for new updates, giving the administrator the option of applying the patch. Agent- based products require up-front work to integrate agents into the workstations and in the server deployment process, but are better suited to large organizations due to their ability to generate less network traffic and provide a real-time network view. The agents maintain information that can be reported when needed. Finally, some patch management tools are hybrids--allowing the user to utilize agents or not. Instead of an automated stand-alone system, entities can also use other methods and tools to perform patch management. For example, they can maintain a database of the versions and latest patches for each server and each client in their network and track the security alerts and patches manually. While labor-intensive, this can be done. In addition, entities can employ systems management tools with patch-updating capabilities to deploy the patches. This method requires monitoring for the latest security alerts and patches. Entities may also need to develop better relationships with their vendors to be alerted to vulnerabilities and patches prior to public release. In addition, software vendors may provide automated tools with customized features to alert system administrators and users of the need to patch, and if desired, automatically apply patches. A variety of resources are also available to provide information related to vulnerabilities and their exploits. As I mentioned earlier, one resource is CERT/CC, a major center for analyzing and reporting vulnerabilities as well as providing information on possible solutions. Another useful resource is NIST's ICAT, which offers a searchable index leading users to vulnerability resources and patch information. ICAT links users to publicly available vulnerability databases and patch sites, thus enabling them to find and fix vulnerabilities existing on their systems. It is based on common vulnerability and exposures (commonly referred to as CVE) naming standards. These are standardized names for vulnerabilities and other information security exposures, compiled in an effort to make it easier to share data across separate vulnerability databases and tools. Many other organizations exist, including the Last Stage of Delirium Research Group, that research security vulnerabilities and maintain databases of such vulnerabilities. In addition, mailing lists, such as BugTraq, provide forums for announcing and discussing vulnerabilities, including information on how to fix them. In addition, Security Focus monitors thousands of products to maintain a vulnerability database and provide security alerts. Finally, vendors such as Microsoft and Cisco provide software updates on their products, including notices of known vulnerabilities and their corresponding patches. In addition to implementing effective patch management practices, several additional steps can be considered when addressing software vulnerabilities, including: deploying other technologies, such as antivirus software, firewalls, and other network security tools to provide additional defenses against attacks; employing more rigorous engineering practices in designing, implementing, and testing software products to reduce the number of potential vulnerabilities; improving tools to more effectively and efficiently manage patching; researching and developing technologies to prevent, detect, and recover from attacks as well as identify their perpetrators, such as more sophisticated firewalls to keep serious attackers out, better intrusion- detection systems that can distinguish serious attacks from nuisance probes and scans, systems that can isolate compromised areas and reconfigure while continuing to operate, and techniques to identify individuals responsible for specific incidents; and ensuring effective, tested contingency planning processes and procedures. Actions are already underway in many, if not all, of these areas. For example, CERT/CC has a research program, one goal of which is to try to find ways to improve technical approaches for identifying and preventing security flaws, for limiting the damage from attacks, and for ensuring that systems continue to provide essential services in spite of compromises and failures. Also, Microsoft recently initiated its Trustworthy Computing strategy to incorporate security-focused software engineering practices throughout the design and deployment of its software, and is reportedly considering the use of automated patching in future products. In summary, it is clear from the increasing number of reported attacks on information systems that both federal and private-sector operations and assets are at considerable--and growing--risk. Patch management can be an important element in mitigating the risks associated with software vulnerabilities, part of overall network configuration management and information security programs. The challenge will be ensuring that a patch management process has adequate resources and appropriate policies, procedures, and tools to effectively identify vulnerabilities and patches that place an entity's systems at risk. Also critical is the capability to adequately test and deploy the patches, and then monitor progress to ensure that they work. Although this can currently be performed, the eventual solution will likely come from research and development to better build security into software and tools from the beginning. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have at this time. Should you have any further questions about this testimony, please contact me at (202) 512-3317 or at [email protected]. Individuals making key contributions to this testimony included Shannin G. Addison, Michael P. Fruitman, Michael W. Gilmore, Sophia Harrison, Elizabeth L. Johnston, Min S. Lee, and Tracy C. Pierson. 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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Attacks on computer systems--in government and the private sector--are increasing at an alarming rate, placing both federal and private-sector operations and assets at considerable risk. By exploiting software vulnerabilities, hackers can cause significant damage. While patches, or software fixes, for these vulnerabilities are often well publicized and available, they are frequently not quickly or correctly applied. The federal government recently awarded a contract for a government-wide patch notification service designed to provide agencies with information to support effective patching. Forty-one agencies now subscribe to this service. At the request of the Chairman of the Subcommittee on Technology, Information Policy, Intergovernmental Relations, and the Census, GAO reviewed (1) two recent software vulnerabilities and related responses; (2) effective patch management practices, related federal efforts, and other available tools; and (3) additional steps that can be taken to better protect sensitive information systems from software vulnerabilities. The increase in reported information systems vulnerabilities has been staggering, especially in the past 3 years. Automated attacks are successfully exploiting such software vulnerabilities, as increasingly sophisticated hacking tools become more readily available and easier to use. The response to two recent critical vulnerabilities in Microsoft Corporation and Cisco Systems, Inc., products illustrates the collaborative efforts between federal entities and the information security community to combat potential attacks. Patch management is one means of dealing with these increasing vulnerabilities to cybersecurity. Critical elements to the patch management process include management support, standardized policies, dedicated resources, risk assessment, and testing. In addition to working with software vendors and security research groups to develop patches or temporary solutions, the federal government has taken a number of other steps to address software vulnerabilities. For example, offered without charge to federal agencies, the federal patch notification service provides subscribers with information on trusted, authenticated patches available for their technologies. At present, the government is considering broadening the scope of these services and capabilities, along with the number of users. Other specific tools also exist that can assist in performing patch management. In addition to implementing effective patch management practices, several additional steps can be taken when addressing software vulnerabilities. Such steps include stronger software engineering practices and continuing research and development into new approaches toward computer security.
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Interior's ongoing reorganization of bureaus with oil and gas functions will require time and resources, and undertaking such an endeavor while continuing to meet ongoing responsibilities may pose new challenges. Historically, BLM managed onshore federal oil and gas activities, while MMS managed offshore activities and collected royalties for all leases. In May 2010, the Secretary of the Interior announced plans to reorganize MMS into three separate bureaus. The Secretary stated that dividing MMS's responsibilities among separate bureaus would help ensure that each of the three newly established bureaus have a distinct and independent mission. Interior recently began implementing this restructuring effort, transferring offshore oversight responsibilities to the newly created BOEMRE and revenue collection to ONRR. Interior plans to continue restructuring BOEMRE to establish two additional separate bureaus--the Bureau of Ocean and Energy Management, which will focus on leasing and environmental reviews, and the Bureau of Safety and Environmental Enforcement, which will focus on permitting and inspection functions. While this reorganization may eventually lead to more effective operations, we have reported that organizational transformations are not simple endeavors and require the concentrated efforts of both leaders and employees to realize intended synergies and accomplish new organizational goals. In that report, we stated that for effective organizational transformation, top leaders must balance continued delivery of services with transformational activities. Given that, as of December 2010, Interior had not implemented many recommendations we made to address numerous weaknesses and challenges, we are concerned about Interior's ability to undertake this reorganization while (1) providing reasonable assurance that billions of dollars of revenues owed to the public are being properly assessed and collected and (2) maintaining focus on its oil and gas oversight responsibilities. We have reported that Interior has experienced several challenges in meeting its obligations to make federal oil and gas resources available for leasing and development while simultaneously meeting its responsibilities for managing public lands for other uses, including wildlife habitat, recreation, and wilderness. In January 2010, we reported that while BLM requires oil and gas operators to reclaim the land they disturb and post a bond to help ensure they do so, not all operators perform such reclamation. In general, the goal is to plug the well and reclaim the site so that it matches the surrounding natural environment to the extent possible, allowing the land to be used for purposes other than oil and gas production, such as wildlife habitat. If the bond is not sufficient to cover well plugging and surface reclamation, and there are no responsible or liable parties, the well is considered "orphaned," and BLM uses federal dollars to fund reclamation. For fiscal years 1988 through 2009, BLM spent about $3.8 million to reclaim 295 orphaned wells, and BLM has identified another 144 wells yet to be reclaimed. In addition, in a July 2010 report on federal oil and gas lease sale decisions in the Mountain West, we found that the extent to which BLM tracked and made available to the public information related to protests filed during the leasing process varied by state and was generally limited in scope. We also found that stakeholders--including environmental and hunting interests, and state and local governments protesting BLM lease offerings--wanted additional time to participate in the leasing process and more information from BLM about its leasing decisions. Moreover, we found that BLM had been unable to manage an increased workload associated with public protests and had missed deadlines for issuing leases. In May 2010, the Secretary of the Interior announced several departmentwide leasing reforms that are to take place at BLM that may address these concerns, such as providing additional public review and comment opportunity during the leasing process. Further, in March 2010, we found that Interior faced challenges in ensuring consistent implementation of environmental requirements, both within and across MMS's regional offices, leaving it vulnerable with regard to litigation and allegations of scientific misconduct. We recommended that Interior develop comprehensive environmental guidance materials for MMS staff. Interior concurred with this recommendation and is currently developing such guidance. Finally, in September 2009, we reported that BLM's use of categorical exclusions under Section 390 of the Energy Policy Act of 2005--which authorized BLM, for certain oil and gas activities, to approve projects without preparing new environmental analyses that would normally be required in accordance with the National Environmental Policy Act--was frequently out of compliance with the law and BLM's internal guidance. As a result, we recommended that BLM take steps to improve the implementation of Section 390 categorical exclusions through clarification of its guidance, standardizing decision documents, and increasing oversight. We have reported that BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet Interior's oversight and management responsibilities for oil and gas operations on federal lands and waters. For example, in March 2010, we reported that BLM and MMS experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. As a result, Interior faces challenges meeting its responsibilities to oversee oil and gas development on federal leases, potentially placing both the environment and royalties at risk. We made a number of recommendations to address these issues. While Interior's reorganization of MMS includes plans to hire additional staff with expertise in oil and gas inspections and engineering, these plans have not been fully implemented, and it remains unclear whether Interior will be fully successful in hiring, training, and retaining these additional staff. Moreover, the human capital issues we identified with BLM's management of onshore oil and gas continue, and these issues have not yet been addressed in Interior's reorganization plans. Federal oil and gas resources generate billions of dollars annually in revenues that are shared among federal, state, and tribal governments; however, we found Interior may not be properly assessing and collecting these revenues. In September 2008, we reported that Interior collected lower levels of revenues for oil and gas production in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners whose revenue collection systems were evaluated in a comprehensive industry study--these resource owners included other countries as well as some states. However, despite significant changes in the oil and gas industry over the past several decades, we found that Interior had not systematically re-examined how the U.S. government is compensated for extraction of oil and gas for over 25 years. GAO recommended Interior conduct a comprehensive review of the federal oil and gas system using an independent panel. After Interior initially disagreed with our recommendations, we recommended that Congress consider directing the Secretary of the Interior to convene an independent panel to perform a comprehensive review of the federal system for collecting oil and gas revenue. More recently, in response to our report, Interior has commissioned a study that will include such a reassessment, which, according to officials, the department expects will be complete in 2011. The results of the study may reveal the potential for greater revenues to the federal government. We also reported in March 2010 that Interior was not taking the steps needed to ensure that oil and gas produced from federal lands was accurately measured. For example, we found that neither BLM nor MMS had consistently met their agency goals for oil and gas production verification inspections. Without such verification, Interior cannot provide reasonable assurance that the public is collecting its share of revenue from oil and gas development on federal lands and waters. As a result of this work, we identified 19 recommendations for specific improvements to oversight of production verification activities. Interior generally agreed with our recommendations and has begun implementing some of them. Additionally, we reported in October 2010 that Interior's data likely underestimated the amount of natural gas produced on federal leases, because some unquantified amount of gas is released directly to the atmosphere (vented) or is burned (flared). This vented and flared gas contributes to greenhouse gases and represents lost royalties. We recommended that Interior improve its data and address limitations in its regulations and guidance to reduce this lost gas. Interior generally agreed with our recommendations and is taking initial steps to implement these recommendations. Furthermore, we reported in July 2009 on numerous problems with Interior's efforts to collect data on oil and gas produced on federal lands, including missing data, errors in company-reported data on oil and gas production, and sales data that did not reflect prevailing market prices for oil and gas. As a result of Interior's lack of consistent and reliable data on the production and sale of oil and gas from federal lands, Interior could not provide reasonable assurance that it was assessing and collecting the appropriate amount of royalties on this production. We made a number of recommendations to Interior to improve controls on the accuracy and reliability of royalty data. Interior generally agreed with our recommendations and is working to implement many of them, but these efforts are not complete, and it is uncertain at this time if the efforts will fully address our concerns. In October 2008, we reported that Interior could do more do encourage the development of existing oil and gas leases. Our review of Interior oil and gas leasing data from 1987 through 2006 found that the number of leases issued had generally increased toward the end of this period, but that offshore and onshore leasing had followed different historical patterns. Offshore leases issued peaked in 1988 and in 1997, and generally rose from 1999 through 2006. Onshore leases issued peaked in 1988, then rapidly declined until about 1992, and remained at a consistently low level until about 2003, when they began to increase moderately. We also analyzed 55,000 offshore and onshore leases issued from 1987 through 1996 to determine how development occurred on leases that had expired or been extended beyond their primary terms. Our analysis identified three key findings. First, a majority of leases expired without being drilled or reaching production. Second, shorter leases were generally developed more quickly than longer leases but not necessarily at comparable rates. Third, a substantial percentage of leases were drilled after the initial primary term following a lease extension or suspension. We also compared Interior's efforts to encourage development of federal oil and gas leases to states' and private landowners' efforts. We found that Interior does less to encourage development of federal leases than some states and private landowners. Federal leases contain one provision-- increasing rental rates over time for offshore 5-year leases and onshore leases--to encourage development. In addition to using increasing rental rates, some states undertake additional efforts to encourage lessees to develop oil and gas leases more quickly, including shorter lease terms and graduated royalty rates--royalty rates that rise over the life of the lease. In addition, compared to limited federal efforts, some states do more to structure leases to reflect the likelihood of oil and gas production, which may also encourage faster development. Based on the limited information available on private leases, private landowners also use tools similar to states to encourage development. In conclusion, as concerns rise over the recent increase in oil prices and as demands are made for additional drilling on federal lands and waters, it is important that Interior meet its current oversight responsibilities. Interior is now in the midst of a major reorganization, which makes balancing delivery of services with transformational activities challenging for an organization. Managing this change in a fiscally constrained environment only exacerbates the challenge. If steps are not taken to improve Interior's oversight of oil and gas leasing, we are concerned about the department's ability to manage the nation's oil and gas resources, ensure the safe operation of onshore and offshore leases, provide adequate environmental protection, and provide reasonable assurance that the U.S. government is collecting the revenue to which it is entitled. Chairman Hastings, Ranking Member Markey, and Members of the Committee, this concludes our prepared statement. We would be pleased to answer any questions that you or other Members of the Committee may have at this time. For further information on this statement, please contact Frank Rusco at (202) 512-3841 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Other staff that made key contributions to this testimony include, Jeffrey Barron, Glenn C. Fischer, Jon Ludwigson, Alison O'Neil, Kiki Theodoropoulos, and Barbara Timmerman. 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 the Interior oversees oil and gas activities on leased federal lands and waters. Revenue generated from federal oil and gas production is one of the largest nontax sources of federal government funds, accounting for about $9 billion in fiscal year 2009. For onshore leases, Interior's Bureau of Land Management (BLM) has oversight responsibilities. For offshore leases, the newly created Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), has oversight responsibilities. Prior to BOEMRE, the Minerals Management Service's (MMS) Offshore Energy and Minerals Management Office oversaw offshore oil and gas activities, while MMS's Minerals Revenue Management Office collected revenues from all oil and gas produced on federal leases. Over the past several years, GAO has issued numerous recommendations to the Secretary of the Interior to improve the agency's management of oil and gas resources. In 2011, GAO identified Interior's management of oil and gas resources as a high risk issue. GAO's work in this area identified challenges in five areas: (1) reorganization, (2) balancing responsibilities, (3) human capital, (4) revenue collection, and (5) development of existing leases. Reorganization: Interior's reorganization of activities previously overseen by MMS will require time and resources and may pose new challenges. Interior began a reorganization in May 2010 that will divide MMS into three separate bureaus--one focusing on revenue collection, another on leasing and environmental reviews, and yet another on permitting and inspections. While this reorganization may eventually lead to more effective operations, GAO has reported that organizational transformations are not simple endeavors. GAO is concerned with Interior's ability to undertake this reorganization while meeting its revenue collection and oil and gas oversight responsibilities. Balancing Responsibilities: GAO has reported that Interior has experienced several challenges with meeting its responsibilities for providing for the development of oil and gas resources while managing public lands for other uses, including wildlife habitat. In January 2010, GAO reported that, while BLM requires oil and gas operators to reclaim the land they disturb and post a bond to help ensure they do so, not all operators perform reclamation. For fiscal years 1988 through 2009, BLM spent about $3.8 million to reclaim 295 so-called "orphaned" wells--because reclamation had not been done, and other resources, including the bond, were insufficient to pay for it. Human Capital: GAO has reported that BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet their oversight and management responsibilities for oil and gas operations. For example, in March 2010, GAO reported that BLM and MMS experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. As a result, Interior faces challenges meeting its responsibilities to oversee oil and gas development on federal leases, potentially placing both the environment and royalties at risk. Revenue Collection: While federal oil and gas resources generate billions of dollars in annual revenues, past GAO work has found that Interior may not be properly assessing and collecting these revenues. In September 2008, GAO reported that Interior collected lower levels of revenues for oil and gas production in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners whose revenue collection systems were evaluated in a comprehensive industry study. Nonetheless, Interior has not completed a comprehensive assessment of its revenue collection policies and processes in over 25 years. Additionally, in March 2010, GAO reported that Interior was not consistently completing inspections to verify volumes of oil and gas produced from federal leases. Development of Existing Leases: In October 2008, GAO reported that Interior could do more to encourage the development of existing oil and gas leases. Federal leases contain one provision--increasing rental rates over time for offshore 5-year leases and onshore leases--to encourage development. In addition to escalating rental rates, states undertake additional efforts to encourage lessees to develop oil and gas leases more quickly, including shorter lease terms and graduated royalty rates.
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The Davis-Bacon Act requires contractors and subcontractors working on federally funded contracts in excess of $2,000 to pay at least locally prevailing wages to laborers and mechanics. The act covers both new construction and the alteration or repair of existing public buildings and works. The Department of Labor sets prevailing wage rates for various job categories in a local area on the basis of periodic surveys it conducts of contractors, unions, public officials, and other interested parties. The Davis-Bacon Act stems from a Depression-era practice of transporting workers from lower-paying areas to bypass local workers who would demand a higher wage. The prevailing wage requirement was meant to prevent this practice by ensuring that workers on federal projects were paid at least the locally prevailing wage. Congress has extended this requirement beyond projects funded directly by the federal government by including Davis-Bacon Act prevailing wage provisions in numerous related laws under which federal agencies assist construction projects through grants, loans, guarantees, insurance, and other methods. Examples of related laws include the Federal-Aid Highway Acts, the Housing and Community Development Act of 1974, and the Federal Water Pollution Control Act. Contractors on projects subject to Davis-Bacon requirements may also be subject to additional prevailing wage requirements under state and local laws. In addition to paying no less than locally prevailing wages, contractors for construction projects that are subject to the Davis-Bacon Act must pay their workers on a weekly basis and submit weekly certified payroll records. The federal contracting or administering agency has primary responsibility for enforcing these requirements, while the Department of Labor has coordination and oversight responsibilities, including the authority to establish regulations and investigate compliance with labor standards as warranted. The prevailing wage provision in section 1606 of the Recovery Act broadly applies Davis-Bacon requirements to all construction projects funded directly or assisted by the federal government under Division A of the act. It reinforces Davis-Bacon Act coverage of construction projects where the federal government is a party to the contract, extends it to projects assisted in whole or in part by Division A of the act, and overri any limitation to Davis-Bacon coverage in related laws under which federal agencies provide financial assistance, such as grants and loan guarantees, to recipients to use for construction projects. It also extends the prevailing wage requirement to some federally assisted projects th would not otherwise be subject to that req uirement. According to federal agency officials, 40 programs are newly subject to Davis-Bacon requirements as a result of the Recovery Act's prevailing wage provision, as shown in table 1. These programs are spread across 12 of 27 federal agencies that received funding under Division A of the ac Most of the programs existed prior to the Recovery Act and are subject to Davis-Bacon requirements for the first time under the act, while some are newly created programs. t. Federal, state, and local officials involved with the 40 Recovery Act programs that are newly subject to Davis-Bacon requirements differed on whether those requirements would increase program costs. However, these officials generally did not expect Davis-Bacon requirements to inhibit their ability to achieve Recovery Act and program goals. Federal officials responsible for most of the programs did not expect Davis-Bacon requirements to affect the timing of their program's Recovery Act efforts, though officials for some programs expected an impact. Federal officials responsible for programs that are newly subject to Davis- Bacon requirements--the prevailing wage rate requirement and the administrative requirements associated with weekly payroll processes-- had mixed views on the extent to which they expected these requirements to affect program costs, as table 2 shows. Officials for the 40 programs provided a range of explanations for the extent to which the prevailing wage rate requirement might impact program costs. Specifically: Little to no impact. Department of Energy officials responsible for two programs said construction firms generally pay prevailing wage rates as a standard practice and therefore the prevailing wage rate requirement would have no impact on program costs. According to other program officials, the impact would be small because a relatively small amount of program funds are to be spent on construction activities that are subject to Davis-Bacon requirements. For example, Department of Justice officials responsible for the Transitional Housing Assistance Grants for Victims of Domestic Violence, Dating Violence, Stalking, or Sexual Assault Program said only a small number of grantees requested funds for construction and that less than 5 percent would be allocated for this purpose. Department of Energy officials responsible for the Geothermal Technologies program noted that the prevailing wage rates were in line with what they expected, and Electricity Delivery and Energy Reliability program officials said existing wage rates paid by utility companies were generally high already so any increase in wage expenses due to prevailing wage rates would probably be minimal. Moderate impact. Officials from the Department of Energy's Weatherization Assistance Program explained that the prevailing wage rate requirement will have at least a moderate impact on program costs. They explained that weatherization projects in buildings taller than four stories will require that workers be paid commercial prevailing wage rates that are higher than the wage rates that would otherwise be used for weatherization projects. Department of Energy officials responsible for the Wind and Hydropower Technologies program explained that the prevailing wage rates for construction workers are sometimes 20 percent higher than what would have been paid for similar work and could increase labor costs by 20 percent. Conversely, these officials said the payment of higher wages could attract a more highly trained laborer and thus possibly result in savings in rework or in adherence to safety guidelines. Large impact. Department of Energy officials from the State Energy Program explained that in some of the areas hardest hit economically, construction workers are paid less than the prevailing wage rate for the county. Therefore, paying the Davis-Bacon prevailing wage rate will increase costs. Likewise, Department of Justice officials responsible for the Correctional Facilities on Tribal Lands Program explained that in some cases the prevailing wage rate may be significantly higher than what the tribe would normally pay for construction. Department of Energy officials responsible for the Energy Efficiency and Conservation Block Grants program anticipated a potentially large impact as a result of the large number of grantees and significant proportion of funds that would be spent on construction labor wages. State and local officials we interviewed also had mixed views about the expected impact of the prevailing wage rate requirement on program costs. District of Columbia weatherization officials explained that the prevailing wage rates were generally in line with what they would expect to pay and some state weatherization officials in California said the prevailing wage rates may be less than what some service providers are currently paying. Data provided by State Energy Program officials in Georgia indicated that contractor wage rates are higher than Davis-Bacon prevailing wage rates in a subset of counties. Conversely, Iowa state weatherization officials explained that the average cost increase would be about 9 percent per home, and one local Lead Hazard Reduction Program official reported that, based on historical experience, the prevailing wage rate requirement could increase program costs by 10 to 13 percent per home. One Mississippi contractor we interviewed said the wage rates would not have an impact on costs because the hourly rates that the company pays its employees are and always have been higher than the Davis-Bacon rates. As table 2 also shows, federal officials reported mixed views on the extent to which they expected Davis-Bacon administrative requirements, such as paying workers weekly, to affect program administrative costs. For example: Little to no impact. Department of Health and Human Services officials responsible for the Capital Improvement Program and Facility Investment Program for Health Centers said the requirements should have no impact on program costs since grantees were asked to include Davis-Bacon compliance in their proposals. Department of Energy officials responsible for the Solar Energy Technologies program expected the administrative requirements to have a small impact because less than 5 percent of funds will be used for construction-related activities subject to Davis-Bacon requirements. Department of Housing and Urban Development officials responsible for the Green Retrofit Program for Multifamily Housing said the administrative requirements would have a small impact because the grant recipients had previous experience with the Davis-Bacon requirements through other federal housing programs and were accustomed to requirements such as paying workers on a weekly basis. Environmental Protection Agency officials responsible for the Diesel Emission Reduction Act Grants program said the impact would be small because the majority of the grant funds are used to purchase equipment and are therefore not subject to the administrative requirements. These program officials added that while the requirements are new to most grantees, the grantees will become familiar with them over time. Moderate impact. State Energy Program officials noted that many construction companies involved with their projects do not maintain payroll records sufficient to meet Davis-Bacon requirements, and as a result, the administrative requirement to pay workers weekly may add to their administrative costs. Large impact. Federal officials responsible for the Weatherization Assistance Program and the Lead Hazard Reduction Program said Davis- Bacon administrative requirements would require a more detailed payroll tracking system, which would be particularly burdensome for small companies. According to Weatherization Assistance Program officials, smaller companies are the ones, generally speaking, that do not usually have experience with the Davis-Bacon requirement for certified weekly payrolls. For these employers, who often employ fewer than five people, it is particularly burdensome to certify payrolls weekly. Lead Hazard Reduction Program officials explained that additional administrative duties necessary for weekly payroll processing will increase administrative costs. To accommodate this increase, the agency is in the process of increasing the cap on how much recipients can spend on administrative costs from 10 to 15 percent of their award. State and local officials we interviewed had mixed views on the impact of Davis-Bacon administrative requirements on program costs. Clean Water State Revolving Fund officials in Georgia and the District of Columbia said they do not anticipate any additional costs as a result of the administrative requirements, whereas program officials in Mississippi and New Jersey noted the requirements would likely increase project costs. Local agencies involved with the Weatherization Assistance Program in California, Michigan, New York, and Ohio reported hiring new staff to process Davis-Bacon paperwork, and local weatherization officials from California noted that the administrative requirements might be particularly burdensome on smaller businesses. Local officials responsible for a Lead Hazard Reduction program in New York said their subcontractor is familiar with the administrative requirements, and the subcontractor has not indicated that these requirements are problematic. Despite these potential cost increases for some Recovery Act programs, most federal officials said the Davis-Bacon requirements will have little, if any, impact on their ability to support their program and Recovery Act goals. Federal officials responsible for 15 of the 40 programs said Davis- Bacon requirements would have no impact on their program's ability to achieve its goals, and officials from 12 programs reported that the requirements would have little impact (see table 3). However, federal officials from four programs--the Weatherization Assistance Program, State Energy Program, Energy Efficiency and Conservation Block Grants, and Correctional Facilities on Tribal Lands Program--noted that the Davis-Bacon requirements could have a large impact on their ability to support the Recovery Act goal of preserving or creating new jobs. For example, Weatherization Assistance Program officials said that Davis- Bacon requirements will have a large impact in urban areas because they have to pay commercial construction rates to weatherize buildings over four stories tall. These commercial construction wage rates are higher than the wage rates officials were expecting to pay and officials said program goals would be affected because they will have to reduce the number of homes weatherized. State and local officials we interviewed and collected data from also reported that the Davis-Bacon requirements would generally have little impact on their ability to achieve program and Recovery Act goals. California state officials responsible for the State Energy Program stated that even though the requirements may have been an inhibiting factor for some applicants, they do not believe that the requirements will negatively affect the ability to achieve energy policy goals. While Ohio state officials responsible for weatherization said their program goals have not been affected, District of Columbia Lead Hazard Reduction program officials said they had to reduce the number of homes to be treated. Florida officials responsible for the Clean Water State Revolving Fund and Drinking Water State Revolving Fund programs reported that the addition of Davis-Bacon requirements had little impact on their program's ability to support the underlying Recovery Act goals, such as creating jobs, in part due to the ultra-competitive behavior during the economic downturn and the enormous demand for environmental infrastructure funding. Conversely, Michigan state weatherization officials said the requirements might affect their ability to support the Recovery Act goal of job creation, especially for smaller businesses and contractors. According to these officials, some smaller local contractors who performed weatherization work before the Recovery Act sometimes may not have the capacity to take advantage of the Recovery Act weatherization work because of requirements such as the weekly payroll certifications. According to federal officials responsible for most programs that are newly subject to Davis-Bacon requirements, the requirements are not likely to affect the timing of their program's Recovery Act efforts. However, officials for some programs expected an impact on their program's timing. Federal officials for 23 of the 40 programs said they did not expect Davis- Bacon requirements to affect their program's timing. For example, an official for the National Science Foundation's Academic Research Infrastructure Program--Recovery and Reinvestment noted that while they had to spend time consulting with the Office of Management and Budget and the Department of Labor on Davis-Bacon requirements, this effort had not significantly altered the program's timing. Federal officials for 2 programs were uncertain about how Davis-Bacon requirements might affect their program's timing, while officials for 7 programs did not provide a response in time for our report. In contrast, federal officials for 8 programs expected Davis-Bacon requirements to have an impact on the timing of their program's Recovery Act efforts. For example, officials with the Department of Energy's Weatherization Assistance Program stated that Davis-Bacon requirements had significantly affected their program's timing because the program is newly subject to the requirements so prevailing wage rates for weatherization workers were not immediately available. Some states decided to wait to begin weatherizing homes until the Department of Labor had determined county-by-county prevailing wage rates for their state to avoid having to pay back wages to weatherization workers who started working before the prevailing wage rates were known. For example, state weatherization officials in Arizona said that all but one of their local service providers decided to wait to weatherize homes using Recovery Act funds until the prevailing wage rates were determined because they were concerned about the time required to reconcile differences in wage rates. The timing of the Weatherization Assistance Program's Recovery Act efforts was also affected by concerns about complying with Davis-Bacon requirements. For example, Pennsylvania weatherization officials stated that delays occurred because some local agencies had initially submitted management plans that had not included language describing how they would comply with those requirements. Officials with the Department of Energy's Energy Efficiency and Conservation Block Grants and State Energy Program also expected Davis-Bacon requirements to affect the timing of their Recovery Act efforts, while officials with the Department of Housing and Urban Development's Lead Hazard Reduction Program reported that grantees were provided additional time to complete their work plans to ensure contractors understood the requirements. We provided a draft of this report to all 27 agencies and the Office of Management and Budget for their review and comment. Two agencies provided technical comments that were incorporated into the report as appropriate. The other agencies had no comments. We also provided a copy of relevant sections of the report to GAO teams responsible for reviewing Recovery Act work in the states mentioned in this report. In some cases, those teams forwarded relevant sections to officials within those states. We included these comments 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 all 27 agencies reviewed in this report, and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff 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 I. Other key contributors to this report were Mark Gaffigan, (Director), Ric Cheston (Assistant Director), Kim Gianopoulos (Assistant Director), David Marroni (Analyst-in-Charge), Angela Miles, and Alise Nacson. Important contributions were also made by Anne Rhodes-Kline, Carol Herrnstadt Shulman, and Barbara Timmerman.
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The American Recovery and Reinvestment Act of 2009 (Recovery Act) has the broad purpose of stimulating the economy. It includes substantial appropriations for construction projects that, under the act's prevailing wage provision, are subject to Davis-Bacon Act requirements. That is, contractors must pay laborers and mechanics who work on those projects at least the prevailing wage rates set for their local area by the Secretary of Labor. In addition, contractors must submit certified payrolls and pay their workers weekly. Prior to the Recovery Act, some federal programs with construction projects were already subject to Davis-Bacon Act requirements. Others, however, are subject to the requirements for the first time because the Recovery Act extended the requirements to all construction projects supported by the act. GAO was asked to (1) identify the programs that are newly affected by the Recovery Act's prevailing wage provision and (2) examine the extent to which that provision is expected to affect each of those newly affected programs. GAO obtained data from 27 agencies and spoke with federal, state, and local officials as well as contractors involved with the newly affected programs. Although GAO is not making recommendations in this report, these findings may be helpful in considering and designing legislation with similar objectives. Fortyprograms are newly subject to Davis-Bacon requirements as a result of the Recovery Act's prevailing wage provision, according to federal agency officials. Of these, 33 programs existed prior to the Recovery Act and are subject to Davis-Bacon requirements for the first time under the act, while 7 are newly created programs. Together, the 40 programs account for about $102 billion of the $309 billion that was appropriated by the Recovery Act for projects and activities. However, a smaller amount of these funds will be subject to Davis-Bacon requirements because not all of the funds will be used for construction activities and only a portion of those funds will be used to pay labor wages. For those programs that are newly subject to Davis-Bacon requirements, officials had mixed views on the impact of these requirements on program costs and goal achievement. In some cases, officials said Davis-Bacon requirements would have little or no impact on program costs for a few reasons, such as (1) the program having a small amount of construction activities, (2) prevailing wage rates that were in line with expectations, and (3) companies' previous experience with weekly payrolls. In other cases, officials said the requirements would have a moderate to large impact on program costs and/or goals. For example, officials from the Department of Energy's (DOE) Energy Efficiency and Conservation Block Grants program anticipated a potentially large cost impact as a result of the significant amount of funds to be spent on construction labor wages. Officials from DOE's Weatherization Assistance Program reported that weatherization projects in buildings taller than four stories will require workers to be paid a commercial prevailing wage rate under the Davis-Bacon Act that is higher than what would otherwise be used and could potentially reduce the number of homes weatherized. Additionally, weatherization officials said that Davis-Bacon requirements affected the program's timing because prevailing wage rates for weatherization workers were not fully available until September 2009. Further, officials from the Department of Housing and Urban Development's Lead Hazard Reduction Program noted that Davis-Bacon requirements would require a more detailed payroll tracking system that could be particularly burdensome for small companies. Those officials also explained that because administrative costs are likely to increase, the department is in the process of increasing the cap on how much recipients can spend on administrative costs.
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The purchase price of electronic products primarily reflects their technological capabilities; it does not include all of the substantial costs that are incurred throughout the equipment's life. A study by Gartner Research, for example, shows that computers costing less than $1,000 typically have a total cost of ownership of more than $5,000 per year when all the energy and maintenance costs are included. Furthermore, the purchase price of electronics does not include the often substantial cost of disposal. Lifecycle costs are high, in part, because electronic products are not always designed to facilitate recycling. EPA estimates that across the federal government 10,000 computers are disposed of each week. Once such products reach the end of their original useful lives, federal agencies have several options for disposing of them. Agencies generally can donate their reusable equipment to schools or other nonprofit educational institutions; give them to a recycler; exchange them with other federal, state, or local agencies; sometimes trade them with vendors to offset the costs of new products; or sell them through the General Services Administration's (GSA) surplus property program, which sells surplus federal government equipment at public auctions. Federal agencies, however, are not required to track the ultimate destination of their donated or recycled e-waste. Instead, agency officials generally consider this to be the recipient organization's responsibility. Consequently, they often have little assurance that their e-waste is ultimately disposed of in an environmentally responsible manner. In our prior work, we found that some U.S. electronics recyclers--including ones that publicly tout their exemplary environmental practices--were apparently willing to circumvent U.S. hazardous waste export laws and export e-waste to developing countries. Specifically, we posed as foreign buyers of broken cathode-ray tube computer monitors--which are considered hazardous waste and illegal to export without a permit--in Hong Kong, India, Pakistan, and other countries; and 43 U.S. companies expressed willingness to export these items. Some of the companies were willing to export this equipment in apparent violation of U.S. law. As we showed in our August 2008 report, equipment exported to developing countries may be handled in a way that threatens human health and the environment. As we reported in November 2005, existing federal government approaches to ensuring environmentally responsible management of electronic equipment from procurement through disposal rely heavily on two interrelated EPA electronic product stewardship initiatives. The first, the electronic product environmental assessment tool (EPEAT®️), assists federal procurement officials in comparing and selecting laptop computers, desktop computers, and monitors with environmentally preferable attributes. The second, the federal electronics challenge (FEC), helps federal agencies fully utilize the benefits of EPEAT-rated electronics by providing resources to help agencies extend these products' life spans, operate them in an energy efficient way, and expand markets for recycling and recovered materials by recycling them at end of life. EPEAT was developed along the lines of EPA's and the Department of Energy's (DOE) Energy Star program in which the federal government rewards manufacturers of energy-efficient products that ultimately save money and protect the environment by providing them with a label for their products that certifies these benefits. EPEAT-registered products are awarded a bronze, silver, or gold certification for increasing levels of energy efficiency and environmental performance. Using EPEAT, an on- line tool, federal procurement officials can evaluate the design of an electronic product for energy conservation, reduced toxicity, extended lifespan, and end of life recycling, among other things. For example, EPEAT can help agency procurement officials choose electronic products with attributes that make the products easier to upgrade. Some computers are now being built with modular features so that hard drives, processors, memory cards, and other components can be upgraded rather than replaced--thus extending their lifecycles. Agency procurement officials can also use EPEAT to choose among products that are designed to make recycling less expensive, such as those without glues or adhesives, with common fasteners and "snap-in" features, and with easily separable plastic and metal components--making their disassembly easier and recycling less costly. Finally, EPEAT can help procurement officials identify electronic products that contain less hazardous materials, which can also lessen their disposal and recycling costs. Products with these attributes can, in many cases, save agencies money over the products' lifecycles when compared to those with similar technological characteristics but without environmental attributes. For example, according to one computer vendor, a particular desktop computer with energy-saving attributes cost $35 more than a similar model that one federal program office had been buying; however, it will save $15 per year in energy costs. Thus, after slightly more than 2 years of use, the EPEAT-rated desktop computer can save more money in energy savings than the additional increase in purchase price and result in measurable environmental benefits. Currently, in the electronic products industry, purchasers can choose from 170 desktop computers, 637 laptop computers, and 487 monitors that meet one of the three EPEAT levels of environmental performance. The breadth of EPEAT products provides procurement officials with a range of devices to meet their technology and budgetary needs. For example, agencies have the flexibility to choose liquid crystal display monitors that meet all the required EPEAT criteria as well as numerous optional criteria, such as the lower levels of mercury in light switches and a reduced number of different types of plastics--attributes that can make recycling easier and less costly. Agencies can also choose other monitors that meet these and other criteria, including additional reductions in toxic materials, along with end-of-life services such as a take-back and reuse program for packaging material. Of note, these different types of monitors can meet different technology needs, as there are some differences in display characteristics and power consumption. As we said earlier, federal agencies also have the opportunity to participate in FEC--a program that first relies heavily on EPEAT for procurement considerations and then provides guidance to participants on how to extend electronic product life spans, operate them in an energy- efficient way, and reuse or recycle them at end-of-life. FEC differs from EPEAT in that where EPEAT assists officials in procuring environmentally preferable products, FEC provides participating agencies and facilities with resources to help ensure that electronic products are operated and disposed of in a manner that fully utilizes the environmental attributes of the EPEAT product. FEC has two partner levels: agency and facility. To participate, executive branch agencies or their subcomponents must register. According to EPA documents, participation can provide agency officials greater assurance that the e-waste they donate to schools, or send for recycling, is ultimately disposed of in an environmentally responsible manner. For instance, in following FEC guidance, participants are to provide recipients of donated equipment with instructions on how to have the equipment recycled responsibly and how to verify that responsible recycling occurs--procedures known as "downstream auditing." When donating equipment, FEC instructs agencies and facilities to ensure that recipients contact local or state environmental or solid waste agencies to obtain a database of vendors who recycle e-waste once the equipment is no longer useful to the recipient organization. FEC also recommends that participating agencies and facilities instruct recipients to avoid arrangements with recyclers that are unable or unwilling to share references and cannot explain the final destination of the e-waste they collect. When recycling equipment, participants are to determine how much electronic equipment the recyclers actually recycle, versus the amount they sell to other parties. If the majority of the incoming e-waste is sold, the recycling facility may be sending a significant amount of e-waste into landfills or for export overseas. In addition, FEC instructs participants to physically inspect potential recycler's facilities. E-waste in trash containers, for example, may indicate that the facility is not recycling it, and the presence of shipping containers may indicate that the facility exports it. As of December 31, 2008, EPA reported that 16 federal agencies and 215 federal facilities--representing slightly more than one-third of all federal employees--participated in the FEC to some extent. In addition, according to the 128 facilities that reported data to EPA, a majority of electronic products purchased during 2008 were EPEAT-registered. This is a sizeable increase from 2005, when we reported that 12 federal agencies and 61 individual federal facilities participated in FEC. Participating agencies include the Departments of Agriculture, Commerce, Defense, Energy, Health and Human Services, Homeland Security, Interior, Justice, Labor, Treasury, Transportation, and Veterans Affairs, as well as the Environmental Protection Agency, Executive Office of the President, General Services Administration, and the United States Postal Service. The benefits of federal agency and facility participation in EPEAT and FEC offer a glimpse of what can be attained through greater federal involvement. For instance, in 2008 FEC participants reported to EPA and the Office of the Federal Environmental Executive that 88 percent of all desktop computers, laptop computers, and monitors they purchased or leased were EPEAT registered. In addition, FEC participants reported that they extended computer life spans so that 63 percent of computers had at least a 4-year useful life. Procurement officials reported purchasing 95 percent of their monitors with energy-efficient power management features enabled and 38 percent of computers with this feature. Finally, participants reported that 50 percent of electronics taken out of service were donated for reuse; 40 percent were recycled; 8 percent were sold; and 2 percent were disposed of. Of those recycled, 95 percent were reportedly done so in an environmentally sound manner. These environmentally preferable choices from "cradle to grave" resulted in $40.3 million in cost savings reported by participating agencies and facilities, energy savings that EPA found to be equivalent to electric power for more than 35,000 U.S. households for 1 year, and emissions savings equivalent to removing nearly 21,000 passenger cars from the road for 1 year. Through participation in the FEC, numerous federal facilities have purchased greener electronic products, reduced the environmental impacts of electronic products during use, and managed obsolete electronics in an environmentally safe way. For example, officials with the Bonneville Power Administration within DOE reported to EPA that they adopted several environmentally responsible practices associated with the procurement and operation of electronic equipment. First, administration officials extended the lifespan of agency computers from 3 to 4 years. With over 500 computers procured each year at an annual cost of more than $500,000, an administration official said that extending computer life spans generated substantial savings. Additionally, Bonneville Power Administration officials procured new flat-screen monitors instead of cathode-ray tube monitors, reducing both hazardous waste tonnage and end of life recycling costs. According to Bonneville Power Administration officials, they expect to save at least $153 per unit over the life of each new monitor. EPA's region 9 facility in San Francisco, California--a 20-story office building that houses nearly 900 EPA employees--also reported achieving substantial environmental benefits through participation in the FEC. The facility's energy subcommittee recommended an audit, which found that enabling computer and monitor power management features, such as those configuring computer monitors to the "sleep" mode instead of the screen saver mode, could save about 10 percent in total energy usage at no cost. In addition, with funding eliminated for new electronics purchases, region 9 staff reported that they reused 30 percent to 40 percent of existing electronics and extended the average lifespan of computers to 5 years. Finally, region 9 staff stated that they successfully recycled more than 10 tons of electronics that had been stored in an offsite warehouse. Although the cost of safely recycling the large quantity of electronics was high and regional staff found it difficult to locate a reputable recycler, EPA headquarters provided funds for the recycling costs and helped find a qualified vendor. The EPEAT and FEC accomplishments achieved to date are steps in the right direction, but opportunities exist to significantly increase the breadth and depth of federal agency and facility participation. First, agencies and facilities representing almost two-thirds of the federal workforce are not yet participating in these promising initiatives, despite Executive Order 13423. This executive order, signed by the President on January 24, 2007, generally requires that each agency (1) meets at least 95 percent of its requirements with EPEAT-registered products; (2) enables the energy saving features on agency computers and monitors; (3) establishes and implements policies to extend the useful life of agency electronic equipment; and (4) uses environmentally sound practices with respect to disposition of agency electronic equipment that has reached the end of its useful life. To implement these requirements, the Office of Management and Budget directed each agency and its facilities to either become a partner in the FEC or to implement an equivalent electronics stewardship program that addresses purchase, operation and maintenance, and end-of- life management strategies for electronic assets consistent with FEC's recommended practices and guidelines. Second, most of agencies and facilities that participate do not fully maximize these programs' resources or the environmental benefits that can be achieved. While we acknowledge the efforts of FEC participants, the FEC statistics on participation may overstate these participants' adherence to the goals of the program, and their successes must be taken in context. Participation by 16 agencies and 215 facilities (representing slightly more than one-third of federal employees), for example, does not mean that all electronic products they purchase are procured, operated, and recycled or reused at end of life in an environmentally preferable fashion. Instead, participation simply means these agencies have identified their current practices for managing electronic products and set goals to improve them. Moreover, as the FEC is an initiative aimed to encourage and support participating agencies and facilities, it does not impose consequences on those agencies who do not meet their goals. As a practical matter, only 34 FEC facility participants (16 percent of participants) reported to EPA that they managed electronic products in accordance with FEC goals for at least one of the three lifecycle phases-- procurement, operation, or disposal--with only 2 facilities showing they did this for all three phases in 2008. The need for increased federal participation in these initiatives--in both breadth and depth--is further underscored by the federal government e- waste that continues to appear in online auctions and may subsequently end up overseas. As we reported in August 2008, significant demand exists for used electronics from the United States. We observed thousands of requests for such items on e-commerce Web sites--mostly from Asian countries, such as China and India, but also from some African countries. In our prior work, we showed that these countries often lack the capacity to safely handle and dispose of e-waste, as disassembly practices in these countries often involve the open-air burning of wire to recover copper and open acid baths for separating metals. These practices expose people to lead and other hazardous materials. In the several weeks leading up to this hearing, we monitored an e-commerce Web site where surplus federal government equipment is auctioned and found nearly 450,000 pounds of cathode-ray tube monitors for sale--items that, based on our prior work, have a high likelihood of being exported. For perspective, using EPA's environmental benefits calculator we calculated the benefits that would result under a hypothetical scenario in which federal agencies replaced 500,000 desktop and laptop computers and computer monitors using EPEAT procurement criteria for each tier of environmental performance--bronze, silver, and gold. As part of this calculation, we added the environmental benefits attained if federal agencies operated all EPEAT units in an energy efficient manner (i.e., enabled Energy Star features) and reused and recycled the end-of-life electronics they replaced in accordance with FEC goals. We found that substantial energy savings and environmental benefits would result at all three EPEAT tiers. Specifically, greater participation could lead to environmental benefits 5- to 10-times greater than the accomplishments of FEC participants in 2008 described earlier. Additionally, if federal agencies were to purchase EPEAT-bronze, silver, or gold products, according to the EPA environmental benefits calculator, they would save approximately $207 million at each level of EPEAT performance in energy usage and realize other cost, waste, and emissions reductions over the useful lives of these products. Table 1 shows the net energy savings and reductions in raw material extraction, greenhouse gas emissions, and toxic materials that would result if agencies and facilities recycled electronic products and replaced them with EPEAT-rated units, as compared to non-EPEAT computers and monitors. To help agency officials put in context the environmental and economic benefits that can result from using environmentally preferable electronic products, the EPA environmental benefits calculator also shows the benefits of procurement, operation, and disposal in accordance with FEC goals using common equivalents. Table 2 shows the environmental benefits of these practices when measured as the amount of household energy usage saved annually and the volume of automobile emissions saved annually. Understandably, when procuring electronics in a challenging fiscal environment, agency officials may give greater weight to price than environmental attributes. However, many of the environmental and human health problems associated with e-waste disposal can be averted through environmentally preferable procurement. Using EPEAT to purchase environmentally-friendly products, agency purchasers can often simultaneously meet their technology needs, benefit the environment, and realize dollar savings over the products' lives. Using the success of the Energy Star program as a precedent, the federal government has taken steps to encourage environmentally preferable choices. We also applaud federal agency and facility donation and recycling practices for providing valuable learning tools to thousands of school children while, at the same time, providing at least some protection against their equipment ending up in landfills or overseas. Such programs have also demonstrated that relatively simple and inexpensive steps can help ensure that donated and recycled e-waste is ultimately managed in a responsible manner. In particular, the FEC provides a framework through which participants can help ensure responsible recycling through downstream auditing of recipient organizations' disposal practices and by following guidance on how to select responsible recyclers. The federal government has the opportunity to lead by example and to leverage its substantial market power by broadening and deepening agency and facility participation in EPA electronic product stewardship initiatives, but meaningful results will only occur if federal agencies and facilities fully participate and utilize these promising initiatives' resources. Ms. Chairwoman, this concludes 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. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact John Stephenson, Director, Natural Resources and Environment at (202) 512-3841 or [email protected]. Key contributors to this statement were Steve Elstein (Assistant Director), Nathan Anderson, Elizabeth Beardsley, Alison O'Neill, and Kiki Theodoropoulos. 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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Advancing technology has led to increasing sales of new electronic devices. With this increase comes the dilemma of managing them at the end of their useful lives. If discarded with common trash, a number of environmental impacts may result, ranging from the loss of valuable resources to the potential release of toxic substances, such as lead. If recycled, they may be exported to countries with waste management systems that are less protective of human health and the environment that those of the United States. The federal government is the world's largest purchaser of electronics, spending nearly $75 billion on electronic products and services in 2009. The Environmental Protection Agency (EPA) has helped implement several product stewardship initiatives to encourage responsible management of electronic products in all three phases of a product's lifecycle--procurement, operation, and end-of-life disposal. In response to a request to provide information on federal procurement and management of electronic products, GAO's testimony describes (1) EPA's electronic product stewardship initiatives, (2) federal agency participation in them, and (3) opportunities for strengthening participation. GAO's testimony is based on its prior work and updated with data from EPA. In our prior report, EPA agreed that increasing federal participation in its initiatives could be encouraged. Agency officials still agree with this finding. Federal government approaches to ensuring environmentally responsible management of electronic equipment from procurement through disposal rely heavily on two interrelated initiatives. The first initiative, the electronic product environmental assessment tool (EPEAT), was developed along the lines of EPA's and the Department of Energy's Energy Star program and assists federal procurement officials in comparing and selecting computers and monitors with environmental attributes that also routinely save money through reduced energy usage over the products' lives. The second initiative--the federal electronics challenge (FEC)--helps federal agencies realize the benefits of EPEAT-rated electronics by providing resources to help agencies extend these products' life spans, operate them in an energy efficient way, and expand markets for recovered materials by recycling them at end of life. The first 5 years of EPA's initiatives have resulted in notable energy savings and environmental benefits reported by participating agencies. According to facilities that reported information to EPA and the Office of the Federal Environmental Executive in 2008, 88 percent of all desktop computers, laptop computers, and monitors the facilities purchased or leased were EPEAT-registered. EPEAT participation reportedly resulted in procurement officials purchasing 95 percent of their monitors with Energy Star power management features enabled and 38 percent of computers with this feature. In addition, 16 federal agencies and 215 federal facilities--representing about one-third of all federal employees--participated in the FEC to some extent in 2008. As a result, participants reported that 50 percent of electronics taken out of service were donated for reuse, 40 percent were recycled, 8 percent were sold, and 2 percent were disposed of. The environmentally responsible choices associated with EPEAT and FEC resulted in a reported $40.3 million in cost savings for participants. The EPEAT and FEC accomplishments are steps in the right direction, but opportunities exist to increase the breadth and depth of federal participation. First, agencies and facilities representing about two-thirds of the federal workforce are not participating in these promising initiatives, despite instructions to do so in implementing Executive Order 13423. Second, few participating agencies and facilities maximize these programs' resources and their potential benefits. For some, participation simply means the agency identified its current practices for managing electronic products and set goals to improve them. Moreover, as the FEC aims to support participating agencies and facilities, it does not impose consequences for those that do not meet their goals. In fact, only 34 FEC facility partners showed they managed electronic products in 2008 in accordance with FEC goals for at least one of the three lifecycle phases, and only 2 facilities showed they did so for all phases. For perspective, GAO calculated that if federal agencies replaced 500,000 desktop and laptop computers and monitors with EPEAT-registered products and operated and disposed of them in accordance with FEC goals, they could achieve substantially greater energy reductions and cost savings.
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The 75 percent rule was established in 1983 to distinguish IRFs from other facilities for payment purposes. According to CMS, the conditions on the list in the rule at that time accounted for 75 percent of the admissions to IRFs. In June 2002 CMS suspended the enforcement of the 75 percent rule after its study of the fiscal intermediaries revealed that they were using inconsistent methods to determine whether an IRF was in compliance and that in some cases IRFs were not being reviewed for compliance at all. CMS standardized the verification process that the fiscal intermediaries were to use, and issued a rule--effective July 1, 2004--that increased the number of conditions from 10 to 13 and provided a 3-year transition period, ending in July 2007, to phase in the 75 percent threshold. The current payment and review procedures for IRFs were established in recent years. The inpatient rehabilitation facility prospective payment system (IRF PPS) was implemented in January 2002. Payment is contingent on an IRF's completing the IRF-PAI after admission and transmitting the resulting data to CMS. Two basic requirements must be met if inpatient hospital stays for rehabilitation services are to be covered: (1) the services must be reasonable and necessary, and (2) it must be reasonable and necessary to furnish the care on an inpatient hospital basis, rather than in a less intensive facility, such as a SNF, or on an outpatient basis. Determinations of whether hospital stays for rehabilitation services are reasonable and necessary must be based on an assessment of each beneficiary's individual care needs. Beginning in April 2002, the fiscal intermediaries, the entities that conduct compliance reviews, were specifically authorized to conduct reviews for medical necessity to determine whether an individual admission to an IRF was covered under Medicare. As we reported in April 2005, among the 506,662 Medicare patients admitted to an IRF in fiscal year 2003, less than 44 percent were admitted with a primary condition on the list in the 75 percent rule. About another 18 percent of IRF Medicare patients were admitted with a comorbid condition that was on the list in the rule. Among the 194,922 IRF Medicare patients that did not have a primary or comorbid condition on the list in the rule, almost half were admitted for orthopedic conditions, and among those the largest group was joint replacement patients whose condition did not meet the list's specific criteria. (See figure 1.) Although some joint replacement patients may need admission to an IRF, such as those with comorbidities that affect the patient's function, our analysis showed that few of these patients had comorbidities that suggested a possible need for the level of services offered by an IRF. Our analysis found that 87 percent of joint replacement patients admitted to IRFs in fiscal year 2003 did not meet the criteria of the rule, and among those, over 84 percent did not have any comorbidities that would have affected the costs of their care based on our analysis of the payment data. Because the data we analyzed were from 2003, when enforcement of the rule was suspended, we also looked at newly released data from July through December 2004, after enforcement had resumed, to determine whether admission patterns had changed. We focused on the largest category of patients admitted to IRFs, joint replacement patients, and found no material change in the admission of joint replacement patients for the same time periods in 2003 and 2004. Across all IRFs, the percentage of Medicare patients admitted for a joint replacement declined by 0.1 percentage point. In conjunction with our finding on the number of patients admitted to IRFs for conditions not on the list in the rule, we determined that only 6 percent of IRFs in fiscal year 2003 were able to meet a 75 percent threshold. Many IRFs were able to meet the lower thresholds that would be in place early in the transition period, but progressively fewer IRFs were able to meet the higher threshold levels. As we stated in our report, the criteria IRFs used to assess patients for admission varied by facility and included patient characteristics in addition to condition. All the IRF officials we interviewed evaluated a patient's function when assessing whether a patient needed the level of services of an IRF. Whereas some IRF officials reported that they used function to characterize patients who were appropriate for admission (e.g., patients with a potential for functional improvement), others said they used function to characterize patients not appropriate for admission (e.g., patients whose functional level was too high, indicating that they could go home, or too low, indicating that they needed to be in a SNF). Almost half of the IRF officials interviewed stated that function was the main factor that should be considered in assessing the need for IRF services. IRF officials reported to us that they did not admit all the patients they assessed. Typically, the IRF received a request from a physician in the acute care hospital requesting a medical consultation from an IRF physician, or from a hospital discharge planner or social worker indicating that they had a potential patient. An IRF staff member--usually a physician and/or a nurse--conducted an assessment prior to admission to determine whether to admit a patient. CMS, working through its fiscal intermediaries, has not routinely reviewed IRF admission decisions, although it reported that such reviews could be used to target problem areas. Among the 10 fiscal intermediary officials we interviewed, over half were not conducting reviews of patients admitted to IRFs. We concluded that the presence of patients in IRFs who may not need the intense level of services provided by IRFs called for increased scrutiny of IRF admissions, which could target problem areas and vulnerabilities and thereby reduce the number of inappropriate admissions in the future. We recommended that CMS ensure that its fiscal intermediaries routinely conduct targeted reviews for medical necessity for IRF admissions. CMS agreed that targeted reviews are necessary and said that it expected its contractors to direct their resources toward areas of risk. It also reported that it has expanded its efforts to provide greater oversight of IRF admissions through local policies that have been implemented or are being developed by the fiscal intermediaries. As we reported, the experts IOM convened and other experts we interviewed differed on whether conditions should be added to the list in the 75 percent rule but agreed that condition alone does not provide sufficient criteria to identify types of patients appropriate for IRFs. The experts IOM convened generally questioned the strength of the evidence for adding conditions to the list in the rule. They reported that the evidence on the benefits of IRF services is variable, particularly for certain orthopedic conditions, and some of them reported that little information was available on the need for inpatient rehabilitation for cardiac, transplant, pulmonary, or oncology conditions. In general, they reported that, except for a few subpopulations, uncomplicated, unilateral joint replacement patients rarely need to be admitted to an IRF. Most of them called for further research to identify the types of patients that need inpatient rehabilitation and to understand the effectiveness of IRFs in comparison with other settings of care. IRF officials we interviewed did not agree on whether conditions, including a broader category of joint replacements, should be added to the list in the rule. Half of them suggested that joint replacement be more broadly defined to include more patients saying, for example, that the current requirements were too restrictive and arbitrary. Others said that unilateral joint replacement patients were not generally appropriate for IRFs. We recommended that CMS conduct additional activities to encourage research on the effectiveness of intensive inpatient rehabilitation and factors that predict patient need for these services. CMS agreed and said that it has expanded its activities to guide future research efforts by encouraging government research organizations, academic institutions, and the rehabilitation industry to conduct both general and targeted research, and plans to collaborate with the National Institutes of Health to determine how to best promote research. There was general agreement among all the groups of experts we interviewed, including the experts IOM convened, that condition alone is insufficient for identifying appropriate types of patients for inpatient rehabilitation, because not all patients with a condition on the list need to be in an IRF. For example, stroke is on the list, but not all stroke patients need to go to an IRF after their hospitalization. Similarly, cardiac condition is not on the list, but some cardiac patients may need to be admitted to an IRF. Among the experts convened by IOM, functional status was identified most frequently as the information required in addition to condition. Half of them commented on the need to add information about functional status, such as functional need, functional decline, motor and cognitive function, and functional disability. However, some of the experts convened by IOM recognized the challenge of operationalizing a measure of function, and some experts questioned the ability of the current assessment tools to predict which types of patients will improve if treated in an IRF. We concluded that if condition alone is not sufficient for determining which types of patients are most appropriate for IRFs, more conditions should not be added to the list at the present time, and that future efforts should refine the rule to increase its clarity about which types of patients are most appropriate for IRFs. We recommended that CMS use the information obtained from reviews for medical necessity, research activities, and other sources to refine the rule to describe more thoroughly the subgroups of patients within a condition that require IRF services, possibly using functional status or other factors, in addition to condition. CMS stated that while it expected to follow our recommendation, it would need to give this action careful consideration because it could result in a more restrictive policy than the present regulations, and noted that future research could guide the agency's description of subgroups. As we stated in our report, we believe that action to conduct reviews for medical necessity and to produce more information about the effectiveness of inpatient rehabilitation could support future efforts to refine the rule over time to increase its clarity about which types of patients are most appropriate for IRFs. These actions could help to ensure that Medicare does not pay IRFs for patients who could be treated in a less intensive setting and does not misclassify facilities for payment. Madam 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 Marjorie Kanof at (202) 512-7114. Linda Kohn and Roseanne Price also made key contributions to this statement. A facility may be classified as an IRF if it can show that, during a 12-month period at least 75 percent of all its patients, including its Medicare patients, required intensive rehabilitation services for the treatment of one or more of the following conditions:1. Stroke. 2. Spinal cord injury. 3. Congenital deformity. 4. Amputation. 5. Major multiple trauma. 6. Fracture of femur (hip fracture). 7. Brain injury. 8. Neurological disorders (including multiple sclerosis, motor neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's disease). 9. Burns. 10. Active, polyarticular rheumatoid arthritis, psoriatic arthritis, and seronegative arthropathies resulting in significant functional impairment of ambulation and other activities of daily living that have not improved after an appropriate, aggressive, and sustained course of outpatient therapy services or services in other less intensive rehabilitation settings immediately preceding the inpatient rehabilitation admission or that result from a systemic disease activation immediately before admission, but have the potential to improve with more intensive rehabilitation. 11. Systemic vasculidities with joint inflammation, resulting in significant functional impairment of ambulation and other activities of daily living that have not improved after an appropriate, aggressive, and sustained course of outpatient therapy services or services in other less intensive rehabilitation settings immediately preceding the inpatient rehabilitation admission or that result from a systemic disease activation immediately before admission, but have the potential to improve with more intensive rehabilitation. 12. Severe or advanced osteoarthritis (osteoarthritis or degenerative joint disease) involving two or more major weight bearing joints (elbow, shoulders, hips, or knees, but not counting a joint with a prosthesis) with joint deformity and substantial loss of range of motion, atrophy of muscles surrounding the joint, significant functional impairment of ambulation and other activities of daily living that have not improved after the patient has participated in an appropriate, aggressive, and sustained course of outpatient therapy services or services in other less intensive rehabilitation settings immediately preceding the inpatient rehabilitation admission but have the potential to improve with more intensive rehabilitation. (A joint replaced by a prosthesis no longer is considered to have osteoarthritis, or other arthritis, even though this condition was the reason for the joint replacement.) 13. Knee or hip joint replacement, or both, during an acute hospitalization immediately preceding the inpatient rehabilitation stay and also meet one or more of the following specific criteria: a. The patient underwent bilateral knee or bilateral hip joint replacement surgery during the acute hospital admission immediately preceding the IRF admission. b. The patient is extremely obese, with a body mass index of at least 50 at the time of admission to the IRF. c. The patient is age 85 or older at the time of admission to the IRF. 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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Medicare classifies inpatient rehabilitation facilities (IRF) using the "75 percent rule." If a facility can show that during a 12-month period at least 75 percent of its patients required intensive rehabilitation for 1 of 13 listed conditions, it may be classified as an IRF and paid at a higher rate than for less intensive rehabilitation in other settings. Because this difference can be substantial, it is important to classify IRFs correctly. GAO was asked to discuss issues relating to the classification of IRFs, and in April 2005 it issued a report, Medicare: More Specific Criteria Needed to Classify Inpatient Rehabilitation Facilities (GAO-05-366). For that report, GAO analyzed data on all Medicare patients (the majority of patients in IRFs) admitted to IRFs in fiscal year 2003, spoke to IRF medical directors, and had the Institute of Medicine (IOM) convene a meeting of experts to evaluate the use of a list of conditions in the 75 percent rule. This testimony is based on the April 2005 report. As noted in the April 2005 report, GAO found that in fiscal year 2003 fewer than half of all IRF Medicare patients were admitted for having a primary condition on the list in the 75 percent rule. Almost half of all patients with conditions not on the list were admitted for orthopedic conditions, and among those the largest group was joint replacement patients. The experts IOM convened said that uncomplicated unilateral joint replacement patients rarely need to be admitted to an IRF, and GAO analysis suggested that relatively few of the Medicare unilateral joint replacement patients had comorbid conditions that suggested a possible need for the IRF level of services. Additionally, GAO found that only 6 percent of IRFs in fiscal year 2003 were able to meet a 75 percent threshold. GAO also found that IRFs varied in the criteria used to assess patients for admission, using patient characteristics such as functional status, as well as condition. The Centers for Medicare & Medicaid Services (CMS), working through its fiscal intermediaries, had not routinely reviewed IRF admission decisions to determine whether they were medically justified, although it reported that such reviews could be used to target problem areas. The experts IOM convened and other clinical and nonclinical experts GAO interviewed differed on whether conditions should be added to the list in the 75 percent rule. The experts IOM convened questioned the strength of the evidence for adding conditions to the list--finding the evidence for certain orthopedic conditions particularly weak--and some of them reported that little information was available on the need for inpatient rehabilitation for cardiac, transplant, pulmonary, or oncology patients. They called for further research to identify the types of patients that need inpatient rehabilitation and to understand the effectiveness of IRFs. There was general agreement among all the groups of experts interviewed that condition alone is insufficient for identifying appropriate types of patients for inpatient rehabilitation, since within any condition only a subgroup of patients require the level of services of an IRF, and that functional status should also be considered in addition to condition. GAO concluded that if condition alone is not sufficient for determining which types of patients are most appropriate for IRFs, more conditions should not be added to the list at the present time and the rule should be refined to clarify which types of patients should be in IRFs as opposed to another setting.
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Today the Social Security program does not face an immediate crisis but rather a long-range and more fundamental financing problem driven largely by known demographic trends. The lack of an immediate solvency crisis affects the nature of the challenge, but it does not eliminate the need for action. Acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program's rising costs. Acting soon would allow changes to be phased in so the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning while helping to avoid related "expectation gaps." Mr. Chairman, as you heard earlier this month while hosting the second Annual OECD International Conference of Chairpersons of Parliamentary Budget Committees, we are not alone in facing long-term budget challenges due to an aging population. Our counterparts in many European countries are debating these same issues, and a number of developed and developing countries have already engaged in fundamental reform of their systems to deal with their long-range challenges. Acting soon will also help put the overall federal budget on a more sustainable footing over the long term, thereby promoting both higher economic growth and more fiscal flexibility. The importance of such flexibility was brought dramatically home last September. The budgetary surpluses of recent years put us in a stronger position to respond both to the events of September 11 and to the economic slowdown than would otherwise have been the case. Going forward, the nation's commitment to surpluses will truly be tested. None of the changes since September 11 have lessened the pressures placed by Social Security, Medicare, and Medicaid on the long-term fiscal outlook. Indeed, the events of September 11 have served to increase our long-range fiscal challenges. Since there is a great deal of confusion about Social Security's current financing arrangements and the nature of its long-term financing problem, I would like to spend some time describing the nature, timing, and extent of the financing problem. As you all know, Social Security has always been largely a pay-as-you-go system. This means that current workers' taxes pay current retirees' benefits. As a result, the relative numbers of workers and beneficiaries has a major impact on the program's financial condition. This ratio, however, is changing. In the 1960s, the ratio averaged 4.2:1. Today it is 3.4:1 and it is expected to drop to around 2:1 by 2030. The retirement of the baby boom generation is not the only demographic challenge facing the system. People are retiring early and living longer. A falling fertility rate is the other principal factor underlying the growth in the elderly's share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95-- a rate that is below replacement. Taken together, these trends threaten the financial solvency and sustainability of this important program. (See fig. 1.) The combination of these trends means that labor force growth will begin to slow after 2010 and become negligible by 2050. (See fig. 2.) Relatively fewer workers will be available to produce the goods and services that all will consume. Without a major increase in productivity, low labor force growth will lead to slower growth in the economy and to slower growth of federal revenues. This in turn will only accentuate the overall pressure on the federal budget. This slowing labor force growth is not always considered as part of the Social Security debate. Social Security's retirement eligibility dates are often the subject of discussion and debate and can have a direct effect on both labor force growth and the condition of the Social Security retirement program. However, it is also appropriate to consider whether and how changes in pension and/or other government policies could encourage longer workforce participation. To the extent that people choose to work longer as they live longer, the increase in the share of life spent in retirement would be slowed. This could improve the finances of Social Security and mitigate the expected slowdown in labor force growth. In addition to encouraging people to work longer, a second approach to addressing labor force growth would be to bring more people into the labor force. In domestic social policy, we have seen an increasing focus on encouraging those previously outside the labor force (i.e., welfare recipients, the disabled) into the workforce. Concern about the slowdown in the growth of the labor force may also lead to discussions about immigration and its role. Increased immigration, however, poses complex issues and is unlikely to be the sole solution. For example, according to a recent United Nations study, it would take more than a sustained tenfold increase in projected immigration to maintain the ratio of workers to retirees at recent levels. These are issues that the Congress may wish to explore further in the next few years. Because of the demographic trends discussed above, current estimates show that within 15 years benefit payments will begin to exceed program revenue, which is composed largely of payroll taxes on current workers. (See fig. 3.) Within the federal budget, Social Security--more properly, the Old-Age and Survivors Insurance and Disability Insurance programs (OASDI)--has two trust funds that authorize Treasury to pay benefits as long as the applicable trust fund has a positive balance. Currently, annual tax revenues to Social Security exceed annual benefit payments. The Trust Funds, by law, invest the resulting cash surplus in U.S. government obligations or securities that are backed by the full faith and credit of the U.S. government. At present, the Trust Funds' assets are in the form of special, nonmarketable Treasury securities that are backed by the full faith and credit of the U.S. government and so carry no risk of default. Although the Trust Funds cannot sell their holdings in the open market, the Trust Funds face no liquidity risk since they can redeem their special Treasury securities before maturity without penalty. These securities earn interest credits at a statutory rate linked to market yields, and this interest from the Treasury is credited to the Trust Funds in the form of additional Treasury securities. I think it is useful to pause for a moment here and reflect on what the term "trust fund" means in the federal budget. Trust funds in the federal budget are not like private trust funds. An individual can create a private trust fund using his or her own assets to benefit a stated individual(s). The creator, or settlor, of the trust names a trustee who has a fiduciary responsibility to manage the designated assets in accordance with the stipulations of the trust. In contrast, federal trust funds are budget accounts used to record receipts and expenditures earmarked for specific purposes. The Congress creates a federal trust fund in law and designates a funding source to benefit stated groups or individuals. Unlike most private trustees, the federal government can raise or lower future trust fund collections and payments or change the purposes for which the collections are used by changing existing laws. Moreover, the federal government has custody and control of the funds. Under current law, when the Social Security Trust Funds' tax receipts exceed costs--that is, when the Trust Funds have an annual cash surplus-- this surplus is invested in Treasury securities and can be used to meet current cash needs of the government or to reduce debt held by the public. In either case, the solvency of the Trust Funds is unchanged. However, while the Treasury securities are an asset to the Trust Funds, they are a liability to the Treasury. Any increase in assets to the Trust Funds creates an increase of equal size in future claims on the Treasury. One government fund is lending to another. As a result, these transactions net out on the government's consolidated books. The accumulated balances in a trust fund do not in and of themselves increase the government's ability to meet the related program commitments. That is, simply increasing trust fund balances does not improve program sustainability. Increases in trust fund balances can strengthen the ability to pay future benefits if a trust fund's cash surpluses are used to improve the government's overall fiscal position. For example, when a trust fund's cash surpluses are used to reduce debt held by the public, this increases national saving, contributes to higher economic growth over the long term, and enhances the government's ability to raise cash in the future to pay benefits. It also reduces federal interest costs below what they otherwise would have been, thereby promoting greater fiscal flexibility in the future. According to the Trustees' intermediate estimates, the combined Social Security Trust Funds will be solvent until 2041. However, our long-term model shows that well before that time program spending will constitute a rapidly growing share of the budget and the economy. Ultimately, the critical question is not how much a trust fund has in assets, but whether the government as a whole can afford the promised benefits in the future and at what cost to other claims on scarce resources. As I have said before, the future sustainability of programs is the key issue policymakers should address--i.e., the capacity of the economy and budget to afford the commitment. Fund solvency can help, but only if promoting solvency improves the future sustainability of the program. Today, the Social Security Trust Funds take in more in taxes than they spend. Largely because of the known demographic trends I have described, this situation will change. Under the Trustees' intermediate assumptions, annual cash surpluses begin to shrink in 2006, and combined program outlays begin to exceed dedicated tax receipts in 2017, a year after Medicare's Hospital Insurance Trust Fund (HI) outlays are first expected to exceed program tax revenues. At that time, both programs will become net claimants on the rest of the federal budget. (See fig. 4.) As I noted above, the special Treasury securities represent assets for the Trust Funds but are future claims against the Treasury. Beginning in 2017, the Trust Funds will begin drawing on the Treasury to cover the cash shortfall, first relying on interest income and eventually drawing down accumulated trust fund assets. Regardless of whether the Trust Funds are drawing on interest income or principal to make benefit payments, the Treasury will need to obtain cash for those redeemed securities either through increased taxes, spending cuts, increased borrowing from the public, or correspondingly less debt reduction than would have been the case had Social Security's cash flow remained positive. Neither the decline in the cash surpluses nor the cash deficit will affect the payment of benefits. However, the shift affects the rest of the budget. The negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. From the perspective of the federal budget and the economy, the challenge posed by the growth in Social Security spending becomes even more significant in combination with the more rapid expected growth in Medicare and Medicaid spending. This growth in spending on federal entitlements for retirees will become increasingly unsustainable over the longer term, compounding an ongoing decline in budgetary flexibility. Over the past few decades, spending on mandatory programs has consumed an ever-increasing share of the federal budget. Prior to the creation of the Medicare and Medicaid programs, in 1962 mandatory spending plus net interest accounted for about 32 percent of total federal spending. By 2002, this share had almost doubled to approximately 63 percent of the budget. (See fig. 5.) *Office of Management and Budget current services estimate. In much of the last decade, reductions in defense spending helped accommodate the growth in these entitlement programs. This, however, is no longer a viable option. Even before September 11, reductions in defense spending were no longer available to help fund other claims on the budget. Indeed, spending on defense and homeland security will grow as we seek to combat new threats to our nation's security. Our long-term budget simulations continue to show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. Assuming, for example, that the tax reductions enacted last year do not sunset and discretionary spending keeps pace with the economy, by midcentury federal revenues may only be adequate to pay Social Security and interest on the federal debt. Spending for the current Medicare program--without the addition of a drug benefit--is projected to account for more than one- quarter of all federal revenues. To obtain balance, massive spending cuts, tax increases, or some combination of the two would be necessary. (See fig. 6.) Neither slowing the growth of discretionary spending nor allowing the tax reductions to sunset eliminates the imbalance. It is important as well to look beyond the federal budget to the economy as a whole. Figure 7 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2002 Trustees' intermediate estimates and the Congressional Budget Office's (CBO) most recent long-term Medicaid estimates, spending for these entitlement programs combined will grow to 14.1 percent of GDP in 2030 from today's 8.3 percent. Taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. This testimony is not about the complexities of Medicare, but it is important to note that Medicare presents a much greater, more complex, and more urgent fiscal challenge than does Social Security. Unlike Social Security, Medicare growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. Increases in the number and quality of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent. Third-party payers generally insulate consumers from the cost of health care decisions. These factors and others contribute to making Medicare a much greater and more complex fiscal challenge than even Social Security. When Social Security redeems assets to pay benefits, the program will constitute a claim on real resources in the future. As a result, taking action now to increase the future pool of resources is important. To echo Federal Reserve Chairman Greenspan, the crucial issue of saving in our economy relates to our ability to build an adequate capital stock to produce enough goods and services in the future to accommodate both retirees and workers in the future. The most direct way the federal government can raise national saving is by increasing government saving. Ultimately, as this Committee recommended last fall, we should attempt to return to a position of surplus as the economy returns to a higher growth path. This would allow the federal government to reduce the debt overhang from past deficit spending, provide a strong foundation for future economic growth, and enhance future budgetary flexibility. Similarly, taking action now on Social Security would not only promote increased budgetary flexibility in the future and stronger economic growth but would also make less dramatic action necessary than if we wait. Perhaps the best way to illustrate this is to compare what it would take to achieve actuarial balance at different points in time by either raising payroll taxes or reducing benefits. Figure 8 shows this. If we did nothing until 2041--the year the Trust Funds are estimated to be exhausted--achieving actuarial balance would require changes in benefits of 31 percent or changes in taxes of 45 percent. As figure 8 shows, earlier action shrinks the size of the necessary adjustment. Thus both sustainability concerns and solvency considerations drive us to act sooner rather than later. Trust Fund exhaustion may be nearly 40 years away, but the squeeze on the federal budget will begin as the baby boom generation starts to retire. Actions taken today can ease both these pressures and the pain of future actions. Acting sooner rather than later also provides a more reasonable planning horizon for future retirees. As important as financial stability may be for Social Security, it cannot be the only consideration. As a former public trustee of Social Security and Medicare, I am well aware of the central role these programs play in the lives of millions of Americans. Social Security remains the foundation of the nation's retirement system. It is also much more than just a retirement program; it also pays benefits to disabled workers and their dependents, spouses and children of retired workers, and survivors of deceased workers. Last year, Social Security paid almost $408 billion in benefits to more than 45 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or older were poor, and 48 percent would have been poor without Social Security. It is precisely because the program is so deeply woven into the fabric of our nation that any proposed reform must consider the program in its entirety, rather than one aspect alone. Thus, GAO has developed a broad framework for evaluating reform proposals that considers not only solvency but other aspects of the program as well. The analytic framework GAO has developed to assess proposals comprises three basic criteria: the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget; the relative balance struck between the goals of individual equity and how readily a proposal could be implemented, administered, and explained to the public. The weight that different policymakers may place on different criteria will vary, depending on how they value different attributes. For example, if offering individual choice and control is less important than maintaining replacement rates for low-income workers, then a reform proposal emphasizing adequacy considerations might be preferred. As they fashion a comprehensive proposal, however, policymakers will ultimately have to balance the relative importance they place on each of these criteria. Historically, Social Security's solvency has generally been measured over a 75-year projection period. If projected revenues equal projected outlays over this time horizon, then the system is declared in actuarial balance. Unfortunately, this measure is itself unstable. Each year, the 75-year actuarial period changes, and a year with a surplus is replaced by a new 75th year that has a significant deficit. This means that, changes that restore solvency only for the 75-year period will not hold. For example, if we were to raise payroll taxes immediately by 1.87 percentage points of taxable payroll today--which, according to the 2002 Trustees Report, is the amount necessary to achieve 75-year balance--the system would be out of balance next year. This is the case because actions taken to close the 75-year imbalance would not fully address the projected deficit in year 76 of 6.49 percent of taxable payroll. Reforms that lead to sustainable solvency are those that avoid the automatic need to periodically revisit this issue. As I have already discussed, reducing the relative future burdens of Social Security and health programs is essential to a sustainable budget policy for the longer term. It is also critical if we are to avoid putting unsupportable financial pressures on future workers. Reforming Social Security and federal health programs is essential to reclaiming our future fiscal flexibility to address other national priorities. The current Social Security system's benefit structure strikes a balance between the goals of retirement income adequacy and individual equity. From the beginning, benefits were set in a way that focused especially on replacing some portion of workers' pre-retirement earnings. Over time other changes were made that were intended to enhance the program's role in helping ensure adequate incomes. Retirement income adequacy, therefore, is addressed in part through the program's progressive benefit structure, providing proportionately larger benefits to lower earners and certain household types, such as those with dependents. Individual equity refers to the relationship between contributions made and benefits received. This can be thought of as the rate of return on individual contributions. Balancing these seemingly conflicting objectives through the political process has resulted in the design of the current Social Security program and should still be taken into account in any proposed reforms. Policymakers could assess income adequacy, for example, by considering the extent to which proposals ensure benefit levels that are adequate to protect beneficiaries from poverty and ensure higher replacement rates for low-income workers. In addition, policymakers could consider the impact of proposed changes on various subpopulations, such as low-income workers, women, minorities, and people with disabilities. Policymakers could assess equity by considering the extent to which there are reasonable returns on contributions at a reasonable level of risk to the individual, improved intergenerational equity, and increased individual choice and control. Differences in how various proposals balance each of these goals will help determine which proposals will be acceptable to policymakers and the public. Program complexity makes implementation and administration both more difficult and harder to explain to the public. Some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security, even those that make incremental changes in the already existing structure. However, the greatest potential implementation and administrative challenges are associated with proposals that would create individual accounts. These include, for example, issues concerning the management of the information and money flow needed to maintain such a system, the degree of choice and flexibility individuals would have over investment options and access to their accounts, investment education and transitional efforts, and the mechanisms that would be used to pay out benefits upon retirement. Harmonizing a system that includes individual accounts with the regulatory framework that governs our nation's private pension system would also be a complicated endeavor. However, the complexity of meshing these systems should be weighed against the potential benefits of extending participation in individual accounts to millions of workers who currently lack private pension coverage. Continued public acceptance and confidence in the Social Security program require that any reforms and their implications for benefits be well understood. This means that the American people must understand why change is necessary, what the reforms are, why they are needed, how they are to be implemented and administered, and how they will affect their own retirement income. All reform proposals will require some additional outreach to the public so that future beneficiaries can adjust their retirement planning accordingly. Yet the more transparent the implementation and administration of reform, and the more carefully such reform is phased in, the more likely it will be understood and accepted by the American people. With regard to proposals that involve individual accounts, an essential challenge would be to help the American people understand the relationship between their individual accounts and traditional Social Security benefits, thereby ensuring that any gaps in expectations about current or future benefits are avoided. In addition, increasing the public's level of sophistication and understanding of how to invest in the market, the relationship between risk and return, and the potential benefits of diversification presents an education challenge that must be surmounted so that the American people have the necessary tools to secure their future. The Enron collapse helps to illustrate the importance of this, as well as the need to provide clear and understandable information so that the public can make informed retirement decisions. Early action to address the financing problems of Social Security yields the highest fiscal dividends for the federal budget and provides a longer period for future beneficiaries to make adjustments in their own planning. The events of September 11 and the challenges of combating terrorism do not change this. In fact, the additional spending that will be required to fight the war on terrorism and protect our homeland will serve to increase our long-range fiscal challenges. It remains true that the longer we wait to take action on the programs driving long-term deficits, the more painful and difficult the choices will become. Although the program does not face an immediate solvency crisis as it did in 1983, the fundamental nature of the program's long-term financing challenge means that timely action is needed. The demographic trends recognized in 1983 are now almost upon us. It is these demographic trends--and their implications for both Social Security and Medicare--that lead to the conclusion that the program faces both a solvency and a sustainability problem. For the American people to understand why change is necessary, a public education campaign will be needed that focuses not just on Social Security but also on our long-range fiscal challenges. We will face many difficult choices in making Social Security sustainable. Focusing on comprehensive packages of reforms that protect the benefits of current retirees while achieving the right balance of equity and adequacy for future beneficiaries will help to foster credibility and acceptance. This will help us avoid getting mired in the details and losing sight of important interactive effects. It will help build the bridges necessary to achieve consensus. Today I have described the three basic criteria against which GAO thinks Social Security reform proposals may be measured. These may not be the same criteria every analyst would suggest, and certainly how policymakers weight the various elements may vary. However, if comprehensive proposals are evaluated as to (1) their financing and economic effects, (2) their effects on individuals, and (3) their feasibility, we will have a good foundation for devising agreeable solutions, perhaps not in every detail, but as an overall reform package that will meet the most important of our objectives.
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Social Security not only represents the foundation of our retirement income system; it also provides millions of Americans with disability insurance and survivor's benefits. Although the Social Security Trustees now project that under the intermediate or "best estimate" assumptions the combined Social Security Trust Funds will be exhausted 3 years later than in last year's estimates, the magnitude of the long-term funding shortfall is virtually unchanged. Without reform, Social Security, Medicare, and Medicaid are unsustainable, and the long-term impact of these entitlement programs on the federal budget and the economy will be dramatic. Social Security reform is part of a larger and significant fiscal and economic challenge. Absent reform, the nation will ultimately have to choose between persistent, escalating federal deficits, significant tax increases, or dramatic budget cuts. Focusing on trust fund solvency alone is not sufficient. Aiming for sustainable solvency would increase the chance that future policymakers would not have to face, on a recurring basis, the difficult questions of whether the government will have the capacity to pay future claims or what else will have to be squeezed to pay those claims. Comparing the beneficiary impact of reform proposals solely to current Social Security promised benefits is inappropriate since all current promised benefits are not funded over the longer term. Reform proposals should be evaluated as packages. If the focus is on the pros and cons of each element of reform, it may prove impossible to build the bridges necessary to achieve consensus. Acting sooner rather than later helps to ease the difficulty of change. Waiting until Social Security faces an immediate solvency crisis will limit the scope of feasible solutions and could reduce the options field to only those choices that are the most difficult and could also delay the really tough decisions on Medicare and Medicaid.
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DOD may be unable to prevent an attack using chemical or biological weapons. Therefore, DOD has determined that servicemembers must be protected to survive and conduct effective military operations. Consequently, DOD supplies servicemembers with a protective ensemble consisting of a suit, mask with breathing filter, rubber boots, butyl gloves, and hoods as required. Figure 1 displays the components that comprise a protective ensemble. During Operation Desert Shield/Desert Storm, DOD noted that most of this equipment (1) could cause unacceptable heat stress to the wearer, (2) could limit freedom of movement and impair job performance, (3) is bulky, and (4) is not fully interoperable across the services. Furthermore, most of the existing suits (1) are no longer manufactured, (2) can be used for up to 14 years from the date of manufacture, and (3) will expire by 2007. To address these issues, DOD developed new, lightweight individual protective equipment such as the Joint Service Lightweight Integrated Suit Technology (JSLIST) trousers and coat to replace the current protective suits. DOD began procuring the JSLIST suits in 1997. An improved multipurpose overboot is in procurement and new protective gloves are under development to improve manual dexterity and/or reduce heat stress on the wearer. Similarly, since the existing masks may cause some breathing difficulty, DOD is developing a new mask but does not expect to begin procurement until fiscal year 2006. During fiscal years 2002 through 2007, DOD plans to spend about $5.7 billion on planning for chemical and biological defense, acquisition of defense equipment, facilities construction, and research and development. In 1999, we recommended that DOD develop a performance plan guided by outcome-oriented management principles embodied in the Government Performance and Results Act of 1993 (Pub. L. 103-62). DOD created a plan; however, performance goals and measures were being developed at the time of our review. DOD's assessment process for determining the risk to military operations is unreliable, and, as a result, the Department's current determination that the risk is generally low is inaccurate. Although the Department uses the Chemical and Biological Defense Program Annual Report to Congress to indicate its readiness for operations in a chemically and biologically contaminated environment, the 2000 report contains erroneous inventory data and understates equipment requirements. More important, the methodology for assessing the risk is flawed because it is not based on the number of complete ensembles needed and it obscures military service readiness by combining service data and reporting the results jointly. DOD's criteria for assessing the risk of wartime shortages is to determine the numbers of protective suits, masks, breathing filters, gloves, boots, and hoods it has on hand, compare them against the requirements for those individual items, and then assign risk. (See table 1) In the draft fiscal year 2001 annual report to Congress provided to us in June 2001, DOD reported that it was generally at low risk for suits.However, the risk assessment process was flawed in part because DOD used erroneous data on protective suits. For example DOD made computational errors in comparing the older suits and JSLIST suits against a combined total suit requirement, the Air Force overreported its suit requirement by 801,167 suits, DOD reported it had 1,229,935 JSLIST suits on hand as of September 30, 2000, but overcounted its inventory by 782,232 JSLIST suits, the Navy included about 117,000 suits that had passed their expiration dates and were therefore unusable, and the Army underreported its suit stocks by an estimated 231,050 suits. These errors occurred in large part as the result of problems in DOD's systems for managing protective suit inventories. We believe that the services collectively had no more than 4,348,999 suits of all types on hand as of September 30, 2000. When we included all the suits for wartime use and adjusted the numbers to account for the errors and miscounts, the risk category changed to high for suits, as shown in table 2. In February 2001, the military services informed the Joint Nuclear, Biological, and Chemical Defense Board that equipment requirements were actually much higher than those reported to Congress and included in the fiscal year 2001 Logistics Support Plan. The board subsequently accepted the new requirements. Based on these new requirements, the risk remained high for suits; changed to high for filters, boots, and hoods; and remained low for gloves and masks, as shown by comparing the risk level columns in tables 2 and 3. DOD has inaccurately assessed the risk to military operations by determining the number of individual items of equipment it has on hand and by combining the services' inventories of individual items. Service guidance specifies that a total of 1,573,866 active and reserve servicemembers need protection to meet current operations plan requirements. DOD provides each deploying servicemember with up to four ensembles either at deployment or held in war reserve and distributed to theater operating forces when needed. The ensembles consist of five components: (1) four protective suits, (2) between four and eight pairs of gloves and boots, (3) between four and eight hoods, (4) up to four breathing filters, and (5) one mask. Because DOD does not report each service's readiness based on the equipment it has on hand, but rather provides a joint assessment, critical service shortages or opportunities for cross-service assistance tend to be obscured. In fact, each service reported shortages of one component of the ensemble. Specifically, the Army reported critical shortages of hoods; the Air Force reported shortages of gloves; the Navy, shortages of suits; the Marine Corps, shortages of boots. When we compared the number of ensembles required by each service's guidance and applied the DOD risk criteria, the risk was high for all four services. As a result, DOD cannot provide all the required ensembles for 682,331 servicemembers scheduled for wartime deployment, as shown in table 4. The risk posed by suit shortages is likely to worsen through 2007 due to increasing rates of older suits' expiration and DOD's plan not to replace all of them. As of October 1, 2000, DOD reported a shortage of about 1.7 million protective suits; it believes about 3.3 million, or 75 percent, of the current suit inventory will expire by 2006. JSLIST suits cost about $203 each compared to about $80 each for most of the existing suits, and DOD plans to buy only about 2.8 million JSLIST suits as replacements. Therefore, the shortage will increase to about 2.2 million suits by 2006. DOD's plan to buy fewer new suits is also influenced by expiration of the suits and budgetary considerations. By replacing suits at a rate slower than the expiration rate, DOD plans to spread future suit purchases over more years to avoid a disproportionately large amount of suits expiring in any one year. This tactic allows greater dispersion of future suit expirations and replacement costs but is likely to also increase the short-term risk of wartime shortages. DOD is attempting to mitigate some of the shortages. For example, the Army plans to procure more than 500,000 hoods through fiscal year 2002, and the Defense Logistics Agency was procuring more of the existing generation of boots at the time of our report. Some opportunities also exist for one service to assist another. For example, the Army and Marine Corps reported significantly more gloves on hand than required and could transfer some to the Air Force to offset Air Force shortfalls since all the services use the same gloves. However, other available equipment is not interoperable and cannot be easily shared. For example, the Navy and Marine Corps suits are hooded, so they do not have separate hoods and therefore cannot help alleviate the Army's shortage. If all goes according to plan, such interoperability problems should ease after fiscal year 2006, as all four services begin using the JSLIST suit and new joint masks, gloves, and boots. Shortcomings in DOD's inventory management of chemical and biological protective equipment adversely affect the Department's ability to accurately assess the readiness of the services to meet requirements for the equipment and mitigate the risk of shortages. DOD's current inventory information on chemical and biological equipment is unreliable for making an accurate risk assessment because DOD and the services cannot easily link inventory records; lack data on suit expiration dates; cannot easily identify, track, and locate defective suits; and have miscalculated the requirements and the number of suits available. These shortcomings are consistent with long-term problems in DOD's inventory management that we have consistently identified since 1990 as a high-risk area due to a variety of problems, including ineffective and wasteful management systems and procedures. The Defense Logistics Agency and the military services store war reserve inventories of chemical and biological protective suits and other equipment at a variety of depots, warehouses, and storage facilities and as noted earlier, use at least nine different inventory systems to manage the inventories. However, because these systems are not linked, DOD-wide oversight of the inventories is restricted, and the systems are not used to directly support the inventory data in the annual report to Congress and the Logistics Support Plan. Instead, DOD makes an additional effort to collect data theoretically already in the systems. The data collection requires units and depots that store the chemical protective equipment to provide separate data on the equipment annually and relies heavily on government and contractor personnel to manually compile the data. Although DOD has at least nine major inventory management systems, it cannot accurately determine the expiration rate of most of the older suits used by the Air Force and Army. These account for about 3.3 million of the current suit inventory and can be used for up to 14 years from the date of manufacture after which testing has determined that the suits cannot be used in a contaminated environment. Therefore, knowing the date the suits were manufactured is critical to estimating the suits' expiration rate and the rate at which the suits must be replaced with JSLIST suits. However, neither DOD nor we can accurately determine the expiration rate of the old suits because the Defense Logistics Agency, the buyer of the suits, was unable to locate most of the relevant procurement records. Moreover, many of the inventory systems cannot be used to locate the actual expired suits in specific depots because the systems do not record equipment expiration dates or the manufacturers' contract or lot numbers. Two examples or illustrations follow: The Army does not record suit expiration information in its primary inventory management system. To compensate, the Army has assumed an annual 20-percent expiration rate of its inventory through fiscal year 2005 and expects that all suits will expire by 2005. However, the Army's assumption may be inaccurate. Records from a depot in Kentucky indicate that almost 80,000 suits would be serviceable after 2005 and some as late as 2008. The Navy does not know when its suits will expire because, according to the Naval Sea Systems Command, the Navy does not require inventory managers to include the expiration date in inventory records. Nonetheless, in June 2001, the Navy estimated that of 178,000 suits that it had on hand, only about 61,000 were actually serviceable because the rest had passed their expiration date. Our review of 19 Military Sealift Command ships, which help to sustain deployed U.S. forces, showed that most had severe suit shortages, due mostly to expirations. We found additional problems in 48 ships in the Atlantic and Pacific fleets. These ships currently report that they are missing one or more components of their ensembles and consequently cannot provide a complete ensemble for a single crewmember. The Air Force and Marine Corps use different inventory management systems that include contract, lot, and expiration information. Consequently, these two services can estimate suit expiration rates to manage their inventories effectively. Nonetheless, neither system is compatible with the other DOD systems. The majority of DOD's and the services' inventory systems cannot be used to identify, track, and locate defective suits that may be in current inventories because contract and lot numbers needed for the purpose are not always included in the inventory records. In September 1999, officials from one manufacturer pleaded guilty to selling 778,924 defective suits to the government. Since these defective suits were distributed to DOD war reserve and various other inventories, it was imperative that the suits be found. In May 2000, DOD directed units and depots to locate the defective suits and issue them for training use only. At the conclusion of our review, DOD had not found about 250,000 of these suits and did not know whether they had been used, were still in supply, or were sent for disposal. Finding the suits was difficult even when the storage depot was known. For example, the Defense Logistics Agency inventory system does not link the contract and lot number with the box or pallet number to allow ease in locating specific items. Consequently, during our review, the Agency resorted to using 19 reservists for up to 34 days to physically inspect all pallets and boxes containing about 1.3 million protective suits at its depot in Albany, GA. The reservists found about 347,000 defective suits. Figure 2 displays some of the boxes of these suits. Despite the problem in finding defective suits, the Defense Logistics Agency's supply system remained unchanged at the time of our review. Agency officials acknowledged that they would have to physically reinspect depot stocks if specific lots of other suits need to be removed from the inventory before the end of their normal 14-year shelf life. Several questionable inventory management practices and related actions have further contributed to the generation of the inaccurate inventory data, which in turn affects the accuracy of DOD's risk assessment process. These include miscalculating suit requirements, failing to count parts of the suit inventory, and counting suits as part of the inventory long before they are actually delivered from manufacturers. Some specifics regarding these counts are as follows: The Air Force double-counted a portion of its suit requirement by reporting a requirement for both 801,167 of the older suits and the same number of replacement JSLIST suits. The Army asked units that store suits to report the numbers being stored, but it did not tell them to include desert pattern suits, which are generally reserved for use in desert climates. As a result, units did not always include desert pattern suits in their reported inventories, and the Army believes it consequently underreported its desert pattern suit inventory by 10 percent of the total, or 231,050 suits. In the fiscal year 2001 Logistics Support Plan and draft Annual Report to Congress, the services reported they had 1,229,935 JSLIST suits on hand on September 30, 2000, but that included 782,232 suits not yet delivered. DOD procedures for compiling inventory data for these reports allow reporting suits expected to be delivered during the year as on hand. In March 2001, the Marine Corps Systems Command, which manages JSLIST suit distribution, acknowledged that DOD did not have 1,229,935 JSLIST suits on hand on September 30, 2000 but might reach that quantity a year later on September 30, 2001. Moreover, in the same two reports, DOD projected that it would reach 1.5 million suits by September 30, 2001, again overestimating JSLIST production. DOD's inventory management practices tend to affect the suit inventory count. This count in turn can significantly affect the results of the risk assessment process, which is a comparison of requirements against the inventory on hand. Because the Department of Defense's risk assessment process is flawed and unreliable, DOD inaccurately assessed the risk to servicemembers' lives and military operations from potential wartime shortages of protective equipment as low. The Department underestimated the risk by analyzing requirements based on individual equipment items and not ensembles. Furthermore, DOD combined this service data into a consolidated DOD inventory position, which obscured service-specific shortages. As we discovered, the risk is currently higher than reported by DOD. Inadequate inventory management has contributed to increased risk. Because the Department has no integrated inventory system for managing protective equipment, it has no effective way to (1) gather the data needed for the annual report to Congress and Logistics Support plan, (2) determine the expiration dates of protective equipment, and (3) ensure that its data is correct. To further compound the problem, the services have counted equipment as on hand before it has been delivered, adding to the overcounting of equipment that they had in the inventory. Inaccurate risk assessment and inadequate inventory management could adversely affect readiness and prevent informed acquisition decisions that could undermine risk mitigation. To improve the Department of Defense's ability to accurately assess the level of risk and readiness for operations in a contaminated environment, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to issue and implement guidance requiring each service to evaluate its risk on the basis of current inventory numbers of complete ensembles against wartime requirements; implement a fully integrated inventory management system to manage chemical and biological defense equipment and use it to prepare (1) the required annual report to Congress and (2) the annual Logistics Support Plan on chemical and biological defense; establish data fields in the inventory management system to show the contract, lot number, and expiration date of shelf life items; and cease counting equipment as on hand before delivery from the contractor. DOD provided written comments on a draft of our report and generally concurred with our recommendations. DOD partially concurred with our recommendation to conduct risk assessments on the basis of ensembles required in wartime and not just components of the ensemble and stated that the department will issue implementing guidance. DOD concurred with comment with our recommendations to (1) establish an integrated inventory management system; (2) include item contract, lot number, and expiration date information in the new inventory system; and (3) cease counting equipment as on hand before it is delivered and explained its plan to implement the recommendations. In addition, DOD provided technical comments, which we incorporated into our report as appropriate. DOD's comments are printed in their entirety in appendix II along with our evaluation of their comments. We discuss our scope and methodology in detail in appendix I. We conducted our review from August 2000 to April 2001 in accordance with generally accepted government auditing standards. We will send copies of this report to 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. If you or your staff have any questions about this report, please contact me at (202) 512-6020. Additional contact and staff acknowledgments are listed in appendix III. We determined (1) whether DOD's process for assessing the risk to military operations on the basis of wartime equipment requirements is reliable and (2) how DOD's inventory management of chemical and biological protective gear has affected the risk level. We included in our scope chemical and biological protective suits, masks and breathing filters, gloves, boots, and hoods. To understand the process DOD uses to assess the risk, we determined how DOD performs risk assessments. We examined DOD's fiscal years 1999, 2000, and 2001 Chemical and Biological Defense: Annual Report to Congress and Joint Service Nuclear, Biological, and Chemical Defense Logistics Support Plan: Readiness and Sustainment Status and service input to these reports. To understand equipment requirements, we interviewed an official from the Office of the Deputy Assistant to the Secretary of Defense, Chemical and Biological Defense; the Joint Nuclear, Biological, and Chemical Defense Board; the Joint Staff; and other organizations and obtained documents showing how many suits, masks, breathing filters, gloves, boots, and hoods are needed to support operations. We also obtained the Center for Army Analysis' Joint Service Chemical Defense Equipment Consumption Rates IV, Volume II; briefing slides; guidance; directives; memorandums; cables; and other documents that specify requirements. We also used service guidance to determine the number of servicemembers scheduled for deployment who need protection. We did not evaluate the validity of the requirements. To calculate on-hand stocks, we obtained inventory records from war reserve or other depots in the United States, Japan, the Republic of Korea, the Netherlands, elsewhere in Europe, and aboard prepositioned ships in Guam to determine the size of the stockpile. As a result of the national security reviews under way at the time of our review, requirements for chemical defense equipment could change. If so, current risk assessments would need revision. To determine how DOD's inventory management practices affected risk, we tried to verify the accuracy of inventory data reported by the services. We did this by (1) interviewing officials and obtaining documents showing how the inventory data were collected and verified, (2) obtaining Navy documents showing the number of suits still in the inventory that had not expired and comparing that number to the reported inventory, and (3) obtaining JSLIST suit production data. We also tried to determine how many of the older chemical protective suits DOD had bought and when, but the Defense Logistics Agency could not find most of its records documenting suit procurement. To determine the compatibility of the nine major supply systems, we interviewed the responsible DOD officials, compared system inventory procedures, checked records against physical inventories, and obtained relevant documents. To determine how long shelf life items can be used and to estimate equipment expiration rates, we interviewed officials from the Army's Soldier Biological and Chemical Command in Maryland; Natick Soldier Center in Massachusetts; and Rock Island Arsenal in Illinois; the Naval Sea Systems Command in Virginia; the Air Force Headquarters Directorate of Supply in Washington, D.C.; and the Marine Corps' Combat Development Command in Virginia and Materiel Command in Georgia. We also interviewed officials and obtained documents from the Defense Logistics Agency offices in Pennsylvania showing planned or actual procurement of JSLIST suits and other equipment. To determine how the services and depots identify which items will expire and need replacement, we inspected or inventoried chemical protective suits stored at the Bluegrass Army Depot in Richmond, KY; the Defense Logistics Agency's war reserve depot in Albany, GA; the Air Force's Mobility Bag Center in Avon Park and MacDill Air Force Base, FL; and aboard ships at the Norfolk Navy Base, Norfolk, VA. At these locations, we met with officials and obtained supply records and suit and other equipment expiration data. The following is our response to the Department of Defense letter dated September 18, 2001. 1. While DOD presents the data in the cited Annual Report to Congress and Logistics Support Plan annexes, the data is presented on an item-by- item basis and not an ensemble basis. Consequently, the information as presented does not give a fully reliable risk assessment. DOD acknowledges that it has scarce resources and must manage risk within those resource constraints. Consequently, DOD also indicated in its comments that it will rely on industrial surge capacity to make up any shortfall in required ensemble components. Nonetheless, the Department's risk assessment is based on having 120 days of supply at the units or in war reserve. If the Department now plans to stock fewer than 120 days of supply and rely on industrial surge to make up the difference in a crisis, the risk level would be higher because the continuing shortages would be greater. 2. The Air Force has developed, and the Marine Corps is developing inventory systems, both of which include contract, lot number, and expiration date of equipment on hand. Adopting one of these systems DOD-wide could reduce or eliminate development costs associated with the Business System Modernization program, assure interoperability across the services, and meet the intent of our third recommendation. In addition to the contact named above, Brian J. Lepore, Raymond G. Bickert, Tracy M. Brown, and Sally L. Newman made key contributions to this report. Major Management Challenges and Program Risks: Department of Defense (GAO-01-244, Jan. 2001). Chemical and Biological Defense: Units Better Equipped but Training and Readiness Reporting Problems Remain (GAO-01-27, Nov. 2000). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/T-NSIAD-00-180, May 2000). Chemical and Biological Defense: Observations on Nonmedical Chemical and Biological R&D Programs (GAO/T-NSIAD-00-130, Mar. 2000). Chemical and Biological Defense: Chemical Stockpile Emergency Preparedness Program for Oregon and Washington (GAO/NSIAD-00-13, Oct. 1999). Chemical and Biological Defense: Observations on Actions Taken to Protect Military Forces (GAO/T-NSIAD-00-49, Oct. 1999). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/NSIAD-99-159, Aug. 1999). Chemical and Biological Defense: Coordination of Nonmedical Chemical and Biological R&D Programs (GAO/NSIAD-99-160, Aug. 1999). Chemical and Biological Defense: DOD's Evaluation of Improved Garment Materials (GAO/NSIAD-98-214, Aug. 1998). Chemical and Biological Defense: Observations on DOD's Plans to Protect U.S. Forces (GAO/T-NSIAD-98-83, Mar. 1998). Assuring Condition and Inventory Accountability of Chemical Protective Suits (D-2000-086, Feb. 25, 2000). M41 Protection Assessment Test System Capabilities (99-061, Dec. 24, 1998). Unit Chemical and Biological Defense Readiness Training (98-174, July 17, 1998). Inventory Accuracy at the Defense Depot, Columbus, Ohio (97-102, Feb. 27, 1997). Army Protective Mask Requirements (95-224, June 8, 1995).
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The Department of Defense (DOD) believes it is increasingly likely that an adversary will use chemical or biological weapons against U.S. forces to degrade superior U.S. conventional warfare capabilities, placing servicemembers' lives and effective military operations at risk. To reduce the effects of such an attack on military personnel, DOD has determined the quantity of chemical and biological protective suits, masks, breathing filters, gloves, boots, and hoods that are needed based on projected wartime requirements. DOD's assessment process is unreliable for determining the risk to military operations. DOD's 2000 report is inaccurate because it includes erroneous inventory data and wartime requirements. Inadequate inventory management is an additional risk factor because readiness can be compromised by DOD's inventory management practices, which prevent an accurate accounting of the availability or adequacy of its protective equipment.
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STB is an independent agency administratively housed within the Department of Transportation. The successor to ICC, STB is responsible for the economic regulation of railroads and certain pipelines, as well as some motor carrier and water carrier activities. STB has fewer responsibilities and functions than ICC. STB's fiscal year 1998 budget is nearly $15.9 million, and it employs about 135 full-time equivalent staff, compared with ICC's fiscal year 1994 budget of $52.2 million and employment of 615 full-time equivalent staff. STB's current authorization ends on September 30, 1998. Most of STB's regulatory oversight centers on the rail industry. This oversight encompasses enforcement of the "common carrier" obligation (that the rates, services, and practices of carriers be reasonable), mergers and acquisitions, and the construction and abandonment of railroad lines. The ICC Termination Act eliminated, among other things, the regulatory requirement to file tariffs listing rates charged for transporting goods and requirements pertaining to contracts for the shipment of nonagricultural commodities. Rail issues constitute the majority of STB's workload. In fiscal year 1997, STB dedicated 116 of its 131 full-time equivalent staff (89 percent) to rail issues. Of the 1,429 decisions STB issued in fiscal year 1997, 988 (about 70 percent) concerned rail issues. STB has jurisdiction over pipelines that provide interstate transportation of commodities other than oil, gas, or water. We identified 21 pipelines carrying five commodities--anhydrous ammonia, carbon dioxide, coal slurry, phosphate slurry, and hydrogen--that are subject to STB's regulation. STB's regulation of these pipelines includes ensuring that pipelines fulfill their common carrier obligations, including determining if the rates charged for these services are reasonable and nondiscriminatory. The ICC Termination Act limited STB's role in regulating pipeline rates by specifying that STB can begin a pipeline rate investigation only in response to a complaint by a shipper or other interested party. The act also eliminated the sole reporting requirement for pipeline carriers--tariff filing. According to STB, over the past 10 years only five cases involving pipelines have come before STB or ICC; one is ongoing. Because of the limited caseload, STB issued only six decisions on pipeline cases in fiscal year 1997 and devoted the equivalent of about one full-time staff member to pipeline issues. STB also has regulatory authority over some motor carrier functions. This oversight includes regulating the rates of household goods carriers and disposition of motor carrier undercharge cases. The ICC Termination Act eliminated some requirements for motor carriers, including tariff filing for most carriers, and transferred responsibility for others, such as registration and insurance, to the Federal Highway Administration. Finally, STB has jurisdiction over domestic water carrier transportation to or from Alaska, Hawaii, or territories and possessions of the United States. This regulation is limited to tariff filing and rate regulation. In fiscal year 1997, STB dedicated about 12 full-time equivalent staff to motor carrier and water carrier issues, primarily motor carrier issues. STB issued 420 decisions (about 29 percent of its workload) on these issues, most related to motor carrier issues. Historically, the federal government has regulated industries engaged in interstate commerce--including common carrier pipelines--with inherent cost advantages that may limit competition from other pipelines as well as other modes of transportation. Specifically, because pipelines are expensive to build--but relatively inexpensive to operate--it is more efficient to build one large pipeline to transport a given amount of a commodity rather than two or more smaller pipelines. In addition, low operating costs may enable a pipeline to reduce its rates temporarily if faced with competition from other modes of transportation. The regulation of pipelines has been imposed to enforce the common carrier obligation, including ensuring that, in the absence of competition, pipeline carriers do not charge unreasonably high rates relative to their costs The federal economic regulation of interstate pipelines is provided by two agencies: the Federal Energy Regulatory Commission, which regulates oil and gas pipelines, and STB, which regulates the remaining pipelines. Regulation by the former covers more pipeline miles and involves more reporting requirements than the latter. For example, about 400,000 miles of oil and gas pipelines are under the jurisdiction of the Federal Energy Regulatory Commission, while fewer than 6,000 miles of pipelines are subject to STB's jurisdiction. In addition, oil and gas pipeline carriers are generally required to file tariffs and annual reports, while pipeline carriers under STB are not. The ability of alternatives to pipelines--local production within the Midwest, as well as barge and rail transport from other areas of the United States--to compete with pipelines within local market areas in the Midwest depends on two factors. First, because storage terminals are key to the distribution of anhydrous ammonia in local midwestern market areas, alternatives must have access to storage terminals within market areas that are also served by pipelines. We found that, while some local market areas currently served by pipelines also have access to alternatives, other market areas may not. Second, alternatives to pipelines must have the ability to increase their supply of anhydrous ammonia to serve these markets. We found that alternatives may not offer effective competition to pipelines because they have limited ability to increase their supply of anhydrous ammonia without additional investments in capital. Because of the large number of local markets that exist along the two midwestern anhydrous ammonia pipelines, we were not able to definitively determine the number of markets that do or do not have competitive alternatives to pipelines. Two pipelines, one owned by Koch Pipeline Company, L.P., and one owned by MAPCO Ammonia Pipeline, Inc., carry anhydrous ammonia from Louisiana, Oklahoma, and Texas to the midwestern states. (See fig. 1.) These pipelines supplied 2.1 million tons (33 percent) of the estimated 6.4 million tons of anhydrous ammonia used in the Midwest in 1996. Three alternatives to pipelines--local production within the Midwest; barge shipments from Louisiana up the Mississippi, Illinois, and Ohio Rivers; and rail shipments primarily from other areas--also provide anhydrous ammonia to the Midwest. Local production accounted for about 3 million tons, or about 47 percent, of the total midwestern demand. Barge shipments accounted for 0.9 million tons (14 percent) and rail shipments accounted for 0.4 million tons (6 percent). The highly seasonal demand--lasting as little as 10 days each in spring and fall--for anhydrous ammonia applied directly to fields as a fertilizer makes it important to have large amounts of this product stored close to farms if farmers' needs are to be met. Regardless of the means of transport, the most efficient way to meet this demand is to have large storage tanks (generally from 20,000 to 40,000 tons of anhydrous ammonia per tank) in terminals located close to fertilizer dealers and farmers throughout the Midwest. As a result, anhydrous ammonia markets in the Midwest appear to be fairly localized. Currently, 60 terminals throughout the Midwest--28 of which are located on pipelines--store anhydrous ammonia for peak-season use. Currently, more than half of the 28 terminals located on pipelines have no alternatives to the pipelines. (See tbl. 1.) The remaining terminals have access to alternatives that may limit the pipelines' ability to charge high rates to deliver the product to that terminal. Some of the 32 terminals not on the pipelines may also be able to supply anhydrous ammonia to fertilizer dealers in a pipeline terminal's market area and effectively limit pipelines' ability to charge high rates. For example, if the price of anhydrous ammonia were to increase at a pipeline terminal in response to higher shipping rates on the pipeline, fertilizer dealers in the area could turn to cheaper sources of anhydrous ammonia--such as terminals served by barge, rail, or local production--if available. If these other sources could increase their supply without incurring significant increases in their transport and storage costs--thus enabling them to keep their prices steady--the pipeline might be forced to keep its rates reasonable in order to retain customers. However, the ability of these alternative sources to expand their supply of anhydrous ammonia beyond current levels without additional investment may be limited. It is unlikely that plants devoted to producing anhydrous ammonia as a first step in manufacturing other forms of fertilizer will switch to producing anhydrous ammonia for direct application. According to representatives from barge companies and barge terminals, the current fleet of barges is operating at or near capacity and terminals also have limited excess capacity. Fertilizer dealers and shippers were also skeptical about the ability of rail to expand capacity to compete with the volume of product currently provided by the pipelines. Expanding capacity in any of these modes could be expensive. For example, new barges are estimated to cost between $4 million and $5 million each, while new barge terminals cost approximately $15 million. As an alternative to the direct application of anhydrous ammonia, farmers could substitute other forms of nitrogen fertilizer. This action would lessen the need to have large amounts of anhydrous ammonia shipped to the Midwest. However, it is not clear that other nitrogen fertilizers are substitutable for anhydrous ammonia. For example, of the nitrogen fertilizers, anhydrous ammonia is best suited for fall application because it loses little of the nutrient during the winter compared with other forms of nitrogen fertilizers. In addition, anhydrous ammonia is relatively low cost and is the most concentrated form of nitrogen available. For example, in April 1997, the cost to farmers of nitrogen in anhydrous ammonia form--82-percent nitrogen content--was $369 per ton, while the cost of nitrogen in a liquid upgrade form--28- to 32-percent nitrogen content--was $533 per ton. Because an increase in pipeline transportation rates would represent only a small portion of the cost of anhydrous ammonia to farmers, a substantial increase in pipeline rates would be required before farmers would be likely to switch. No clear conclusions can be reached on whether the continued economic regulation of pipelines under STB's jurisdiction is needed because such a determination requires the examination of competition in numerous local markets along 21 pipelines. Such an examination was not feasible for our study, nor was it feasible to address whether anhydrous ammonia pipelines are representative of all pipelines under STB jurisdiction. There will be several issues before the Congress as it decides whether to extend, modify, or rescind STB's authority to regulate pipelines. These issues deal with whether to substantively change or leave in place how STB regulates pipelines. We have not addressed whether the current approach to the economic regulation of pipelines might remain substantially unchanged but carried out by another agency. First, do pipelines under STB's jurisdiction lack effective competition in a significant number of market areas and have the potential to charge unreasonably high rates? Whether pipelines under STB's jurisdiction have such power is uncertain. As discussed above, limited competition may exist in a number of anhydrous ammonia markets on two pipelines in the Midwest while other markets may have sufficient alternatives to constrain pipeline rates. However, according to a 1986 report from the Department of Justice, all markets along a pipeline do not necessarily have to be competitive in order to justify deregulation of the pipeline. Instead, Justice concluded that the number of markets along a pipeline that do not have competitive alternatives--and therefore require regulation--should be balanced against the costs of regulating that pipeline. Second, are the costs of regulation burdensome to pipeline carriers? The regulatory requirements imposed on pipeline carriers do not appear to be high. STB does not have the authority to initiate rate cases. In addition, STB does not require that pipelines file rate schedules, nor does it impose reporting requirements on pipelines wanting to start up or go out of business. In fiscal year 1997, STB devoted the equivalent of about one full-time staff member to pipeline issues. If a rate case is brought before STB, the cost to the pipeline carrier of defending the case could be substantial. The limited number of pipeline rate cases in STB's and ICC's history provides little basis for estimating the cost of these cases. However, STB officials told us that the cost of rail rate cases ranges from less than $50,000 up to about $1 million. Third, does the limited number of pipeline rate cases indicate there is no need for continued regulation? It is possible that the very limited number of rate cases brought before STB and its predecessor in the last 10 years is evidence of effective competition and therefore there is no need to continue pipeline regulation. However, some shippers we talked to contend that the mere existence of a federal regulatory agency with the authority to roll back rate increases acts as a deterrent to unfair rate increases. Finally, would shippers have recourse if STB's economic regulation of pipelines was eliminated? Absent STB or any other regulatory body, shippers that believe they are being charged unfair rates would presumably complain to the Department of Justice or the Federal Trade Commission. However, neither of these agencies currently has the statutory authority to investigate complaints from shippers that believe they are being charged rates that are unreasonable or discriminatory, unless the complaint alleges a violation of antitrust laws. This concludes our statement. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the regulatory role of the Surface Transportation Board (STB), focusing on: (1) STB's responsibilities in regulating surface transportation; (2) the historical reasons for the economic regulation of pipelines; (3) the ability of alternatives to anhydrous ammonia pipelines to compete in the Midwest; and (4) issues before Congress as it decides to extend, modify or rescind STB's authority to regulate pipelines. GAO noted that: (1) STB is responsible for the economic regulation of railroads and certain pipelines, as well as some aspects of motor carrier and water carrier transportation; (2) the majority of STB's resources and workload are devoted to examining rail issues; (3) in fiscal year 1997, STB dedicated 89 percent of its staff years to rail issues and less than 1 percent to pipeline issues; (4) historically, the federal government has regulated the rates charged by interstate pipelines because pipelines have inherent cost advantages that may limit competition from other pipelines as well as from other modes of transportation; (5) two federal agencies--STB and the Federal Energy Regulatory Commission--regulate pipelines; (6) this regulation includes ensuring that all shippers have access to pipeline transportation services and that the rates charged by pipeline carriers for these services are reasonable and nondiscriminatory; (7) the ability of alternatives to anhydrous ammonia pipelines to compete with pipelines in the Midwest varies, depending on these alternatives' access to the market areas served by pipelines and their ability to increase their supply of anhydrous ammonia to compete within those market areas; (8) GAO's work showed that some market areas currently served by pipelines also have access to alternatives, while other market areas may not; (9) however, even where alternatives to pipelines are available, they may not offer effective competition because they have limited ability to increase their supply of anhydrous ammonia without additional investments in capital; (10) because of the large number of local markets that exist along the two midwestern anhydrous ammonia pipelines, GAO was not able to definitively determine the number of markets that do or do not have competitive alternatives to pipelines; (11) no clear conclusions can be reached on whether continued economic regulation of pipelines under STB's jurisdiction is needed because such a determination requires the examination of competition in numerous local markets along 21 pipelines; and (12) however, as Congress considers reauthorizing STB, pipeline regulation issues to consider include: (a) whether pipelines do not face effective competition in a significant number of market areas and subsequently have the potential to charge unreasonably high rates; (b) what the costs of regulating pipelines are; (c) whether the limited number of pipeline cases before STB and its predecessor indicates there is no need for regulation; and (d) whether shippers would have any recourse if STB's economic regulation of pipelines was eliminated.
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Total Medicare spending for physician services depends on actual payment rates, the volume of services provided, and the mix of those services. Medicare spending goes up when the price paid to physicians for each service increases, when the number of services provided rises, or when more intensive, and therefore more expensive, services replace less intensive ones. Since 1992, Medicare has paid for physician services using a fee schedule. The fee for each service is a dollar conversion factor, adjusted to reflect the resources required for that service relative to the resources required to provide all other physician services, and the differences in the costs of providing services across geographic areas. Along with the fee schedule, the Congress enacted a system of spending targets designed to control growth in total spending for physicians' services. The Sustainable Growth Rate (SGR) system was created in the Balanced Budget Act of 1997 and revised in the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA). It replaced the first system of spending targets, implemented in 1992, known as the Volume Performance Standard. The SGR system sets spending targets for physician services and adjusts payment rates to bring spending in line with those targets. The SGR target for total spending is based on spending in an initial, or base, year and the estimated growth in real per capita GDP each year and three other factors that affect overall spending on physician services--the changes in the cost of inputs used to produce physicians' services (as measured by the Medicare Economic Index (MEI)), the number of Medicare beneficiaries in the traditional fee-for-service program, and expenditures that result from changes in laws or regulations. The spending target for physician payments is applied by incorporating it into the adjustment to the conversion factor that determines the payment amount per service. The conversion factor is determined annually by adjusting the previous year's conversion factor by the change in the MEI, to account for the cost of inputs for physician services, and adjusting this product on the basis of the relationship between the cumulative SGR target and Medicare physician spending. The conversion factor update is greater than the MEI when physician spending has been below the targets and is less than the MEI when physician spending has been higher. In response to escalating Medicare expenditures, the Congress made major changes in Medicare payment policies, beginning first by enacting the hospital inpatient prospective payment system, which was implemented in 1983, and then the Medicare physician fee schedule, implemented in 1992. When enacting the fee schedule, the Congress recognized that setting fees alone would not sufficiently restrain physician spending growth. Despite some constraints on physician fees since the 1970s, spending on physician services had grown dramatically in the 1980s as a result of increases in the volume and intensity of services provided. The Congress, therefore, provided that annual physician fee increases would depend upon whether total Medicare physician spending exceeded or fell short of cumulative spending targets. Since the implementation of the fee schedule and spending targets, the rise in Medicare spending for physician services has slowed significantly, reflecting lower growth in the volume and intensity of these services. Before the physician fee schedule was implemented, Medicare payments for physicians' services were largely based on historical charges. Although during the 1970s the Congress introduced some controls on annual payment rate increases, Medicare spending for physician services continued to rise. This was also true in the 1980s--between 1980 and 1990, for example, Medicare spending per beneficiary for physician services grew at an average annual rate of more than 12 percent, tripling from $278 to $890 (see fig. 1). Much of the spending growth resulted from increases in the volume of services provided to each beneficiary and the substitution of more intensive and expensive services for less intensive and expensive ones. The Physician Payment Review Commission, which was charged with advising the Congress on Medicare physician payment issues, observed, "y the late 1980s. . . volume and intensity growth had become the primary cause of higher program spending. In fact, from 1986 until 1992, while physician payment rates grew by less than 2 percent annually, the volume and intensity of services rose by almost 8 percent per year." The Congressional Budget Office in 1986 stated that "oth the price and the volume of services must be controlled to constrain costs . . .."Spending targets were needed to limit growth in volume and intensity of physician services. In 1989 testimony, Health and Human Services Secretary Louis W. Sullivan said "Medicare physician spending has increased at compound annual rates of 16 percent over the past 10 years. And in spite of our best efforts to control volume and reign in expenditures, Medicare physician spending is currently out of control. . . An expenditure target. . . sets an acceptable level of growth in the volume and intensity of physician services." The Congress introduced spending targets for physician services in conjunction with the physician fee schedule in 1992 to help constrain the rise in Medicare spending for physician services. The targets incorporated limited growth in the volume and intensity of services and were revised each year based on estimates of changes in the number of Medicare beneficiaries and physician input prices. If actual spending exceeded the targeted amounts, future payment rates would be reduced, relative to what they would have been if actual spending had equaled the targets, to offset the excess spending. If actual spending fell short of the targets, future payment rates would be increased. Since 1992, the growth in the volume and intensity of physicians' services per Medicare beneficiary has moderated (see fig. 2). Between 1992 and 2000, the average annual increase in Medicare spending due to changes in volume and intensity of services per beneficiary was about 2 percent. In contrast, between 1985 and 1991, immediately before the introduction of spending targets, volume and intensity of services per beneficiary increased at an average annual rate of about 8 percent. The application of the SGR system in 2002 resulted in a 5.4 percent reduction in physician payment rates, despite an estimated 2.6 percent increase in the costs of inputs used to provide physician services. The reduction occurred because estimated cumulative physician services spending since 1996 exceeded the target for cumulative spending by approximately $8.9 billion, or 13 percent of projected 2002 spending. In part, the payment update reflects adjustments made to the spending targets for previous years for revisions in GDP estimates and for more accurate actual spending statistics. Correcting these errors in previous years' targets and spending totals to reflect more recent data resulted in larger physician payment increases in those years than if accurate data had been used, and they contributed to the size of the reduction in payments in 2002. The SGR system sets spending targets for physician services and adjusts payment rates to bring spending in line with those targets. Conceptually, if spending equals the targeted amount, physician payment rates are updated to keep pace with the percentage change in input prices as measured by the MEI. If spending exceeds the target, the change in payment rates is smaller than the change in input prices. If spending falls short of the target, payment rates are allowed to grow faster than the rise in input prices. By adjusting payment rates when prior-year spending has been too high, the SGR system moderates the growth in Medicare outlays for physician services. The SGR adjustments to the input price update are determined by how much the cumulative physician spending since 1996 differs from the cumulative spending target since then. Spending and targets must both be estimated from information available each November when payment rates are set for the following year. Previously, those estimates were then used in subsequent years. Based on requirements in the BBRA, however, HCFA implemented a process for revising the most recent two years of spending and target estimates. Because the annual targets are determined by changes in four factors--the number of fee-for-service beneficiaries, real per capita GDP, input costs, and the effect of changes in laws or regulations--a revision to any of those factors, or to estimates of prior spending, can change the spending estimate. The SGR adjustments to the input price update can then take effect because of growth in the volume or intensity of services delivered, resulting in spending deviating from targets, or because of revised estimates for prior years' targets and spending. In setting payment rates for 2002, CMS updated its estimates of past spending and recalculated past targets. The net effect of both revisions indicated that Medicare outlays were an estimated $8.9 billion too high. The SGR is designed to recover this excess amount by lowering payment rates in 2002 and future years. CMS' original estimates of spending since 1998 were too low, in part because the agency had not included all appropriate claims in making these estimates. The original spending targets for 2000 and 2001 were too high, largely because the Bureau of Economic Analysis in the Department of Commerce revised its GDP and GDP growth estimates for those years. To some extent, the reduction in payment rates this year corrects for inaccuracies in previous estimates that produced physician fees that were too high in 2000 and 2001. In both years, payment rates increased by more than the change in input prices because the information available at the time those rates were established suggested that physician spending had been held below the targets. In 2000, payment rates increased 5.4 percent, while input costs increased 2.4 percent; in 2001, payment rates increased 4.5 percent, while input costs increased by 2.1 percent. The reason that 2002 payment rates fall 5.4 percent while input prices increase by 2.6 percent is that the revised estimates revealed that spending exceeded the targets in previous years. The reduction would have been almost 4 percentage points greater, but the SGR system limits how much fees can be adjusted for the differences between actual and target spending. Several measures could moderate the fluctuations in physician payment rates. Although these modifications to the SGR could mitigate the possible impact of rate instability or reductions in beneficiary access to needed services, doing so could also lessen the ability of spending targets to encourage fiscal discipline. Available data indicate that access is adequate, but more timely and detailed information is critical to promptly recognize potential deteriorations in access. The SGR system is designed to limit the fluctuations in payment rates, but its design could be modified to achieve greater rate stability. The BBRA specified that adjustment to realign spending with the targets cannot cause payments to fall by more than 7 percentage points below, or increase by more than 3 percentage points above, the percentage change in input prices. In addition, spending deviations from past targets are not corrected in a single year but are spread over several years. Greater rate stability could be achieved by narrowing the range over which rates could change from one year to the next. Similarly, the corrections for spending deviations could be spread over longer periods of time. Modifying how spending targets are set could also reduce year-to-year fluctuations in rates. Currently, the changes in GDP for a single year are used to establish the spending target. The difficulty in accurately estimating GDP has contributed to the problem of fluctuations in the target. In addition, linking annual changes in the targets to annual changes in GDP ties the target to the business cycle. GDP growth rates are higher during periods of prosperity and lower during downturns--a commonly used definition of a recession is a decline in real GDP for two successive quarters. But health care needs of Medicare beneficiaries are not cyclical. Neither significantly lowering spending targets during a downturn nor unduly increasing them in a period of prosperity is appropriate. Linking the determination of spending targets to average levels of GDP over several years would help eliminate much of the cyclical variation. Any changes to the SGR must balance the desire for greater rate stability with the need for fiscal discipline. Spending targets create a feedback mechanism between physicians' behavior and payment rate increases. However, spending targets do not create direct incentives for any individual physician, since it is the collective behavior of all physicians that determines the payment adjustments that result from missing the spending targets. The primary value of spending targets in instilling fiscal discipline is the signal they send that affordability of the program is an important concern in establishing Medicare policies. Limiting the size of the payment adjustment for missed spending targets or to corrections in prior years' targets, and lengthening the time over which those adjustments are incorporated, could partially mute the signal targets send and erode some of the fiscal discipline they encourage. On the other hand, excessive rate fluctuations can be difficult for providers and may ultimately affect beneficiaries' access to physician services if rate fluctuations cause too many providers to decline to participate in the program. Ensuring that the use of spending targets does not compromise appropriate access to services is a key concern. Spending targets that are updated principally by the growth in GDP and other factors may not reflect fully changes in medical care and the markets for these services. It is therefore important to monitor service use to assess whether appropriate access for beneficiaries is secured, especially if fees are reduced. Such monitoring needs to involve recent experience so that if spending targets need adjustments, those adjustments are done promptly to ameliorate any problems. Information on physicians' willingness to see Medicare patients is dated but overall does not indicate access problems. Data from the 1990s show that virtually all physicians treated Medicare beneficiaries or if accepting new patients, accepted those covered by Medicare. According to data from the American Medical Association (AMA), 96.2 percent of all nonfederal physicians (excluding residents and pediatricians who do not normally serve Medicare patients) treated Medicare beneficiaries in 1996, an increase from the 94.2 percent AMA reported in 1994. A 1999 survey sponsored by MedPAC found that 93 percent of physicians who were accepting any new patients were accepting new patients covered by Medicare. Payment rate decisions should not be made in a data vacuum. As health needs change, technology improves, or health care markets evolve, spending targets and resulting payment rates may need to be adjusted periodically, not by a formula designed for annual updates, but by specifying a new base year target calibrated to ensure appropriate access. Payment rates that are too low can impair beneficiary access to physician services, while payment rates that are too high add unnecessary financial burdens to Medicare. Informed decisions about appropriate payment rates and rate changes cannot be made unless policymakers have detailed and recent data on beneficiaries' access to needed services. The SGR mechanism uses information about physician spending in relation to cost increases, changes in the number of beneficiaries, and growth in the overall economy to impose fiscal discipline on Medicare outlays for these services. This mechanism provides a signal when spending threatens to grow out of control and in that sense is analogous to what the Comptroller General has called for in testimony on several occasions with regard to the entire Medicare program. The demographic changes facing the nation require policymakers to look ahead and assess both current and future Medicare spending in relation to the entire federal budget and the economy--first to understand the urgent need for fiscal discipline, then to make choices to ensure the sustainability and affordability of the program. A mechanism like the SGR provides a benchmark for assessing the trend in physician spending and can prompt actions to bring that spending in line with overall program goals. In assessing the options for updating physician payments, the program's prospects for long-term sustainability should be paramount. Meeting that challenge will involve difficult decisions that will likely affect beneficiaries, providers, and taxpayers. This concludes my prepared statement. I would be happy to answer any questions that you or Members of the Subcommittee may have. For more information regarding this testimony, please contact me at (202) 512-7114 or Laura A. Dummit at (202) 512-7119. James Cosgrove, Kathryn Linehan, Lynn Nonnemaker, and Hannah Fein also made key contributions to this statement.
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Congress implemented a physician fee schedule and a fee update formula to moderate spending growth relative to specified Medicare spending targets. These spending targets increase annually to reflect higher costs for physician services, the growth in the overall economy, and changes in the number of Medicare beneficiaries. Physician fees are adjusted for changes in the costs of providing services and on actual cumulative spending compared to the cumulative targets. Physician fees are updated to reflect higher costs to provide services. These updates are adjusted up or down on actual spending either falling below or exceeding the targets. In November 2001, the Centers for Medicare and Medicaid announced that updating Medicare's fees will decline 5.4 percent from what was paid in 2001, despite an estimated 2.6 percent increase in the cost of physician inputs. This reduction accounts for historical cumulative spending that exceeded the target by $8.9 billion, or 13 percent of estimated 2002 spending. Several factors contributed to the disparity between actual and targeted spending, including the correction of substantial errors in past spending estimates and the revision of targets for prior years. The current update mechanism could be modified to moderate fluctuations in physician fees and to ensure adequate payments, while retaining the fiscal discipline created by having a spending target. Such modifications would need to balance concerns about preserving fiscal discipline on physician spending with the need to maintain adequate payment rates to ensure that beneficiaries have access to physician services. Because the paramount consideration in setting payment rates is ensuring appropriate beneficiary access to services, timely and detailed data on Medicare beneficiary service use are essential to achieving this balance.
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VA operates the largest integrated health care system in the United States, providing care to nearly 5 million veterans per year. The VA health care system consists of hospitals, ambulatory clinics, nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. In addition to providing medical care, VA is the largest educator of health care professionals, training more than 28,000 medical residents annually, as well as other types of trainees. State licenses are issued by state licensing boards, which generally establish state licensing requirements governing their licensed practitioners. Current and unrestricted licenses are licenses that are in good standing in the states that issued them, and licensed practitioners may hold licenses from more than one state. To keep a license current, practitioners must renew their licenses before they expire and meet renewal requirements established by state licensing boards, such as continuing education. Renewal procedures and requirements vary by state and occupation. When licensing boards discover violations of licensing practices, such as the abuse of prescription drugs or the provision of poor quality of care that results in adverse health effects, they may place restrictions on licenses or revoke them. Restrictions from a state licensing board can limit or prohibit a practitioner from practicing in that particular state. Some, but not all, issued state licenses are marked in such a way as to indicate that the licenses have had restrictions placed on them. Generally, state licensing boards maintain a database of information on restrictions, which employers can often obtain at no cost either by accessing the information on a board's Web site or by contacting the board directly. National certificates are issued by national certifying organizations, which are separate and independent from state licensing boards. These organizations establish professional standards that are national in scope for certain occupations, such as respiratory and occupational therapists. Practitioners who are required to have a national certificate to practice in VA may renew these credentials periodically by paying a fee and verifying that they obtained required educational credit hours. National certifying organizations can place restrictions on a certification or revoke certification for violations of the organization's professional standards. Like state licensing boards, national certifying organizations maintain a database of information on disciplinary actions taken against practitioners with national certificates and many can be accessed at no cost. We identified key VA screening requirements that are intended to ensure that VA facilities employ health care practitioners who have valid professional credentials and personal backgrounds appropriate to deliver safe health care to veterans. Officials at VA facilities are required to verify whether credentialsstate licenses and national certificatesheld by applicants and employees are current and unrestricted. VA also requires its facilities to check the names of all applicants VA intends to hire against a federal list of individuals who have been excluded from participation in any federal health care programs and to compare applicants' educational institutions against lists of fraudulent institutions. Additionally, VA requires that individuals in certain positions undergo a background investigation, which includes checking their fingerprints against a fingerprint-based criminal history database. VA policy requires officials at its facilities to screen applicants to determine whether they possess at least one current and unrestricted state license or an appropriate national certificate, whichever is applicable for the position they seek. We classified VA's practitioners into three groups, depending upon the credentials and the verification process VA requires for employment. Figure 1 illustrates VA's process for credentials verification with state licensing boards and national certifying organizations for these groups for applicants VA intends to hire and for employed practitioners, whose credentials are checked periodically. Groups A and B represent practitioners who must be licensed to work in VA. However, the requirements and process VA uses to verify professional credentials is different for each of these groups. Group C represents practitioners who must have a national certificate to work in VA and may also have a state license. The process used to screen applicants in all three groups has two stages. First, applicants are required to disclose, if applicable, their state licenses and national certificates. Second, VA facility officials are required to verify whether applicants' state licenses or national certificates are current and unrestricted. To verify applicants' credentials, VA officials are required to either contact state licensing boards or to physically inspect an applicant's national certificate. Officials are also required to document that they verified the status of the professional credentials. VA also has requirements for verifying the credentials of its employed practitioners. Like the verification process for applicants, this process involves employed practitioners' disclosures and VA verification of that information. VA employed practitioners in group A are required to disclose all of their current licenses, while those in group B must disclose only one license. For employed practitioners in group A, facility officials are also required to determine if any expired licenses disclosed as current and unrestricted at the beginning of employment had restrictions placed on them prior to their expiration. VA depends on its employed practitioners in group B to inform facility officials of any change in the status of their license, including any that have expired. Employed practitioners in group C must disclose a national certificate. VA officials must confirm that the disclosed licenses and certificates are current and unrestricted. For group A practitioners, VA facility officials contact the appropriate state licensing boards directly; for groups B and C they physically inspect the state license or national certificate. VA officials verify these credentials periodically depending on the occupation and the requirements of the state or national organization that issued the license or certificate. For example, a registered nurse with a state license from Virginia must renew the license every 3 years, while a respiratory therapist must renew the national certificate every 5 years. VA officials are required to document these verifications. If VA's verification process identifies that a state licensing board or national certifying organization took disciplinary action against a practitioner, facility officials are required to determine the circumstances of the disciplinary action. Licensing boards and certifying organizations have various options for disciplining practitioners. For example, a nurse who is abusing drugs and voluntarily enters a drug abuse program may retain a license to practice with supervision when administering drugs. In contrast, a physician whose treatment results in the death or the permanent disability of a patient may have a license revoked. On the basis of a review of the action taken by the state licensing board or national certifying organization, VA officials are to determine whether an applicant should be hired or an employed practitioner should be retained or terminated. To supplement its checks with state licensing boards, VA has requirements for searching for disciplinary actions taken against licensed practitioners that might not have been disclosed by physician and dentist applicants and employed practitioners. VA requires its facilities to check national databases for information on disciplinary actions taken against these practitioners. Specifically, VA requires that facility officials query the Federation of State Medical Boards (FSMB) database, which includes records of disciplinary actions taken against physicians by all state licensing boards. Similarly, VA requires facility officials to query the National Practitioner Data Bank (NPDB), which contains information including disciplinary actions taken against physicians and dentists. Facility officials must document the results of these queries. VA policy requires its facilities to check the names of all applicants VA intends to hire against a federal list of individuals who have been excluded from participation in any federal health care program. The list, referred to as the List of Excluded Individuals and Entities (LEIE), is maintained by the Department of Health and Human Services' Office of Inspector General. Since March 1999, VA facilities are to electronically query the LEIE Web site on all applicants prior to employment. VA also requires its facilities to make sure that an applicant's educational degrees are authentic. VA requires that applicants for some positions, such as social workers, have degrees from accredited institutions. To prevent the use of fraudulent degrees to obtain employment, VA requires that its facilities compare the educational institutions listed by an applicant against existing lists of "diploma mills" that sell fictitious college degrees and other professional credentials. VA's employed practitioners are required to undergo a background investigation that verifies their personal histories. A background investigation verifies, for instance, an individual's history of employment, education, and residence. It also includes a fingerprint check that searches for evidence of criminal activity by comparing fingerprints against a database of criminal records. The Office of Personnel Management (OPM) conducts the investigations for VA and reports its results back to the facility that requested the investigation. In conjunction with the background investigation, VA employed practitioners are required to disclose information about their professional and personal backgrounds by filling out the Declaration for Federal Employment form--also known as form 306. Employed practitioners are asked to disclose, among other things, information about criminal convictions, employment terminations, military court-martials, and delinquencies on federal loans. Failure to disclose information requested on form 306 is grounds for dismissal. Facility officials compare the information obtained from form 306 with the results obtained through the background investigation to determine whether employed practitioners have been forthcoming in their disclosures. If the background investigation results include questionable issues, such as discrepancies in work or criminal histories, the facility has 90 days to take action. Gaps in key VA screening requirements result in vulnerabilities when screening certain health care practitioners. Although the screening requirements for some occupations, such as physicians, are adequate because they require verifying all licenses by contacting state licensing boards, screening requirements for other occupations are less stringent. These less stringent requirements do not require checking all licenses, and they require physical inspection of one license only rather than contacting the state licensing board. Similarly, VA does not require contacting national certifying organizations to verify national certificatesthe credentials held by health care practitioners, such as respiratory therapists. Physical inspection of credentials alone can be misleading; not all state licenses and national certificates indicate whether they are restricted, and licenses and certificates can be forged. While VA requires checking a national database for physicians and dentists, it does not require that facility officials query a national database that contains reports of disciplinary actions and criminal convictions involving all licensed practitioners. In addition, VA does not require that all practitioners undergo background investigations, including fingerprinting, to check for criminal records. These gaps create vulnerabilities because VA may remain unaware of health care practitioners who could place patients at risk. VA's requirements for verifying the professional credentials of applicants it intends to hire and employed practitioners in group A, such as physicians and dentists, are complete and thorough. This is also the case for applicants VA intends to hire in group B, such as nurses and pharmacists. VA requires facility officials to verify all state licenses by contacting the appropriate state licensing boards. To supplement these requirements for physicians and dentists, VA officials also must query FSMB and NPDB to identify reports of any disciplinary actions involving these practitioners. In contrast to all practitioners in group A, the process for verification of licenses for group B practitioners has gaps, as illustrated in figure 2. VA's verification process for group B practitioners that it intends to hire is as stringent as the process used for group A practitioners. However, the process used to verify licenses for continued employment of group B practitioners is less stringent, because facility officials are required to check only one state license, which is selected by the practitioner. Furthermore, officials are not required to contact the state licensing board directly, but instead may simply physically inspect the one state license to check its status. Employed practitioners in group B with multiple state licenses select the one state license under which they will continue to practice in VA. The license selected does not have to be from the state where the VA facility is located. VA officials check only that single license. As a result, these employed practitioners could have a restricted license in one state, or several restricted state licenses, but offer VA officials an unrestricted license from another state for verification. Moreover, the method required to periodically verify the status of licenses for continued employment of practitioners in group B is not thorough. VA facility officials are only required to physically inspect the license-- instead of contacting the state licensing board. VA facility officials we interviewed were unaware of the inherent vulnerabilities in relying on a physical inspection. According to licensing board officials, one cannot determine with certainty that a license is valid and unrestricted unless the state licensing board is contacted directly. These officials explained that state licensing boards do not always exchange information. Furthermore, physical inspection of licenses alone can be misleading because not all state licensing boards mark a license to indicate that it is restricted, and licenses can be forged, even though licensing boards have taken steps to minimize this problem. Licensing board officials also pointed out that many state boards do not charge a fee to verify licenses. Unlike the national database queries of FSMB for physicians and NPDB for physicians and dentists, VA does not require facility officials to query the Healthcare Integrity and Protection Data Bank (HIPDB), a national database that contains information on disciplinary actions and criminal convictions involving all licensed practitioners. All government agencies, including state licensing boards, are required to report to HIPDB. VA accesses HIPDB when it queries the NPDB for physicians and dentists because the databases share information. However, VA does not require its facilities to query HIPDB for all licensed practitioners even though VA is authorized by statute to query this database at no charge. VA's requirements for verifying the professional credentials of both applicants and employed practitioners in group C also have gaps, as illustrated in figure 3. For both applicants and employed practitioners in group C, which include respiratory therapists and dietitians for example, facility officials are only required to physically inspect the national certificate to check its status. The physical inspection is required when these practitioners apply for employment and periodically for continued employment. Additionally, VA requires applicants in group C to disclose all of the state licenses they have ever held, but does not require facility officials to verify any of these state licenses. However, according to officials from national certifying organizations, the authenticity and status of a national certificate can only be assured by contacting the national certifying organizations directly. For example, an official from the National Board for Respiratory Care told us that practitioners that were certified prior to July 2002 are not required to renew their certificates--they can voluntarily choose to recertify. Thus, physical inspection of a certificate will not ensure that there has been no disciplinary action taken by the board since the certificate was issued. VA has not implemented consistent background screening requirements, which include fingerprint checks, for all practitioners. Although VA requires background investigations for newly hired employed practitioners, it does not require background investigations for certain contract health care practitioners, practitioners who work without compensation from VA, medical consultants, and medical residents. VA, with prior approval from OPM, has the authority to determine which positions in VA require a background investigation. VA requested and received permission from OPM to exempt certain categories of health care practitioners from background investigations, based on VA's assessment that these types of practitioners do not need a background investigation. Table 1 lists the types of practitioners that VA exempts from background investigations. VA requested and received permission from OPM, in 2001 and 2003, to perform fingerprint-only checks for contract health care practitioners, who work in a facility for 6 months or less and are currently exempt from background investigations, and for all volunteers who have access to patients, patient information, or pharmaceuticals. OPM began to offer a fingerprint-only checka new screening optionfor use by federal agencies in 2001. Compared to background investigations, which typically take several months to complete, fingerprint-only checks can be obtained within 3 weeks or less and cost less than $25, about a quarter of the cost of a background investigation. In commenting on a draft of this report, VA said that it planned to implement fingerprint-only checks for all contract health care practitioners, medical residents, medical consultants, and practitioners that work without direct compensation from VA, as well as certain volunteers. However, VA has not issued guidance to its facilities instructing them to implement fingerprint-only checks on all these practitioners. VA did issue guidance to its facilities to implement fingerprint-only checks for volunteers who have access to patients, patient information, or pharmaceuticals. Implementing fingerprint-only checks for practitioners who are currently exempt from background investigations would detect practitioners with a criminal history. According to the lead VA Office of Inspector General investigator in the Dr. Swango case, if Dr. Swango had undergone a fingerprint check at the VA facility where he trained, VA facility officials would have identified his criminal history and could have taken appropriate action. Additionally, one of the facilities we visited had implemented fingerprint-only checks of medical residents training in the facility and contract health care practitioners. An official at this facility stated that at a minimum, fingerprint-only checks of medical residents and contract practitioners were necessary to help ensure the safety of veterans in the facility. FSMB in 1996 recommended that states perform background investigations, including criminal history checks, on medical residents in order to better protect patients because residents have varying levels of unsupervised patient care. This recommendation, in part, resulted from reports that over a 4-year period more than 500 residents had performance, behavioral, or criminal problems during their training. In the four facilities we visited, we found mixed compliance with the existing key VA screening requirements which are intended to ensure that applicants and employed practitioners at VA facilities have valid professional credentials and personal backgrounds to deliver safe health care to veterans. None of the four VA facilities complied with all of the key requirements. Moreover, VA does not conduct oversight of its facilities to determine if they comply with these key screening requirements. In order to show the variability in the level of compliance among the four VA facilities we visited, we measured their performance against a compliance rate of at least 90 percent for each of five of the six screening requirements, even though VA allows no deviation from these requirements. Table 2 summarizes the rate of compliance among the four VA facilities we visited. For detailed information about our analysis and each facility's compliance with a particular requirement, see appendixes I and II. For the sixth requirementmatching the educational institutions listed by a practitioner against lists of diploma millswe asked facility officials if they did this check and then asked them to produce the lists of diploma mills they use. All four facilities generally complied with VA's existing policies for verifying the professional credentials of employed practitioners, either by contacting the state licensing board for practitioners, such as physicians, or physically inspecting the license or national certificate for practitioners, such as nurses and respiratory therapists. They also generally ensured that applicants VA intended to hire had completed the Declaration for Federal Employment form, which requires the applicants to disclose, among other things, information about criminal convictions, employment terminations, and delinquencies on federal loans. However, three of the four facilities did not follow VA's policies for verifying all of the professional credentials of applicants and three facilities did not compare applicants' names to LEIE prior to hiring them. Two of the four facilities conducted background investigations on their employed practitioners at least 90 percent of the time, but the other two facilities did not. We also asked officials whether their facilities checked the educational institutions listed by an applicant against a list of diploma mills to verify that the applicant's degree was not obtained from a fraudulent institution. An official at one of the four facilities told us his staff consistently performed this check. Officials at the other three facilities stated they did not perform the check because they did not have a list of diploma mills. In addition to assessing the rate of compliance with the key screening requirements, we found that VA facilities varied in how quickly they took action to deal with background investigations that returned questionable results, such as discrepancies in work or criminal histories. OPM gives a VA facility up to 90 days to take action after the facility receives investigation results with questionable findings. We reviewed the timeliness of actions taken by facility officials from August 1, 2002, to August 23, 2003, at the four facilities we visited and six additional facilities geographically spread across the VA health care system. We found that officials at 5 of the 10 facilities took action within the 90-day time frame, with the number of days ranging on average from 13 to 68. Officials at 3 facilities exceeded the 90-day time frame on average by 36 to 290 days. One facility took action on its cases prior to OPM closing the investigation, and another facility did not have the information available to report. For additional information on the average number of days it took each facility to report its actions, see appendix II. One of the cases that exceeded the 90-day time frame involved a nursing assistant who was hired to work in a VA nursing home in June 2002. In August 2002, OPM sent the results of its background investigation to the VA facility, reporting that the nursing assistant had been fired from a non- VA nursing home for patient abuse. During our review, we found this case among stacks of OPM results of background investigations that were stored on a cart and in piles on the desk and on other work surfaces of a clerk's office. After we brought this case to the attention of facility officials in December 2003, they reviewed the report and then terminated the employee for not disclosing this information on the Declaration for Federal Employment form 306. The employee had worked at the VA facility for more than 1 year. Another case at the same facility that exceeded the 90-day time frame involved an employee who had been convicted for possession of illegal drugs prior to being hired by VA. He had been hired at the facility in August 2002 and was to complete a background investigation form at that time. In June 2003, almost 1 year after being hired, a facility official realized the employee had not completed and returned this form and gave the employee the form to complete. The employee returned the completed form in the same month and it was sent to OPM, which returned the results of its investigation to the facility in July 2003, before the employee's probationary period of 1 year was completed. The OPM report revealed numerous arrests for possession of illegal drugs. During our December 2003 review and about 120 days after the investigation results were returned from OPM, we found this report and brought it to the attention of the facility director. Later, a facility official told us that VA's regional counsel stated that since the employee's 1-year probationary period had ended and the employee had disclosed this information on the Declaration for Federal Employment form 306, the facility could not take action to terminate the employee. VA has not conducted oversight of its facilities' compliance with the key screening requirements. Instead, VA has relied on OPM to do limited reviews of whether facilities were meeting certain human resources requirements, such as completion of background investigations. These reviews did not include determining whether the facilities were verifying professional credentials. Although VA established the Office of Human Resources Oversight and Effectiveness in January 2003 to conduct such oversight, the office has not conducted any facility compliance evaluations. There is no VA policy outlining the human resources program evaluations to be performed by this office, and the resources have not been provided to support the functions of this office. VA's screening requirements are intended to ensure the safety of veterans by identifying applicants and employed practitioners with restricted or fraudulent credentials, criminal backgrounds, or questionable work histories. However, gaps in VA's existing screening requirements allow some practitioners access to patients without a thorough screening of their professional credentials and personal backgrounds. For example, although the screening requirements for verifying professional credentials for some occupations, such as physicians, are adequate, VA does not apply the same screening requirements for all occupations with direct patient care access. Specifically, VA does not require that all licenses be verified, or that licenses and national certificates be verified by contacting state licensing boards or national certifying organizations. VA relies on two national databases to identify physicians and dentists who have had disciplinary actions taken against them. In addition, VA accesses a third national database, HIPDB, for physicians and dentists, because HIPDB is linked to one of the two national databases VA currently accesses. HIPDB is a national database that contains reports of disciplinary actions and criminal convictions involving all licensed practitioners, not just physicians and dentists. However VA does not require facility officials to query HIPDB for all licensed practitioners. As a result, practitioners such as nurses, pharmacists, and physical therapists do not have their state licenses checked against a national database. In addition, VA does not require all practitioners with direct patient care access, such as medical residents, to have their fingerprints checked against a criminal history database. These gaps create vulnerabilities that could allow incompetent practitioners or practitioners with the intent to harm patients into VA's health care system. In addition to these gaps, compliance with the existing key screening requirements was mixed at the four facilities we visited. None of the four facilities complied with all of the key VA screening requirements. However, all four facilities generally complied with VA's requirement to periodically verify the credentials of practitioners for their continued employment. Although VA created the Office of Human Resources Oversight and Effectiveness in January 2003 expressly to provide oversight of VA's human resources practices at its facilities, it has not provided resources for this office to conduct oversight of VA facilities' compliance with these requirements. Without such oversight, VA cannot provide reasonable assurance that its facilities comply with requirements intended to ensure the safety of veterans receiving health care in VA facilities. In light of the gaps we found and mixed compliance with the key screening requirements by VA facilities, we believe effective oversight could reduce the potential risks to the safety of veterans receiving health care in VA facilities. To better ensure the safety of veterans receiving health care at VA facilities, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following four actions: expand the verification requirement that facility officials contact state licensing boards and national certifying organizations to include all state licenses and national certificates held by applicants and employed practitioners, expand the query of the Healthcare Integrity and Protection Data Bank to include all licensed practitioners that VA intends to hire and periodically query this database for continued employment, require fingerprint checks for all health care practitioners who were previously exempted from background investigations and who have direct patient care access, and conduct oversight to help ensure that facilities comply with all key screening requirements for applicants and current employees. In commenting on a draft of this report, VA generally agreed with our findings and conclusions. VA acknowledged that we identified gaps in its process for conducting background and credentialing checks and that we provided what appeared to be reasonable recommendations to close those gaps. VA stated that it would provide a detailed action plan to implement our recommendations when the final report was issued. VA said that our draft report inaccurately omitted VA's querying HIPDB for practitioners who practice independently. We revised our report to clarify that NPDB queries performed by VA automatically check HIPDB for these practitioners because the databases are linked. However, VA does not perform queries of HIPDB for the majority of its licensed practitioners, which includes nurses, pharmacists, physical therapists, and dental hygienists. VA also incorrectly stated that the draft report did not include VA's requirement to query FSMB for physicians. In addition, VA said that it planned to implement fingerprint-only checks for all contract health care practitioners, medical residents, medical consultants, and practitioners that work without direct compensation from VA, as well as certain volunteers. However, VA has not issued guidance to its facilities instructing them to implement fingerprint-only checks for all these practitioners. Further, VA stated that the title of the report implied that veterans are receiving inadequate care on a broad basis. We disagree. The title reflects vulnerabilities created by the gaps in the screening of practitioners that could place veterans at risk by allowing incompetent practitioners or those with the intent to harm patients into VA's health care system. VA provided technical comments which we incorporated, as appropriate. VA's written comments are reprinted in appendix III. 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 date. We will then send copies of this report to the Secretary of Veterans Affairs and other interested parties. We also will make copies available to others upon request. 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 about this report, please call me at (202) 512-7101. Another contact and key contributors are listed in appendix IV. We examined VA's policies and practices that are intended to ensure that health care practitioners at its facilities have appropriate credentials and backgrounds to provide care to veterans. Specifically, we (1) identified key VA screening requirements for its health care practitioners, (2) determined the adequacy of these screening requirements, and (3) assessed the extent to which selected VA facilities complied with these screening requirements. To identify key VA screening requirements for its health care practitioners, we reviewed VA's policies and VA Handbook 5005, which explains how to implement the screening policies. We limited our review to 43 occupations in VA that have direct patient care access or have an impact on patient care. See table 3 for a list of the occupations included in our review. To identify the 43 occupations, we consulted with VA human resource officials. We interviewed human resource officials at VA headquarters and at each facility we visited. We classified the practitioners who are required to have professional credentialsa state license or a national certificateinto three groups according to VA's requirements for verifying these credentials. Groups A and B represent practitioners who must be licensed to work in VA. However, the requirements and process VA uses to verify professional credentials is different for each of these groups. Group C represents practitioners who must have a national certificate to work in VA and may also have a state license. Practitioners not included in the three groups are not required to have either a license or a national certificate to work in VA facilities. To determine the adequacy of the key VA screening requirements, we analyzed VA's policies and procedures to identify whether there were inconsistencies in how the requirements were applied among various types of practitioners. We interviewed VA headquarters and facility officials and practitioners at the facilities we visited to determine how VA's policies are implemented in facilities. In addition, we interviewed representatives from 13 state licensing boards and the District of Columbia Board of Nursing and 2 national certifying organizations to determine if VA's requirements for verifying professional credentials are adequate for identifying practitioners without valid and unrestricted state licenses and national certificates. To assess the extent to which VA facilities we visited complied with the key screening requirements, we chose a judgmental sample of four VA facilities that varied in size, location, and medical school affiliations to assess the extent to which these selected facilities complied with these requirements. The four facilities are located in Big Spring, Texas; New Orleans, Louisiana; Seattle, Washington; and the District of Columbia. We chose these facilities based on geographic variation, affiliations with medical schools to train residents, and types of health care services provided. Of the four facilities we visited, three are large facilities located in major metropolitan areas and each are affiliated with at least one medical school. The remaining facility is small, providing mainly primary care and long-term care services to veterans and is located in a rural area. For each facility, VA provided, from its automated pay system, a list of current practitioners in the 43 occupations. As a result of using VA's automated pay system, our sample does not include those practitioners providing care through a contract or training agreement or without direct compensation from VA. For each of the four facilities, we selected a random sample of 100 practitioners either hired or assigned to their current position no earlier than January 1, 1993. We chose to limit our review to approximately the last 10 years because VA changed its process for credentials verification in the early 1990s. For each of these practitioners, we reviewed their personnel files to check that the facility had complied with the following key VA screening requirements: verify state licenses and national certificates for applicants; verify state licenses and national certificates for employed practitioners; query the List of Excluded Individuals and Entities (LEIE) prior to hire; ensure completion of background investigations, including fingerprints; ensure completion of the Declaration for Federal Employment form, also known as form 306; and verify that the educational institutions listed by a practitioner VA intends to hire are checked against lists of diploma mills. In order to show the variability in the level of compliance among the four VA facilities we visited, we distinguished between facilities that had a compliance rate of at least 90 percent for each of five of the six screening requirements and those that did not. For each facility and key screening requirement, we compared the percentage of personnel files found in compliance to an acceptance level of 90 percent. In order to confirm that a requirement had a compliance rate less than 90 percent, we performed a one-sided significance test at the 95 percent confidence level. See appendix II for detailed information on the four VA facilities' compliance with each of the key VA screening requirements. Our results from these four facilities cannot be generalized to other facilities. In order to determine compliance with the key screening requirement to verify that the educational institutions listed by a practitioner are not fraudulent, we asked facility human resources staff if they performed this screening and asked them to produce their lists of diploma mills. Additionally, we reviewed VA facilities' response times to 214 background investigation results returned from OPM with questionable issues, from August 1, 2002, to August 23, 2003, at the four locations we visited and six other VA facilities selected based on geographic location. The six additional facilities were located in Boston, Massachusetts; East Orange, New Jersey; Indianapolis, Indiana; Palo Alto, California; Portland, Oregon; and San Diego, California. For these 10 facilities, we asked officials to provide the date they took action on cases returned from OPM, and from VA headquarters we obtained the dates when OPM returned the cases to the facility. We determined the average number of days it took each facility to take action after these cases were returned from OPM with questionable issues. Our results cannot be generalized to other VA facilities. See appendix II for detailed information on the results of our analysis. Tables 4 and 5 show the sample counts used to measure compliance and the results of our review for five of the requirements. Table 6 shows the average number of days it took each facility to take action after cases with questionable issues were returned from OPM. In addition to the contact named above, Jacquelyn T. Clinton, Jessica Cobert, Mary Ann Curran, Martha A. Fisher, Krister Friday, Lesia Mandzia, and Marie Stetser made key contributions to this report.
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Cases of practitioners causing intentional harm to patients have raised concerns about the Department of Veterans Affairs' (VA) screening of practitioners' professional credentials and personal backgrounds. GAO was asked to (1) identify key VA screening requirements, (2) evaluate their adequacy, and (3) assess compliance with these screening requirements. GAO reviewed VA's policies and identified key VA screening requirements for 43 health care occupations; interviewed officials from VA, licensing boards, and certifying organizations; and randomly sampled about 100 practitioners' personnel files at each of four VA facilities we visited. GAO identified key screening requirements that VA uses to verify the professional credentials and personal backgrounds of its health care practitioners. These requirements include verifying professional credentials; completing background investigations for certain practitioners, including fingerprinting to check for criminal histories; and checking national databases that contain reports of practitioners who have been professionally disciplined or excluded from federal health care programs. GAO found adequate screening requirements for certain practitioners, such as physicians, for whom all licenses are verified by contacting state licensing boards. However, screening requirements for others, such as currently employed nurses and respiratory therapists, are less stringent because they do not require verification of all licenses and national certificates. Moreover, they require only physical inspection of the credential rather than contacting state licensing boards and national certifying organizations. Physical inspection alone can be misleading; not all credentials indicate whether they are restricted, and credentials can be forged. VA also does not require facility officials to query, for other than physicians and dentists, a national database that includes reports of disciplinary actions involving all licensed practitioners. In addition, many practitioners with direct patient care access, such as medical residents, are not required to undergo background investigations, including fingerprinting to check for criminal histories. VA has not conducted oversight of its facilities' compliance with the key screening requirements. This pattern of mixed compliance and the gaps in key VA screening requirements creates vulnerabilities to the extent that VA remains unaware of practitioners who could place patients at risk.
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According to IRS, during the mid to late 1990's, abusive tax schemes reemerged across the country. The use of abusive tax shelters, anti- taxation arguments, abusive tax schemes, and frivolous returns last peaked in the 1980's. IRS characterizes an abusive tax scheme as any plan or arrangement created and used to obtain tax benefits not allowable by law. Schemes run from simple to very complex, from clearly illegal to those carefully constructed to disguise the illegality of the scheme. Furthermore, users of schemes can range from those believing their position is correct to those who knowingly but willfully file incorrect tax returns. Schemes can be based on improper use of domestic and foreign trusts, inflated business expenses and deductions, falsely claimed tax credits and refunds, and various anti-tax arguments. Some schemes are created by tax professionals such as accountants, lawyers, and paid tax preparers, or by groups and individuals. Tax schemes are offered to taxpayers using various means, including conferences or seminars, publications, advertisements, and the Internet. Others are promoted by word-of-mouth. Abusive tax schemes that are generally used by individuals fall into four major categories. For the first two of these, frivolous returns and frivolous refunds, taxpayers submit a tax return that either states an argument that IRS can readily identify as frivolous, or a return with characteristics IRS has identified as reflecting a frivolous argument. For the other two types of schemes, abusive trusts and offshore compliance strategies, taxpayers' returns are less likely to reveal use of a clearly abusive tax scheme. These schemes generally use any number of anti-tax arguments to incorrectly claim that income is exempt from taxation or that IRS otherwise lacks authority needed to tax income. These arguments have been well litigated in the courts and consistently ruled to be without merit. Examples include the following: Form 2555 Scheme: In this scheme, individuals file an IRS Form 2555, Foreign Earned Income, and claim that their income was not earned within the United States. This is also known as the "not a citizen" argument in which taxpayers file returns stating they are citizens of the "Republic of " and not citizens of the United States, and thus, their income is not taxable. Section 861: Individuals using this scheme claim that under Internal Revenue Code section 861 income tax must only be paid on foreign income and, therefore, their income is not subject to tax or withholding. In these cases, taxpayers file a tax return and show a zero amount for wages. According to IRS, this argument has spread to some employers who are using it to avoid withholding and paying payroll- type taxes on their employees. According to IRS, credit and refund abusive tax schemes are designed to substantially reduce taxes or create a refund for the taxpayer, generally by claiming eligibility for a credit that does not exist or to which the taxpayer is not properly entitled. One such scheme that has received much attention is the Slavery Reparation Refund scheme. According to IRS, promoters circulate or publish information claiming African Americans are eligible for slavery reparations. Taxpayers claiming this credit generally enter a significant amount on their tax return as a credit that results in a taxpayer realizing a refund if not detected by IRS. A trust is a legitimate form of ownership, which completely separates asset responsibility and control from the benefits of ownership. As such, trusts are commonly used in matters such as estate planning. An abusive domestic trust scheme usually involves a taxpayer creating a trust that does not meet the Internal Revenue Code requirements that the assets and income of the trust not be subject to the control of the taxpayer. Once such an improper trust is established and the taxpayer has transferred business or personal assets to it, the scheme may involve further abuses, such as offsetting income of the trust by overstating its business expenses or including the taxpayer's personal expenses--like a home mortgage--as an expense of the trust. The taxpayer will often use multiple entities such as partnerships, limited liability companies, or secondary level trusts that can be tiered or layered to mask the taxpayer's continued ownership or control of the trust's income or assets. Abuses that involve foreign locations can take a wide array of forms and attempt to use a number of techniques to improperly avoid paying taxes. One common technique is simply to use foreign locations to add another level of complexity in obscuring the true ownership of assets or income and thus obfuscating whether taxes are owed and by whom. Use of foreign locations, for instance, can be combined with use of trusts to make unraveling the true ownership of assets and income more difficult for IRS. According to IRS, criminals long have used offshore schemes to disguise the true nature of their enterprise and the resulting income. Promoters of abusive tax schemes have, according to IRS, increasingly devised schemes that in some fashion involve transferring income or title to assets to foreign locations. Often foreign locations are selected because they are tax havens with little or no taxation on income in their jurisdiction, have privacy rules that help schemers hide what they are doing, or have other characteristics favorable to carrying out the schemes. According to IRS, once such transfers are established, income is often repatriated back to the U.S. owners through loans, credit cards, or debit cards. By using complex transactions and multiple entities, the individuals using these schemes attempt to hide their income and avoid potential tax liabilities. According to IRS's fiscal year 2003-2004 Small Business and Self-Employed (SB/SE) Division Strategic Assessment Report, abusive tax schemes represent a rapidly growing risk to the tax base. IRS estimates the potential revenue loss from these schemes to be in the tens of billions of dollars annually. According to an IRS official, to make accurate estimates in this area of noncompliance is difficult. For one reason, the nuances and types of schemes are constantly changing and evolving, particularly in the areas of abusive trusts and offshore compliance. Also, IRS's detection of schemes is challenging. Trust schemes, in particular, often involve multiple entities that are vertically layered or tiered in an attempt to disguise the true ownership of the income or assets of the trust. The difficulty in determining the significance of offshore compliance is also exacerbated because these types of schemes generally use tax haven countries to disguise the transactions and prevent IRS from routinely collecting tax-related information on transactions. Despite the difficulties in accurately estimating the significance of abusive tax schemes, IRS provided us with estimates in four major scheme areas-- Frivolous Returns, Frivolous Refunds, Abusive Domestic Trusts, and Offshore Schemes. According to IRS, its estimates were made in February of 2002 and were derived from information gathered during tax return processing and examination activities and from the work of IRS's Criminal Investigation, the law enforcement arm of IRS. According to an IRS official, these estimates were derived from tax year 2000 information, the last full year for which data were available. IRS's estimates are as follows: Frivolous returns: about 62,000 taxpayers with associated tax amounts approximating $1.8 billion. Frivolous refunds: about 105,000 taxpayers with associated tax amounts approximating $3.1 billion. Abusive domestic trusts: about 65,000 taxpayers with tax losses approximating $2.9 billion. Offshore schemes: about 505,000 taxpayers with tax losses ranging from $20 billion to $40 billion. IRS's estimates for the numbers of taxpayers and taxes in connection with frivolous returns and refunds, although not precise, likely have less uncertainty than its estimates of the numbers of taxpayers and taxes at risk in connection with abusive domestic trusts and offshore schemes. IRS's estimates for frivolous returns and refunds are based in large part on returns and refund claims that IRS has identified while processing tax returns and has addressed by pulling the associated returns and notifying the taxpayers that their returns contained errors that need to be corrected. Thus, in these cases, IRS has a fairly direct basis for counting the number of taxpayers involved and the amount of tax involved. Furthermore, because IRS has pulled these returns from processing, in general, improper refund claims have not been paid out, and IRS is pursuing collection of the proper amount of tax when taxpayers have failed to pay the full amount owed. In contrast, although taxpayers using domestic trusts and offshore schemes may file tax returns, those returns alone seldom provide enough information for IRS to determine whether an abusive scheme was used. Therefore, IRS's estimates of the numbers of taxpayers and the taxes at risk for the domestic trust and offshore scheme categories generally rely on limited numbers of cases that have been examined or investigated, on intelligence obtained in the course of normal tax administration and Criminal Investigation activities, and on IRS officials' professional judgments. Recognizing that offshore transactions are a significant factor in offshore schemes, IRS has been taking steps concerning the use of credit/debit cards issued by offshore banks to U.S. taxpayers. Although having an offshore credit card is not illegal, IRS believes that some U.S. taxpayers are using such cards to evade U.S. taxes. In October 2000, a federal judge authorized IRS to serve "John Doe" summonses on American Express and MasterCard to obtain limited information on U.S. taxpayers holding credit cards issued by banks in several tax haven countries. On the basis of information received from MasterCard, IRS identified about 235,000 accounts issued through 28 banks located in 3 countries. IRS's ongoing analysis of these data leads it to estimate that between 60,000 and 130,000 U.S. customers are associated with these 235,000 accounts. In part because MasterCard is estimated to have about 30 percent of this market, IRS estimates that there could be 1 to 2 million U.S. citizens with credit/debit cards issued by offshore banks. However, this is a very preliminary estimate. IRS officials believe this estimate may be reduced because, among other things, a portion of these accounts may not be associated with abusive tax schemes. By comparison, only about 117,000 individual taxpayers indicated that they had offshore bank accounts in tax year 1999. On March 25, 2002, IRS petitioned for permission to serve a summons on VISA International, seeking records on transactions using cards issued by banks in over 20 tax-haven countries. The estimates of the number of individuals and dollar consequences associated with offshore credit/debit card schemes are very uncertain at this time. Nevertheless, IRS's February 2002 estimate of $20 billion to $40 billion in tax dollars at risk from offshore schemes may grow as IRS learns more about the extent of the problem. No one individual or office could provide an agencywide perspective on IRS's strategy, goals, objectives, performance measures, or program results, for its efforts to address abusive tax schemes. Consequently, a clear and consistent picture of IRS's efforts was difficult to obtain. Available information indicates that IRS began increasing its efforts to combat abusive schemes over the past 2 or 3 years, continued to do so in 2001, and plans further future efforts. Limited data also suggest that these enhanced efforts have helped IRS convict more promoters and users of abusive schemes over the past 3 years, which IRS has publicized through enhanced communication strategies. Organizationally, IRS identifies and deals with schemes in two primary ways--during its processing and examination of tax returns (compliance and enforcement) and through the work of Criminal Investigation (CI). However, most of IRS's programs to address abusive schemes are the responsibility of SB/SE and CI. IRS also works with various federal agencies in its efforts to identify and deal with abusive tax schemes. IRS has taken a number of steps to enhance its compliance and enforcement efforts--its audit and other civil enforcement activities--that focus on abusive tax schemes. In the past year, for example, IRS has increased staff years devoted to examining abusive tax scheme promoters, decided to assign about 50 more agents to promoter examinations and train them, and laid plans for assigning 200 or more additional staff to reviewing abusive tax schemes and offshore compliance schemes. Furthermore, IRS has created an organization that initially will focus on developing leads and cases related to abusive scheme promoters and that will monitor promoter web sites. IRS identifies many abusive tax schemes during its normal tax return processing and examination activities. For example, when tax returns initially are processed either manually or by computers, processes are in place to detect apparent frivolous returns or returns reflecting improper refunds. In these cases, the returns are pulled from processing to be forwarded elsewhere for follow-up action. Both the Wage and Investment (W&I) and SB/SE divisions in IRS process taxpayers' tax returns and both have responsibilities for identifying tax returns that may involve abusive tax schemes. Three principal SB/SE efforts focusing on or related to abusive tax schemes are the Frivolous Return Program, the Office of Flow-Through Entities and Abusive Tax Schemes, and the National Fraud Program. The Frivolous Return Program identifies the tax returns of individuals who assert unfounded legal or constitutional arguments and refuse to pay their taxes or to file a proper tax return. The program also identifies returns claiming frivolous refunds, such as those involving slavery reparations. Generally, IRS provides guidance to those who process tax returns to identify the characteristics of returns claiming such frivolous arguments or refunds. IRS also has programmed its computers to do so. The Treasury Inspector General for Tax Administration helped IRS develop software programs to identify slavery reparation schemes. Since both W&I and SB/SE staff process tax returns, both divisions are involved in identifying such returns. Once identified, the returns are pulled out of the tax return processing stream and forwarded to the Frivolous Return Program unit where they are to be resolved with the taxpayer. The program was consolidated in January 2001, at the Ogden, Utah, Compliance Services Center. The compliance center staff enters information about each case into a database and assigns 1 of 31 different codes identifying the frivolous argument or refund being claimed by the taxpayer. Then, a notice requesting taxpayers to file a proper tax return is to be sent advising them that IRS has judged their tax return to include an argument that is without legal merit or a credit or tax refund to which they are not entitled. IRS officials indicate that the number of staff assigned to the Frivolous Return Program unit in Ogden grew from 18 employees in September 2000 to 45 employees in September 2001. Some of this increase may not reflect a net IRS-wide increase in full-time equivalents (FTE) for frivolous returns since the increase has, in part, been due to centralizing efforts in Ogden from other IRS locations. IRS officials expect to assign more employees to this program in fiscal year 2003. The Office of Flow-Through Entities and Abusive Tax Schemes became operational in January 2000. The office was created to organize IRS's efforts in addressing abusive tax schemes, particularly trusts, and to identify their promoters and sellers. The unit's goals are (1) to catalogue and profile schemes and trends, (2) direct compliance resources to examine schemes and promoters or refer tax scheme promoters and participants for criminal prosecution, (3) increase employee knowledge and skills related to abusive tax scheme issues, and (4) enhance coordination within IRS on issues related to abusive tax schemes. IRS expects to assign and train about 50 revenue agents this fiscal year to focus mainly on promoters of abusive tax schemes. The agents are to undergo training during the summer of 2002 and to begin examining cases by the fall of 2002. According to IRS, the number of abusive promoter leads increased from 25 in March 2001 to 155 in February 2002. In addition, the number of abusive promoter cases approved for further examinations has increased from 17 cases to 94 cases during the same period. The time spent on these cases is also increasing. IRS also reports that time spent on promoter examinations for fiscal year 2002 is expected to be 12.1 staff years, which is up from 4.4 and 1.2 staff years in fiscal 2001 and fiscal year 2000, respectively. Furthermore, IRS plans additional expansion of its abusive tax scheme compliance efforts. For example, IRS expects to develop units that will include 8 to 10 agents in each of 15 locations. These units will address abusive tax schemes and flow-through entities. In addition, given the growing significance of the offshore credit/debit card schemes, IRS plans to create four special enforcement groups. Each group will be staffed by approximately 8 agents and will concentrate on these offshore schemes. This growth in staffing reflects IRS's increased priority for these schemes. IRS officials expect that the agents assigned to these units will be redirected largely from other compliance areas. Schedule K-1 Transcription and Matching. In the spring of 2001, the transcription of Schedule K-1 information became a major responsibility of the Office of Flow-Through Entities and Abusive Tax Schemes. According to IRS, information provided on Schedule K-1s is important for determining whether recipients of flow-through income have properly reported that income on their tax returns. IRS can use transcribed data for information-matching to determine whether proper reporting of income occurred. IRS believes that flow-through entities such as trusts and partnerships are increasingly being used in abusive tax schemes. IRS can also use these K-1 data in its return examination and tax collection activities to help identify abusive tax schemes. Tax year 1995 marked the last year that Schedule K-1 information was transcribed by IRS. From 1990 through 1995, IRS transcribed approximately 5 percent to 12 percent of the Schedule K-1s received. After 1995, IRS did not transcribe Schedule K-1 information submitted with paper returns nor did it match the income information contained on the schedules with the information presented on individual beneficiaries' or partners' tax returns. IRS again started to transcribe tax year 2000 K-1 information during the spring of 2001 and completed the process in December 2001. IRS officials told us that the matching of the K-1 information against individual tax returns was to begin in March 2002. IRS cites several reasons for reinstating its transcription and matching of Schedule K-1s. First, IRS has observed a significant increase in flow- through entities. The number of tax returns filed by Trusts, Partnerships, and S-Corporations has increased by 12 percent, 33 percent, and 35 percent, respectively, over the 6-year period from fiscal years 1995 through 2000. IRS also estimates an overall increase of nearly 2 million such returns by 2009. Second, based on a small study, in January 2002, IRS estimated that between 6 percent and 15 percent of total flow-through income would not be reported on tax year 2001 returns. Although data available to us at the time of this testimony were not clear, IRS estimates that income of about $1 trillion was distributed to taxpayers from flow- through entities for tax year 2000. Third, IRS expects its Schedule K-1 matching program not only to identify underreporting or nonreporting of income but also to improve taxpayer compliance. Transcription and matching of Schedule K-1 data are expected to increase accurate reporting of trust income on future tax returns just as matching of wage, interest, and other types of income has increased the accuracy of taxpayers' tax returns. As a result, the Schedule K-1 program places taxpayers who receive flow-through income on a more equal footing with taxpayers who are wage earners. Lead Development Center. IRS has adopted a strategy of identifying promoters of tax schemes as a key to halting their promotion and identifying those who have taken advantage of the scheme and thus likely owe taxes. By early April 2002, SB/SE is to initiate a Lead Development Center. The center's primary functions are to develop case leads and assemble case information for distribution to compliance field offices for further investigation. Initially the center will focus on abusive tax scheme promoters, and over time, it will expand to perform similar functions for fraud and anti-money laundering cases. Also, the center will operate a computer laboratory that, among other things, is expected to monitor possible abusive promoter sites on the Internet. In addition, the center is to serve as a coordinating link among various IRS groups that deal with abusive tax scheme issues and with outside stakeholders such as the Department of Justice, the Federal Trade Commission (FTC), and others. The National Fraud Program, which operates at IRS's campuses and field offices, coordinates efforts and provides oversight to IRS's compliance efforts to identify potential tax fraud. In addition, the program helps identify trends and disseminates the information within IRS and acts as a liaison on fraud cases involving bankruptcy and employment and excise taxes among other types of tax fraud. A National Fraud Program manager sets overall policy and program direction. Fraud managers are located in five area offices, and they oversee the activities of about 65 fraud referral specialists. These specialists assist other IRS revenue compliance staff in identifying cases with fraud potential, determining when indications of fraud are present, and developing potential cases. They also review fraud cases for technical accuracy and adequacy of supporting documentation to ensure appropriate and consistent application of fraud program guidelines and requirements. In cases where there is evidence of criminal activity, those cases are to be referred to criminal investigation within IRS. IRS's Criminal Investigation investigates and pursues promoters and sellers of abusive schemes and the individuals using such schemes. CI's role is the enforcement of the tax laws for individuals who willfully fail to comply with their obligation to file and pay taxes and who ignore IRS's collection and compliance efforts. The most flagrant cases are recommended for criminal prosecution. Criminal Investigation also administers the Questionable Refund Program that focuses on stopping the payment of various false tax refunds and, if warranted, on prosecuting the taxpayers involved. Furthermore, CI develops education and publicity activities warning taxpayers about abusive tax schemes and placed public information officers (PIO) in the field to specifically generate publicity regarding IRS's law enforcement efforts. CI's enforcement strategy as it relates to fraudulent tax schemes is to focus primarily on the promoters of these schemes and on taxpayers who willfully use these schemes to evade taxes. For example, during a tax scheme investigation, CI generally attempts to gain access to a fraudulent promoter's list of clients to whom the promoter sold the scheme. In addition to pursuing the promoter, CI can then use the list of clients to determine who may have used the abusive scheme. CI determines which users of the abusive scheme merit investigation for possible prosecution and which users merit referral to IRS operating divisions for possible compliance and civil enforcement action. Although CI has data on enforcement activity related to several types of tax scams (e.g., related to employment tax, refunds, return preparers, nonfilers, and domestic and foreign trusts), CI only separately tracked its promoter efforts for domestic and foreign trusts. (See table 1.) CI officials said that the number of full-time equivalent staff working on domestic and foreign trusts increased from 55 in fiscal year 1999 to 69 in fiscal year 2001. Although no consistent pattern exists across all of the categories in table 1, CI has had increases in the number of convictions obtained over the 3- year period. Furthermore, looking only at promoter-related cases, indictments, convictions, and active investigations increased over the period while the number of prosecutions recommended declined. For purposes of deterring individuals from engaging in abusive trusts, the pattern of increasing convictions has provided IRS an opportunity to publicize more cases in which individuals have been found guilty. Further, the increases in indictments and convictions of promoters may help deter promoter activity in particular. Because the investigative and legal processes can span several years, data like those in the table do not show whether the cases investigated lead to prosecutions, convictions, and indictments in that same year. Further, the data do not account for differences in the importance of cases, such as whether major fraudulent efforts are being successfully investigated and closed. IRS data do show that the average length of sentence for the abusive domestic and foreign trust program rose substantially from 35 months in 1999 to 64 months in 2001. To the extent that average length of sentence relates to the severity of the crime, IRS may be making headway in pursuing key abusive trust cases. The Questionable Refund Program (QRP), administered by CI, was established in 1977. The QRP was designed to identify false returns, stop the payment of false refunds, and prosecute scheme perpetrators. Various false refund schemes are pursued under this program, including ones involving the earned income tax credit, the fuel tax credit, social security refund schemes, and slavery reparations. Tax returns and return information are subject to manual processing or computerized information matching. IRS's compliance staff identifies those returns claiming a possible false refund generally during these various return examination processes and referred to Questionable Refund Detection Teams (QRDT). The QRDT staff within CI determines which returns should be pursued within CI or civilly. Schemes with criminal potential are referred to CI field offices for investigation while schemes lacking criminal potential are referred to the appropriate IRS compliance or collection group. CI's efforts to inform and educate the public about abusive tax schemes and to publicize the results of its enforcement activities related to such schemes take many forms and involve several types of media. CI has been particularly active in trying to disseminate information to the public to make them aware of IRS's activities and accomplishments in combating abusive tax schemes. In addition, CI has PIOs located across the country who work with local media to publicize IRS's efforts and results. CI Education and Publicity Activities. CI's education and publicity activities focus on warning taxpayers about fraudulent tax schemes so that they will not be tempted to use such schemes. CI hopes that increasing media coverage of successful tax scheme prosecutions will deter the public from participating in tax schemes because the perceived risk of detection, prosecution, and resulting penalties and sanctions will be too high. In addition, CI officials believe that publicizing the prosecutions of promoters and users of tax schemes helps assure the public that people are paying their fair share of taxes. CI posted its web page (www.ustreas.gov/irs/ci) on the Internet in September 1997. According to CI officials, over the past 2 years the Internet site has evolved into an important tool for educating and alerting the public about tax schemes and about CI's efforts to detect and deal with those who promote and use tax schemes. The Internet site provides fraud alerts warning the public of schemes where promoters are targeting unsuspecting taxpayers; information on topics including tax filing responsibilities, nonfilers, and abusive tax return preparers; summaries of cases and successful prosecutions of promoters and users of fraudulent schemes; and press releases and other IRS publications to generate a wide public distribution. Tax practitioners are also targets of CI's publicity strategy. According to CI officials, some tax practitioners are using IRS's materials directly from the Internet site to inform those clients who may believe that a given tax scheme is legal. For example, clients may ask the tax practitioner to set up a fraudulent trust to reduce their taxes, and the tax practitioner can simply print the brochure about "Too Good to be True? - Trusts" from CI's Internet site to discourage the taxpayers from using such a trust. In conjunction with using the Internet site as an informational tool to educate and warn the public of frivolous schemes, CI has taken steps to increase IRS's visibility and presence on the Internet. According to CI, it has recently intensified its efforts to improve the ranking of IRS's web page through the use of "metatags" or keyword tags. By doing so, IRS seeks to have Internet users who enter various terms in available Internet search engines find IRS's web page listed near the top of displayed search results. For example, CI is planning to add tags such as "pay no tax," and "form 1040" so that entering these terms will result in CI's Internet site being listed in the displayed search results. CI is pursuing other possible strategies to ensure that CI's site rises to the top of Internet search responses. For example, CI staff has occasionally visited known promoter Internet sites to gather information on keywords used by those sites. IRS plans to incorporate those keyword tags into its Internet site. As a result, IRS expects to increase the odds that the CI Internet site would be included alongside Internet sites that promote questionable tax avoidance strategies. In addition, CI is working to create a web content manager position with responsibilities that include designing a strategy to maximize the potential of CI's Internet site. The manager would be responsible for helping to integrate CI data into the pages in IRS's Internet site that provide information to specific types of taxpayers. CI Public Information Officers. In October 2000, CI established PIOs in each of IRS's 35 field offices. The PIOs serve as points of contact for all internal and external CI communications initiatives, including the issuing of press releases and the coordination of important law enforcement media events. Although IRS has other media relations specialists located in its field offices, their duties tend to focus on publicizing tax filing season information, including the benefits of electronic filing. CI PIOs generate publicity regarding IRS's law enforcement activities including the detection and prosecution of abusive tax schemes. Primary functions of the PIOs include establishing contacts with editors, reporters, and news directors to educate them on tax issues and provide information about IRS and CI to enable them to write in-depth articles. encouraging media to include more stories on the detection and prosecution of abusive tax schemes. getting articles included in trade and professional journals and magazines that are read frequently by professionals such as doctors, lawyers, and accountants to make them aware of abusive tax schemes. developing a local media strategy. Part of CI's local strategy involves generating a "hook" to get the stories focused more on communities. In addition, CI has employed a strategy of "bundling" news stories. For example, CI has been working cases on fraud involved in the restaurant industry. Once several such cases have been put together, CI will bundle these stories together into a single news story for possible publication in magazines and journals read by people in the restaurant industry. giving speeches and participating in a wide variety of presentations, panel discussions, and conferences with professional organizations, including the American Bar Association, the American Institute of Certified Public Accountants, and the American Medical Association, to create public awareness of CI's activities and to provide information about fraudulent tax schemes. IRS works with various federal agencies in its efforts to identify and deal with fraudulent tax schemes. These include the Federal Trade Commission (FTC),the Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCen), the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), and the United States Attorneys Offices (USAO). In some cases, IRS's coordination is on an informal basis, as it is with the FTC and the SEC, and involves the sharing of certain information and detection techniques. In other cases, the relationship is more formal, as in the case with DOJ or USAOs, which prosecute fraud and other tax-related cases with the assistance of IRS staff. IRS officials participate in various federal agency working groups, including a multiagency task force to share information, skills, and procedures for combating fraud on the Internet; an IRS and DOJ working group created to examine the use of civil injunctions against abusive promoters currently under criminal investigation; and a money-laundering- experts working group. According to the officials we interviewed, these working groups are invaluable for developing networking relationships between agencies which facilitate information-sharing among staff. IRS staff also attends quarterly meetings with staff from the FTC, SEC, and DOJ to develop joint initiatives to combat Internet fraud. These meetings have spawned other activities for IRS staff, including FTC-sponsored training seminars and periodic visits to FTC's Internet laboratory to keep current with FTC efforts to combat Internet fraud. IRS has tried to develop a better understanding of the potential breadth of the problem of abusive tax schemes involving individual taxpayers and the steps needed to coordinate and manage numerous efforts to combat abusive tax schemes. In some cases, these steps have been recently implemented, and in other cases, IRS is working to implement them. These expanded efforts have not been accompanied, however, by performance goals or measures that Congress and IRS can use to assess IRS's progress. The increased scope of the abusive tax scheme problem, and perhaps especially the offshore compliance schemes, could strain IRS's audit resources. IRS is now beginning to gather data that will better enable it to estimate the magnitude and nature of the offshore credit and debit card schemes. Improved data will help IRS identify how many and what types of resources it may need to address the schemes. However, the evasive nature of these schemes may necessitate face-to-face audits in a significant portion of cases to determine whether taxes are owed and the amount owed. Even if the number of individuals involved in these schemes is a fraction of the reported estimate of 1 to 2 million, IRS's staff may be challenged to audit them and maintain its current audit coverage as well. IRS's face-to-face audits have been declining, decreasing from nearly 400,000 in fiscal year 1999 to nearly 200,000 in fiscal year 2001. Accordingly, IRS has begun considering whether other techniques than audits could be used to resolve these cases. For example, IRS is considering options such as disclosure initiatives, settlement initiatives, and self-correction programs. These techniques will need to be tested and refined to determine which, if any, are effective. The increased scope of abusive tax schemes has also led IRS to develop an improved process for selecting the best cases to pursue among the many that it identifies, develop a new policy to govern simultaneous criminal and civil enforcement investigations of taxpayers, consider how to ensure that increased volumes of scheme-related tax assessments are followed up by IRS's collection function when taxpayers are unable to pay in full, and use its internal research group and a contractor to develop better models for identifying indicators that taxpayers may be participating in abusive tax schemes. In addition, a significant organizational change has just been implemented in SB/SE that is intended to increase program oversight and coordinate programs and units dealing with abusive schemes and related tax fraud activities. To that end, in the past few weeks SB/SE has divided its Office of Flow-Through Entities and Abusive Tax Schemes. Now, its efforts to ensure accurate reporting of income connected to flow-through entities will fall under a director for reporting compliance. IRS separated the flow- through entity effort from other abusive tax scheme efforts because it judged that the flow-through effort is more related to its traditional information-matching and examination programs than to its abusive scheme efforts. The flow-through effort will, however, also provide useful information for IRS to use elsewhere in investigations of abusive schemes. The rest of SB/SE's major programs and efforts that are more directly focused on abusive tax schemes--the National Fraud program, the Abusive Tax Schemes program, the Lead Development Center, and the Anti-Money Laundering program--have been placed under a single executive for reporting enforcement. Monitoring the Internet and other media outlets where abusive tax schemes often are advertised will also be part of this centralized effort. To date, however, IRS has not provided information on its staff year investments in combating abusive tax schemes and has not established performance goals and measures that IRS and Congress can use to gauge whether these efforts are achieving desired results. We testified recently that the IRS commissioner identified four major areas of systematic noncompliance. These areas not only focus heavily on abusive tax schemes involving individuals, but also include corporate tax shelter activity. The fiscal year 2003 budget request includes increased resources for compliance efforts, but, excluding the Earned Income Credit program, it is unclear from IRS's congressional budget justification how many resources IRS intends to devote to major areas of noncompliance or what performance measures will be available to Congress and IRS to assess progress. IRS has long-standing programs and related efforts aimed at detecting and dealing with abusive tax schemes, particularly those related to frivolous tax returns and fraudulent tax refund claims. Recently, IRS has begun to take a more assertive and coordinated approach to detecting and dealing with an ever-changing array of schemes, including those involving the use of domestic and offshore trusts. In the past year, IRS has added more resources to these efforts, created new programs, and improved others, and it is reorganizing its operations. Furthermore, based on the limited data available, IRS appears to be realizing some increased success in convicting those involved in schemes, publicizing these results, and uncovering previously hidden major offshore compliance problems. Nevertheless, it is difficult to get a clear picture of all that is underway in IRS how much is new as opposed to reemphasized or reorganized, and how the pieces combine to form a planned, coordinated effort with specific, defined outcomes. One of the difficulties we encountered in gathering information was that no central office, group, or executive could provide us with an agencywide focus or perspective on IRS's strategy, goals, objectives, performance measures, or program results. Responsibility for the efforts was spread across various functions and groups within IRS. To some extent this lack of clarity is not surprising given the fairly rapid and ongoing change in IRS's efforts, the expanding scope of the problem, and the difficulty in determining the difference between what is legitimate, aggressive tax planning and an abusive tax scheme.
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Estimating the extent of abusive tax schemes used by individual taxpayers is difficult because they are often hidden. Nevertheless, the Internal Revenue Service (IRS) believes that the number and dollar consequences of these schemes has grown recently. IRS estimates that 740,000 taxpayers used abusive schemes in tax year 2000. IRS caught $5 billion in improper tax avoidance or tax credit and refund claims, but estimates that another $20 to $40 billion went undetected. Recent developments suggest that the number of individuals using an abusive tax scheme involving offshore accounts may be greater than estimated and potential lost revenues may be higher than estimated. Because no one individual or office could provide an agencywide perspective on IRS's strategy, goals, objectives, performance measures, or program results, it is difficult to provide a clear picture of IRS's efforts to address abusive tax schemes. IRS has created new offices, reemphasized and reorganized earlier efforts, and plans to assign at least 200 additional staff to its efforts. Limited data suggest that IRS's enhanced efforts have helped to successfully convict those promoting and taking advantage of abusive schemes, publicize these results, and uncover previously hidden major offshore compliance problems. The number of possible abusive tax schemes, however, could outstrip IRS's audit resources. Furthermore, identifying and handling these cases will require better coordination on IRS's part. IRS has not yet developed a way to track the resources used to combat abusive schemes, nor has it developed goals and measures to assess its progress.
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The electricity industry, as shown in figure 1, is composed of four distinct functions: generation, transmission, distribution, and system operations. Once electricity is generated--whether by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydro energy--it is generally sent through high-voltage, high-capacity transmission lines to local electricity distributors. Once there, electricity is transformed into a lower voltage and sent through local distribution lines for consumption by industrial plants, businesses, and residential consumers. Because electric energy is generated and consumed almost instantaneously, the operation of an electric power system requires that a system operator constantly balance the generation and consumption of power. Utilities own and operate electricity assets, which may include generation plants, transmission lines, distribution lines, and substations--structures often seen in residential and commercial areas that contain technical equipment such as switches and transformers to ensure smooth, safe flow of current and regulate voltage. Utilities may be owned by investors, municipalities, and individuals (as in cooperative utilities). System operators--sometimes affiliated with a particular utility or sometimes independent and responsible for multiple utility areas--manage the electricity flows. These system operators manage and control the generation, transmission, and distribution of electric power using control systems--IT- and network-based systems that monitor and control sensitive processes and physical functions, including opening and closing circuit breakers. As we have previously reported, the effective functioning of the electricity industry is highly dependent on these control systems. However, for many years, aspects of the electricity network lacked (1) adequate technologies--such as sensors--to allow system operators to monitor how much electricity was flowing on distribution lines, (2) communications networks to further integrate parts of the electricity grid with control centers, and (3) computerized control devices to automate system management and recovery. As the electricity industry has matured and technology has advanced, utilities have begun taking steps to update the electricity grid--the transmission and distribution systems--by integrating new technologies and additional IT systems and networks. Though utilities have regularly taken such steps in the past, industry and government stakeholders have begun to articulate a broader, more integrated vision for transforming the electricity grid into one that is more reliable and efficient; facilitates alternative forms of generation, including renewable energy; and gives consumers real-time information about fluctuating energy costs. This vision--the smart grid--would increase the use of IT systems and networks and two-way communication to automate actions that system operators formerly had to make manually. Smart grid modernization is an ongoing process, and initiatives have commonly involved installing advanced metering infrastructure (smart meters) on homes and commercial buildings that enable two-way communication between the utility and customer. Other initiatives include adding "smart" components to provide the system operator with more detailed data on the conditions of the transmission and distribution systems and better tools to observe the overall condition of the grid (referred to as "wide-area situational awareness"). These include advanced, smart switches on the distribution system that communicate with each other to reroute electricity around a troubled line and high-resolution, time-synchronized monitors--called phasor measurement units--on the transmission system. Figure 2 illustrates one possible smart grid configuration, though utilities making smart grid investments may opt for alternative configurations depending on cost, customer needs, and local conditions. According to the National Energy Technology Laboratory, a Department of Energy (DOE) national laboratory supporting smart grid efforts, smart grid systems fall into several different categories: Integrated communications, such as broadband over power line communication technologies or wireless communications technologies. Advanced components, such as smart switches, transformers, cables, and other devices; storage devices, such as plug-in hybrid electric vehicles and advanced batteries; and grid-friendly smart home appliances. Advanced control methods, including real-time monitoring and control of substation and distribution equipment. Sensing and measurement technologies, such as smart meters and phasor measurement units. Improved interfaces and decision support, which includes software tools to analyze the health of the electricity system and real-time digital simulators to study and test systems. The use of smart grid systems may have a number of benefits, including improved reliability from fewer and shorter outages, downward pressure on electricity rates resulting from the ability to shift peak demand, an improved ability to shift to alternative sources of energy, and an improved ability to detect and respond to potential attacks on the grid. Both the federal government and state governments have authority for overseeing the electricity industry. For example, the Federal Energy Regulatory Commission (FERC) regulates rates for wholesale electricity sales and transmission of electricity in interstate commerce. This includes approving whether to allow utilities to recover the costs of investments they make to the transmission system, such as smart grid investments. Meanwhile, local distribution and retail sales of electricity are generally subject to regulation by state public utility commissions. State and federal authorities also play key roles in overseeing the reliability of the electric grid. State regulators generally have authority to oversee the reliability of the local distribution system. The North American Electric Reliability Corporation (NERC) is the federally designated U.S. Electric Reliability Organization, and is overseen by FERC. NERC has responsibility for conducting reliability assessments and enforcing mandatory standards to ensure the reliability of the bulk power system-- i.e., facilities and control systems necessary for operating the transmission network and certain generation facilities needed for reliability. NERC develops reliability standards collaboratively through a deliberative process involving utilities and others in the industry, which are then sent to FERC for approval. These standards include critical infrastructure protection standards for protecting electric utility-critical and cyber-critical assets. The Energy Independence and Security Act of 2007 (EISA) established federal support for the modernization of the electricity grid and required actions by a number of federal agencies, including the National Institute of Standards and Technology (NIST), FERC, and DOE. With regard to cybersecurity, the act called for NIST and FERC to take the following actions: NIST was to coordinate development of a framework that includes protocols and model standards for information management to achieve interoperability of smart grid devices and systems. As part of its efforts to accomplish this, NIST planned to identify cybersecurity standards for these systems and also identified the need to develop guidelines for organizations such as electric companies on how to securely implement smart grid systems. In January 2011, we reported that NIST had identified 11 standards involving cybersecurity that support smart grid interoperability and had issued a first version of a cybersecurity guideline. FERC was to adopt standards resulting from NIST's efforts that it deemed necessary to ensure smart grid functionality and interoperability. The act also authorized DOE to establish two initiatives to facilitate the development of industry smart grid efforts. These were the Smart Grid Investment Grant Program and the Smart Grid Regional Demonstration Initiative. DOE made $3.5 billion and $685 million of American Recovery and Reinvestment Act ("Recovery Act") funds available for these two initiatives, respectively. The Smart Grid Investment Grant Program provided grant awards to utilities in multiple states to stimulate the rapid deployment and integration of smart grid technologies, while the Smart Grid Regional Demonstration Initiative was to fund regional demonstrations to verify technology viability, quantify costs and benefits, and validate new business models for the smart grid at a scale that can be readily adopted around the country. The federal government has also undertaken various other smart-grid-related initiatives, including funding technical research and development, data collection, and coordination activities. In January 2012, the DOE Inspector General reported that cybersecurity plans submitted by Smart Grid Investment Grant Program recipients were not always complete or they did not describe intended security controls in sufficient detail. The report also stated that DOE officials approved cybersecurity plans for smart grid projects even though some of the plans contained shortcomings that could result in poorly implemented controls. The report recommended, among other things, that DOE ensure that grantees' cybersecurity plans were complete, including thorough descriptions of potential security risks and related mitigation through necessary controls. The responsible DOE office stated that it will continue to ensure that the security plans are complete and are implemented properly. Threats to systems supporting critical infrastructure--which includes the electricity industry and its transmission and distribution systems--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.sources may adversely affect computers, software, networks, organizations, entire industries, or the Internet. Cyber threats can be unintentional or intentional. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt Different types of cyber threats from numerous 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. Moreover, these groups have a wide array of cyber exploits at their disposal. Table 1 provides descriptions of common types of cyber exploits. 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 critical services, including electrical power. For example, in May 2008, we reported that the corporate network of the Tennessee Valley Authority (TVA)--the nation's largest public power company, which generates and distributes power in an area of about 80,000 square miles in the southeastern United States-- 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. GAO-07-1036 and GAO-12-92. grid. When several key transmission lines in northern Ohio tripped due to contact with trees, they initiated a cascading failure of 508 generating units at 265 power plants across eight states and a Canadian province. Davis-Besse power plant. The Nuclear Regulatory Commission confirmed that in January 2003, the Microsoft SQL Server worm known as Slammer infected a private computer network at the idled Davis-Besse nuclear power plant in Oak Harbor, Ohio, disabling a safety monitoring system for nearly 5 hours. In addition, the plant's process computer failed, and it took about 6 hours for it to become available again. While presenting significant potential benefits, the smart grid vision and its increased reliance on IT systems and networks also expose the electric grid to potential and known cybersecurity vulnerabilities, which could be exploited by a wide array of cyber threats. This creates an increased risk to the smooth and reliable operation of the grid. As we and others have reported, these vulnerabilities include an increased number of entry points and paths that can be exploited by potential adversaries and other unauthorized users; the introduction of new, unknown vulnerabilities due to an increased use of new system and network technologies; wider access to systems and networks due to increased connectivity; an increased amount of customer information being collected and transmitted, providing incentives for adversaries to attack these systems and potentially putting private information at risk of unauthorized disclosure and use. We and others have also reported that smart grid and related systems have known cyber vulnerabilities. For example, cybersecurity experts have demonstrated that certain smart meters can be successfully attacked, possibly resulting in disruption to the electricity grid. In addition, we have reported that control systems used in industrial settings such as electricity generation have vulnerabilities that could result in serious damages and disruption if exploited. Further, in 2009, the Department of Homeland Security, in cooperation with DOE, ran a test that demonstrated that a vulnerability commonly referred to as "Aurora" had the potential to allow unauthorized users to remotely control, misuse, and cause damage to a small commercial electric generator. Moreover, in 2008, the Central Intelligence Agency reported that malicious activities against IT systems and networks have caused disruption of electric power capabilities in multiple regions overseas, including a case that resulted in a multicity power outage. In our January 2011 report, we identified a number of key challenges that industry and government stakeholders faced in ensuring the cybersecurity of the systems and networks that support our nation's electricity grid. Among others, these challenges included the following: Lack of a coordinated approach to monitor whether industry follows voluntary standards. As mentioned above, under EISA, FERC is responsible for adopting cybersecurity and other standards that it deems necessary to ensure smart grid functionality and interoperability. However, FERC had not developed an approach coordinated with other regulators to monitor, at a high level, the extent to which industry will follow the voluntary smart grid standards it adopts. There had been initial efforts by regulators to share views, through, for example, a collaborative dialogue between FERC and the National Association of Regulatory Utility Commissioners (NARUC), which had discussed the standards-setting process in general terms. Nevertheless, according to officials from FERC and NARUC, FERC and the state public utility commissions had not established a joint approach for monitoring how widely voluntary smart grid standards are followed in the electricity industry or developed strategies for addressing any gaps. Moreover, FERC had not coordinated in such a way with groups representing public power or cooperative utilities, which are not routinely subject to FERC's or the states' regulatory jurisdiction for rate setting. We noted that without a good understanding of whether utilities and manufacturers are following smart grid standards, it would be difficult for FERC and other regulators to know whether a voluntary approach to standards setting is effective or if changes are needed. Lack of security features being built into certain smart grid systems. Security features had not been consistently built into smart grid devices. For example, according to experts from a panel convened by GAO, currently available smart meters had not been designed with a strong security architecture and lacked important security features, such as event logging and forensics capabilities, which are needed to detect and analyze attacks. In addition, these experts stated that smart grid home area networks--used for managing the electricity usage of appliances and other devices in the home--did not have adequate security built in, thus increasing their vulnerability to attack. Without securely designed smart grid systems, utilities may not be able to detect and analyze attacks, increasing the risk that attacks would succeed and utilities would be unable to prevent them from recurring. Lack of an effective mechanism for sharing cybersecurity information within the electricity industry. The electricity industry lacked an effective mechanism to disclose information about smart grid cybersecurity vulnerabilities, incidents, threats, lessons learned, and best practices in the industry. For example, experts stated that while the industry has an information-sharing center, it had not fully addressed these information needs. According to these experts, information regarding incidents such as both successful and unsuccessful attacks must be able to be shared in a safe and secure way; this is crucial to avoid publicly revealing the reported organization and penalizing entities actively engaged in corrective action. Such information sharing across the industry could provide important information regarding the level of attempted attacks and their methods, which could help grid operators better defend against them. In developing an approach to cybersecurity information sharing, the industry could draw upon the practices and approaches of other industries. Without quality processes for information sharing, utilities may not have the information needed to adequately protect their assets against attackers. Lack of industry metrics for evaluating cybersecurity. The electricity industry was also challenged by a lack of cybersecurity metrics, making it difficult to measure the extent to which investments in cybersecurity improve the security of smart grid systems. Experts noted that while such metrics are difficult to develop, they could help in comparing the effectiveness of competing solutions and determining what mix of solutions best secure systems. Further, our panel of experts noted that having metrics would help utilities develop a business case for cybersecurity by helping to show the return on a particular investment. Until such metrics are developed, increased risk exists that utilities will not invest in security in a cost-effective manner or be able to have the information needed to make informed decisions about their cybersecurity investments. Accordingly, in our January 2011 report, we made multiple recommendations to FERC, including that it develop an approach to coordinating with state regulators to evaluate the extent to which utilities and manufacturers are following voluntary smart grid standards and develop strategies for addressing any gaps in compliance with standards that are identified as a result. We further recommended that FERC, working with NERC as appropriate, assess whether commission efforts should address any of the cybersecurity challenges identified in our report. FERC agreed with our recommendations and described steps the commission intended to take to address them. We are currently working with FERC officials to determine the status of their efforts to address these recommendations. In summary, the electricity industry is in the midst of a major transformation as a result of smart grid initiatives and this has led to significant investments by many entities, including utilities, private companies, and the federal government. While these initiatives hold the promise of significant benefits, including a more resilient electric grid, lower energy costs, and the ability to tap into alternative sources of power, the prevalence of cyber threats aimed at the nation's critical infrastructure and the cyber vulnerabilities arising from the use of new technologies highlight the importance of securing smart grid systems. In particular, it will be important for federal regulators and other stakeholders to work closely with the private sector to address key cybersecurity challenges posed by the transition to smart grid technology. While no system can be made 100 percent secure, proven security strategies could help reduce risk to an acceptable level. Chairman Stearns, Ranking Member DeGette, and Members of the Subcommittee, this completes our statement. We would be happy to answer any questions you have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected] or David C. Trimble at (202) 512-3841 or [email protected]. Other key contributors to this statement include Michael Gilmore (Assistant Director), Jon R. Ludwigson (Assistant Director), Paige Gilbreath, Barbarol J. James, and Lee A. McCracken. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The electric power industry is increasingly incorporating information technology (IT) systems and networks into its existing infrastructure as part of nationwide efforts--commonly referred to as the "smart grid"--aimed at improving reliability and efficiency and facilitating the use of alternative energy sources such as wind and solar. Smart grid technologies include metering infrastructure ("smart meters") that enable two-way communication between customers and electricity utilities, smart components that provide system operators with detailed data on the conditions of transmission and distribution systems, and advanced methods for controlling equipment. The use of these systems can bring a number of benefits, such as fewer and shorter outages, lower electricity rates, and an improved ability to respond to attacks on the electric grid. However, this increased reliance on IT systems and networks also exposes the grid to cybersecurity vulnerabilities, which can be exploited by attackers. Moreover, for nearly a decade, GAO has identified the protection of systems supporting our nation's critical infrastructure--which include the electric grid--as a governmentwide high-risk area. GAO is providing a statement describing (1) cyber threats facing cyber-reliant critical infrastructures and (2) key challenges to securing smart grid systems and networks. In preparing this statement, GAO relied on its previously published work in this 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 had been a dramatic increase in cyber activity targeting U.S. computers and systems in the previous 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, and 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 infrastructures, the security of sensitive information, and the flow of commerce. Moreover, the smart grid's reliance on IT systems and networks exposes the electric grid to potential and known cybersecurity vulnerabilities, which could be exploited by attackers. As GAO reported in January 2011, securing smart grid systems and networks presented a number of key challenges that required attention by government and industry. These included: A lack of a coordinated approach to monitor industry compliance with voluntary standards. The Federal Energy Regulatory Commission (FERC) is responsible for regulating aspects of the electric power industry, which includes adopting cybersecurity and other standards it deems necessary to ensure smart grid functionality and interoperability. However, FERC had not, in coordination with other regulators, developed an approach to monitor the extent to which industry will follow the voluntary smart grid standards it adopts. As a result, it would be difficult for FERC and other regulators to know whether a voluntary approach to standards setting is effective. A lack of security features built into smart grid devices. According to a panel of experts convened by GAO, smart meters had not been designed with a strong security architecture and lacked important security features. Without securely designed systems, utilities would be at risk of attacks occurring undetected. A lack of an effective information-sharing mechanism within the electricity industry. While the industry has an information-sharing center, it had not fully addressed the need for sharing cybersecurity information in a safe and secure way. Without quality processes for sharing information, utilities may lack information needed to protect their assets against attackers. A lack of metrics for evaluating cybersecurity. The industry lacked metrics for measuring the effectiveness of cybersecurity controls, making it difficult to measure the extent to which investments in cybersecurity improve the security of smart grid systems. Until such metrics are developed, utilities may not invest in security in a cost-effective manner or be able to make informed decisions about cybersecurity investments. GAO made several recommendations to FERC aimed at addressing these challenges. The commission agreed with these recommendations and described steps it is taking to implement them.
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Title XIX of the Social Security Act authorizes federal funding to states for Medicaid, which finances health care services including acute and long- term care for certain low-income, aged, or disabled individuals. States have considerable flexibility in designing and operating their Medicaid programs. Within broad federal requirements, each state determines which services to cover and to what extent, establishes its own eligibility requirements, sets provider payment rates, and develops its own administrative structure. In addition to groups for which federal law requires coverage--such as children and pregnant women at specified income levels and certain persons with disabilities--states may choose to expand eligibility or add benefits that the statute defines as optional. Medicaid is an open-ended entitlement: states are generally obligated to pay for covered services provided to eligible individuals, and the federal government is obligated to pay its share of a state's expenditures under a CMS-approved state Medicaid plan. The federal share of each state's Medicaid expenditures is based on a statutory formula linked to a state's per capita income in relation to national per capita income. In 2002, the specified federal share of each state's expenditures ranged from 50 percent to 76 percent; in the aggregate, the federal share of total Medicaid expenditures was 57 percent. The Social Security Act provides that up to 60 percent of the state share of Medicaid spending can come from local- government revenues and sources. Some states design their Medicaid programs to require local governments to contribute to the programs' costs. For more than a decade, some states have used various financing schemes, some involving IGTs, to create the illusion of a valid state Medicaid expenditure to a health care provider. This payment has enabled states to claim federal matching funds regardless of whether the program services paid for had actually been provided. As various schemes have come to light, Congress and CMS have taken actions to curtail them (see table 1). Many of these schemes involve payment arrangements between the state and government-owned or government-operated providers, such as local- government-operated nursing homes. A variant of these creative financing arrangements involves states' exploitation of Medicaid's upper payment limit (UPL) provisions. These schemes share certain characteristics, including IGTs, with other financing schemes from prior years (see table 1). In particular, these arrangements create the illusion that a state has made a large Medicaid payment-- separate from and in addition to Medicaid expenditures that providers have already received for covered services--which enables the state to obtain a federal matching payment. In reality, the large payment is temporary, since the funds essentially make a round-trip from the state to the Medicaid providers and back to the state. As a result of such round-trip arrangements, states obtain excessive federal Medicaid matching funds while their own state expenditures remain unchanged or even decrease. Figure 1, which is based on our earlier work, illustrates how this mechanism operated in one state (Michigan). As shown in figure 1, the state made Medicaid payments totaling $277 million to certain county health facilities; the total included $155 million in federal funds and $122 million in state funds (step 1). On the same day that the county health facilities received the funds, they transferred all but $6 million back to the state, which retained $271 million (steps 2 and 3). From this transaction, the state realized a net gain of $149 million over the state's original outlay of $122 million. In cases like this, local-government facilities can use IGTs to easily return the excessive Medicaid payments to the state via electronic wire transfers. We have found that these round-trip transfers can be accomplished in less than 1 hour. The IGT is critical, because if the payment does not go back to the state, the state gains no financial benefit and actually loses from the arrangement because it has simply paid the provider more than its standard Medicaid payment rate for the services. In a variant of this practice, some states require a few counties to initiate the transaction, by taking out bank loans for the total amount the states determined they can pay under the UPL. The counties wire the funds to the states, which then send most or all of the funds back to the counties as Medicaid payments. The counties use these "Medicaid payments" to repay the bank loans. Meanwhile, the states claim federal matching funds on the total amount. Consistent with past actions, Congress and CMS have taken steps to curtail UPL financing schemes when they have come to light. At the direction of Congress, the agency--then called the Health Care Financing Administration (HCFA)--finalized a regulation in 2001 that significantly narrowed the UPL loophole by limiting the amount of excessive funds states could claim. HCFA estimated that its 2001 regulation would reduce the federal government's financial liability due to inappropriate UPL arrangements by $55 billion over 10 years; a related 2002 regulation was estimated to yield an additional $9 billion over 5 years. CMS recognized that some states had developed a long-standing reliance on these excessive UPL funds, and the law and regulation authorized transition periods of up to 8 years for states to come into compliance with the new requirements. As we recently reported, however, even under the new regulations, states can still aggregate payments to all local-government nursing homes under one UPL to generate excessive federal matching payments beyond their standard Medicaid claims. For example, CMS information about states complying with the new regulation indicates that, through UPL arrangements with public nursing homes and other public facilities, states can still claim about $2.2 billion annually in federal matching funds exceeding their standard Medicaid claims. States' use of these creative financing mechanisms undermines the federal-state Medicaid partnership as well as the program's fiscal integrity in at least three ways. First, state financing schemes effectively increase the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. For example, for one state we analyzed (Wisconsin), we estimated that by obtaining excessive federal matching payments and using these funds as the state share of other Medicaid expenditures, the state effectively increased the federal matching share of its total Medicaid expenditures from 59 percent to 68 percent in state fiscal year 2001. The state did so by generating nearly $400 million in excessive federal matching funds via round-trip arrangements with three counties. Similarly, the HHS Office of the Inspector General found that a comparably structured arrangement in Pennsylvania effectively increased that state's statutorily determined matching rate from 54 percent to about 65 percent. Second, CMS has no assurance that these increased federal matching payments are used for Medicaid services. Federal Medicaid matching funds are intended for Medicaid-covered services for the Medicaid-eligible individuals on whose behalf payments are made. Under state financing schemes, however, states can use funds returned to them at their own discretion. We recently examined how six states with large UPL financing schemes involving nursing homes used the federal funds they generated. As in the past, some states in our review deposited excessive funds from UPL arrangements into their general funds, which the states may or may not use for Medicaid purposes. For example, one state (Oregon) has used funds generated by its UPL arrangement to help finance education programs. Table 2 provides further information on how states used their UPL funds in recent years, as reported by the six states we reviewed. Third, these state financing schemes undermine the fiscal integrity of the Medicaid program because they enable states to make to providers payments that significantly exceed their costs. In our view, this practice is inconsistent with the statutory requirement that states ensure that Medicaid payments are economical and efficient. Under UPL financing arrangements, some states pay a few public providers excessive amounts, well beyond the cost of services provided. We found, for example, that Virginia's proposed arrangement would allow the state to pay six local- government nursing homes, on average, $670 in federal funds per Medicaid nursing home resident per day--more than 12 times the $53 daily federal payment these nursing homes normally received, on average, per Medicaid resident. Although CMS and the Congress have often acted to curtail states' financing schemes, problems persist. Improved CMS oversight and additional congressional action could help address continuing concerns with UPL financing schemes and other inappropriate arrangements. We recently reported that CMS has taken several actions to improve its oversight of state UPL arrangements, including forming a team to coordinate its review of states' proposed and continuing arrangements, drafting internal guidelines for reviewing state methods for calculating UPL amounts, and conducting financial reviews that have identified hundreds of millions of dollars in improper claims. Starting in August 2003, when considering states' proposals to change how they would pay nursing homes or other institutions, CMS also began to ask states to provide previously unrequested information. The information includes sources of state matching funds for supplemental payments to Medicaid providers, the extent to which total payments would exceed providers' costs, how a state would use the additional funds, and whether a state required providers to return payments (and, if so, how the state planned to spend such funds). As of October 2003, CMS indicated that it had asked 30 states with proposed state Medicaid plan amendments to provide additional information, and the agency was in the process of receiving and reviewing states' initial responses. We also reported, however, that CMS's efforts do not go far enough to ensure that states' UPL claims are for Medicaid-covered services provided to eligible beneficiaries. Moreover, we remain concerned that in carrying out its oversight responsibilities, CMS at times takes actions inconsistent with its stated goals for limiting states' use of these arrangements. For example, we previously reported that while the agency was attempting to narrow the glaring UPL loophole in 2001, it was allowing additional states to engage in the very schemes it was trying to shut down, at a substantial cost to the federal government. More recently, we reported that CMS's granting two states the longest available transition period of 8 years, for phasing out excessive claims under their UPL arrangements, was not consistent with the agency's stated goals. We estimated that, as a result of these decisions, these two states can claim about $633 million more in federal matching funds under their 8-year transition periods than they could have claimed under shorter transition periods consistent with CMS's stated policies and goals. In our view, additional congressional action also could help address continuing concerns about Medicaid financing schemes. Although Congress and CMS have taken significant steps to help curb inappropriate UPL arrangements and other financing schemes, states can still claim federal matching funds for more than a public provider's actual costs of providing Medicaid-covered services. As long as states are allowed to make payments exceeding a facility's actual costs, the loophole remains. A recommendation open from one of our earlier reports would, if implemented, close the existing loophole and thus mitigate these continuing concerns. We previously recommended that Congress consider prohibiting Medicaid payments that exceed actual costs for any government-owned facility. If this recommendation were implemented, a facility's payment would be limited to the reasonable costs of covered services it actually provides to eligible beneficiaries, thus eliminating the possibility of the exorbitant payments that are now passed through individual facilities to states. The Administration appears to support such legislative action; the President's budget for fiscal year 2005 sets forth a legislative proposal to cap Medicaid payments to government providers (such as public hospitals or county-owned nursing homes) to the actual cost of providing services to Medicaid beneficiaries. The term "IGTs" has come to be closely associated--if not synonymous-- with the abusive financing schemes undertaken by some states in connection with illusory payments for Medicaid services to claim excessive federal matching funds. IGTs are a legitimate state budget tool and not problematic in themselves. But when they are used to carry out questionable financial transactions that inappropriately shift state Medicaid costs to the federal government, they become problematic. We believe the problem goes beyond IGTs. An observation we made in our first report on this issue in 1994 is as valid today as it was then: in our view, the Medicaid program should not allow states to benefit from arrangements where federal funds purported to benefit providers are given to providers with one hand, only to be taken back with the other. State financing schemes, variants of which have been applied for a decade or longer, circumvent the federal and state funding balance set under law. They have also resulted in the diversion of federal funds intended to pay for covered services for Medicaid-eligible individuals to whatever purpose a state chooses. Although Congress and CMS have often acted to address Medicaid financing schemes once they become apparent, new variations continue to emerge. Experience shows that some states are likely to continue looking for creative means to supplant state financing, making a compelling case for the Congress and CMS to sustain vigilance over federal Medicaid payments. Understandably, states that have relied on federal funding as a staple for their own share of Medicaid spending are feeling the budgetary pressure from the actual or potential loss of these funds. The continuing challenge remains to find the proper balance between states' flexibility to administer their Medicaid programs and the shared federal-state fiduciary responsibility to manage program finances efficiently and economically in a way that ensures the program's fiscal integrity. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of the Subcommittee may have. For future contacts regarding this testimony, please call Kathryn G. Allen at (202) 512-7118. Katherine Iritani, Tim Bushfield, Ellen W. Chu, Helen Desaulniers, Behn Miller Kelly, and Terry Saiki also made key contributions to this testimony. Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed. GAO-04-228. Washington, D.C.: February 13, 2004. Major Management Challenges and Program Risks: Department of Health and Human Services. GAO-03-101. Washington, D.C.: January 2003. Medicaid: HCFA Reversed Its Position and Approved Additional State Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001. Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000. State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington, D.C.: January 23, 1996. Michigan Financing Arrangements. GAO/HEHS-95-146R. Washington, D.C.: May 5, 1995. Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994. 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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Medicaid, the federal-state health financing program for many of the nation's most vulnerable populations, finances health care for an estimated 53 million lowincome Americans, at a cost of $244 billion in 2002. Congress structured Medicaid as a shared fiduciary responsibility of the federal government and the states, with the federal share of each state's Medicaid payments determined by a formula specified by law. In 2002, the federal share of each state's expenditures ranged from 50 to 76 percent under this formula; in the aggregate, the federal share of total Medicaid expenditures was 57 percent. Some states have used a number of creative financing schemes that take advantage of statutory and regulatory loopholes to claim excessive federal matching payments. GAO was asked to summarize prior work on how some of these schemes operated, including the role of intergovernmental transfers (IGT), which enable government entities--such as the state and local-government facilities like county nursing homes--to transfer funds among themselves. GAO was also asked to discuss these schemes' effects on the federalstate Medicaid partnership and to discuss what can be done to curtail them. For many years states have used varied financing schemes, sometimes involving IGTs, to inappropriately increase federal Medicaid matching payments. Some states, for example, receive federal matching funds on the basis of large Medicaid payments to certain providers, such as nursing homes operated by local governments, which greatly exceed established Medicaid rates. In reality, the large payments are often temporary, since states can require the local-government providers to return all or most of the money to the states. States can use these funds--which essentially make a round-trip from the states to providers and back to the states--at their own discretion. States' financing schemes undermine the federal-state Medicaid partnership, as well as the program's fiscal integrity, in at least three ways. The schemes effectively increase the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. GAO estimated that one state effectively increased the federal matching share of its total Medicaid expenditures from 59 percent to 68 percent in state fiscal year 2001, by obtaining excessive federal funds and using these as the state's share of other Medicaid expenditures. There is no assurance that these increased federal matching payments are used for Medicaid services, since states use funds returned to them via these schemes at their own discretion. In examining how six states with large schemes used the federal funds they generated, GAO found that one state used the funds to help finance its education programs, and others deposited the funds into state general funds or other special state accounts that could be used for non-Medicaid purposes or to supplant the states' share of other Medicaid expenditures. The schemes enable states to pay a few public providers amounts that well exceed the costs of services provided, which is inconsistent with the statutory requirement that states ensure economical and efficient Medicaid payments. In one state, GAO found that the state's proposed scheme increased the daily federal payment per Medicaid resident from $53 to $670 in six local-government-operated nursing homes. Although Congress and the Centers for Medicare & Medicaid Services have acted to curtail financing schemes when detected, problems persist. States can still claim excessive federal matching funds for payments exceeding public facilities' actual costs. GAO suggests that Congress consider a recommendation open from prior work, that is, to prohibit Medicaid payments that exceed actual costs for any government-owned facility.
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The FBI primarily grants security clearances to state and local law enforcement officials who participate in FBI task forces and to state and local chiefs of police and sheriffs. Since September 11, the FBI has expanded its JTTF initiative from 35 JTTFs to 84 JTTFs. This increase in JTTFs created more opportunities for information sharing and participation by state and local officials, thus increasing the number of security clearance applications submitted to the FBI by state and local officials. After September 11, an increasing number of state and local officials who were not assigned to JTTFs began requesting security clearances to obtain terrorism-related information that might affect their jurisdictions. In some cases, state and local officials assigned to JTTFs were not able to share classified information with their state and local superiors because the superiors lacked security clearances. In addition to forming the JTTFs, the FBI launched the LEO initiative to focus on granting security clearances to officials in an executive, decision-making role who were not posted to a JTTF. According to the FBI, the launch of this initiative also increased the number of state and local security clearance applications. Presidential Executive Order 12968, Access to Classified Information, dated August 1995, established federal executive branch criteria for granting access to classified information. As implemented by the FBI, the primary criterion for granting access to classified information is an individual's "need to know," which is defined as the determination made by an authorized holder of classified information that a prospective recipient requires access to specific classified information in order to perform or assist in a lawful and authorized governmental function. In addition to possessing a need to know, individuals must have a security clearance based upon a favorable adjudication of an appropriate background investigation, been briefed on the responsibilities for protecting classified information, signed a nondisclosure agreement acknowledging those responsibilities, and agreed to abide by all appropriate security requirements. An amendment to Presidential Executive Order 12958, Executive Order 13292, issued in 2003, also allows federal agencies, including the FBI, to share classified information in an emergency with individuals who lack a prior security clearance when necessary to respond to an imminent threat to life or in defense of the homeland. Prior to this executive order, during high-priority cases when there was a threat to life, the FBI would provide pertinent information to those with a need to know by granting them interim clearances. Federal government-wide policies, as implemented by the FBI, apply to state and local officials seeking FBI-issued security clearances. The security clearance process for state and local officials involves six broad steps that consist of the (1) FBI field office officials' determining the applicant's need to know classified national security information and level of clearance required, (2) applicant's submission of application materials to an FBI field office, (3) applicant fingerprinting and interview conducted by FBI field office officials, (4) FBI field officials' routing of application materials to FBI headquarters and the FBI investigators' completion of a background investigation, (5) FBI headquarters' adjudication of clearance applications based on federal government adjudication standards, and (6) notification of an adjudication. The FBI's policies for granting access to classified information requires state and local officials to undergo the same background investigation and adjudication procedures as do individuals who have an employment relationship with the FBI or other federal government agencies and require access to classified national security information. The FBI received its authority to grant security clearances from the Department of Justice in 1993 (see fig. 1). Presidential Executive Order 12968, Access to Classified Information, dated August 1995, established federal executive branch criteria for granting access to classified information. The FBI's Manual of Investigative Operations and Guidelines outlines the bureau's policies and procedures for investigating and adjudicating various categories of security clearance cases, including FBI employees, contractors, and state and local officials. The FBI cannot grant a security clearance to any individual based simply on the individual's rank or position. Police chiefs, for example, are not automatically granted security clearances and must undergo the same procedures as all other individuals. State and local officials do not have a direct employment relationship with the FBI, but sometimes they require access to FBI workspaces and classified information. The procedures for conducting background investigations and granting access to classified information are identical to those for all FBI cases. For example, the FBI requires a background investigation of the last 10 years of a person's life for all individuals in need of a top secret security clearance. This also applies to state and local officials. Generally, state and local officials' contact with the FBI is primarily through the local FBI field office, and field office management is personally held accountable by FBI headquarters for all security clearance applications processed through their offices. Nevertheless, a number of stakeholders, including state and local officials themselves, are involved in various parts of the application process which, as figure 2 depicts, can be summarized in six steps. To initiate the security clearance application process, state and local officials first identify the individuals in their departments who require access to classified information, taking into consideration JTTF assignments, internal staffing needs, and FBI field office guidance. Once individuals are identified, the FBI field office specify the need to know for each individual, which in turn determines the appropriate level of the security clearance: top secret or secret. Next, FBI field officials distribute application materials to the selected state and local officials. The instructions for completing the application materials (see fig. 3) require the applicant to provide information reaching back 10 years, and must include all previous employment, residences, foreign travel and contacts, and references. The applicant also signs a statement authorizing access to his or her credit records. Upon submission of the application materials, an FBI field office official reviews the materials, conducts a face-to-face interview, and fingerprints the applicant (see fig. 4). In addition, the FBI is moving toward requiring all security clearance applicants to undergo a polygraph examination to be completed during the security interview. FBI field office officials summarize the information collected for submission to the FBI headquarters. According to FBI headquarters guidance, the FBI field office also must compile a portion of the investigative information for submission to FBI headquarters within 10 days of receipt of the application. However, the FBI was not able to estimate the actual processing time for these preliminary tasks. This procedure opens the investigation and corresponds to the beginning of FBI headquarters' involvement in the security clearance application process. Following the opening of the case, FBI headquarters conducts government-wide required security clearance National Agency Checks. Such inquiries include checks of the National Crime Information Center, fingerprint checks, and Office of Personnel Management and Defense Clearance and Investigations Index inquiries . FBI headquarters then refers the case to the FBI's Background Investigation Contract Service (BICS) Unit. BICS conducts background investigations for FBI security clearance applications, including applications from state and local officials. Typical background investigations include verification of citizenship, credit, and criminal history checks. For a top secret security clearance, the background investigation includes additional checks such as the verification of education, employment, and residences within the past 10 years. Interviews of friends, coworkers, supervisors, and neighbors also are conducted. The background investigation may be expanded if an applicant has resided abroad or has a history of mental health disorders, drug or alcohol abuse. Once all required background information has been submitted to FBI headquarters, the adjudicator assigned to the case reviews the information. In some cases, the adjudicator must request additional leads to follow up on information uncovered in the investigation that might increase the risk of granting the individual access to classified information. To confirm or mitigate information collected, the adjudicator may require a second interview with the applicant. For example, if a negative credit history is uncovered, the applicant may be asked how he or she is attempting to remedy that situation. The adjudicator summarizes this information in a report, which includes a recommendation as to whether to grant a security clearance based on 13 federal government-wide adjudicative standards. These standards include an assessment of the applicant's allegiance to the United States, personal conduct, mental health, and associations with undesirable persons or foreign nationals, among other things. A supervisory official reviews this recommendation and grants final approval. In cases where a denial of clearance is recommended, the adjudicator's unit chief also must review the report. According to the FBI, the same day the adjudication is made regarding whether to grant access to classified information, the FBI field office is notified. In cases of a favorable decision, according to FBI policies, the FBI field office then has 10 days to set up a security briefing with the applicant. The security clearance does not take effect until the security briefing has been completed and the applicant has signed a non-disclosure agreement. Documentation of the interview and the signed agreement are sent to FBI headquarters to record that the clearance has taken effect. The FBI's goal for processing top secret security clearance applications is 6 to 9 months, and its goal for processing secret security clearance applications is 45 to 60 days, though actual completion times can vary from case to case. The majority of the applications the FBI received for top secret security clearances since September 11, were processed within the FBI's stated time frame goals. In contrast, the majority of secret applications received since September 11, were not processed within the FBI's time frame goals. However, during the last half of 2003 the FBI nearly doubled its success rate for completing secret security clearance applications within its time frame goals. The FBI's goal is to process top secret security clearance applications in 6 to 9 months, though actual completion times can vary from case to case. The FBI has received 1,211 applications for top secret security clearances since September 11, 2001. Of the top secret applications received, about 835 were granted and 276 were pending at the time our review. The FBI denied clearances to 7 applicants. The FBI often assigns greater priority to processing applications for state and local JTTF members, who are required to have top secret clearances. Consequently, as figure 5 shows, about 92 percent of the 835 applications for top secret security clearances granted were processed within the FBI's time frame goal of 6 to 9 months since September 11. Of the 276 top secret security clearance applications that were still pending completion at the time of our review, over 90 percent were processed within the FBI's time frame goal of 6 to 9 months. As noted earlier, the FBI's average actual time frame for processing top secret security clearances for state and local officials has declined since September 11. As shown in figure 6, the average number of days for completing a top secret security clearance application declined from 244 days in the last quarter of 2001 to 70 days in the third quarter of 2003. The FBI's time frame goal for granting secret security clearances is 45 to 60 days, though actual completion times can vary from case to case. The FBI received 2,363 applications for secret security clearances from state and local officials since September 11. Of the secret security clearance applications received, 2,021 had been granted and 267 were pending at the time of our review. The FBI did not deny any secret security clearance applications. The FBI processed about 26 percent of secret applications within its time frame goals, as shown in figure 7. The remainder, about 72 percent, were granted in more than 60 days. An analysis of the last 6 months of data collected during our review shows that the FBI has begun to process secret applications more quickly. The FBI received about 483 secret security clearance applications between June 2003 and December 2003. About 46 percent of those applications were processed within the FBI's time frame goals (see fig. 8), nearly doubling the success rate for completing secret security clearance applications within the designated time frame goals. The FBI has also improved its overall actual completion time frames for secret security clearance applications since the second quarter of 2003, as shown in figure 9. The average number of days for processing a secret security clearance application was about 90 in the last quarter of 2001. By the fourth quarter of 2002, the average number of days for processing a secret security clearance application had risen to about 115, and in the third quarter of 2003, the average number of days declined to about 60. FBI officials stated that the bureau's time frame goals are approximate averages and actual completion times can vary depending on a number of factors. For example, numerous past residences or foreign travel can extend the time it takes to conduct a background investigation. In addition, background investigations can take additional time when information from the applicant's application does not match the information collected during investigation interviews. FBI guidance to state and local officials states that the processing time for each application will vary depending on its complexity. Also, according to a DOJ official, the number of applications in the FBI's queue, as well as the FBI's staffing resources, affect the time needed to process a security clearance application. According to FBI officials, the volume of security clearance applications increased substantially after September 11. Although the FBI's security clearance process begins when a need for a clearance is determined, as shown in figure 2, the FBI does not begin to track the processing of security clearance applications until after the FBI field office completes its preliminary tasks and forwards the application package to FBI headquarters. These preliminary tasks can include checks with the internal affairs unit of the department where the official is employed, administering a polygraph examination, and verifying citizenship with the U.S. Citizenship and Immigration Services. The official must also undergo a face-to-face personnel security interview. Though guidance to FBI field offices requires that these tasks be performed and the application forwarded to headquarters within 10 days of receipt of the security clearance application, the FBI was not able to estimate the actual processing time for these preliminary tasks. According to the FBI, the time required to perform the initial steps of the process varies by field office and is dependent on the unique circumstance of each candidate. For example, state and local officials who are located in a law enforcement agency that is distant from the FBI field office may require additional time to schedule tasks that take place at the field office. According to FBI officials, the time frames for completion of these preliminary tasks may also depend on the laws, regulations, policies, and union agreements that may affect the local police agency. The FBI has undertaken various steps to enhance its process for granting security clearances to state and local officials and to facilitate information sharing with state and local law enforcement agencies. Since September 11, the FBI has consulted with state and local officials to collect their views and recommendations regarding information sharing and improving the security clearance process. The FBI identified state and local officials' unfamiliarity with the requirements for processing security clearance applications as one of the main impediments to timely processing of applications. To improve understanding of its policies for granting security clearances, the FBI published an informational brochure for state and local officials and continued to meet with state and local law enforcement organizations. The FBI also developed policy guidance and a checklist of procedures for FBI field office officials, added staff to the headquarters unit responsible for processing state and local security clearance applications, and developed database resources at headquarters to track applications. To promote information sharing between the FBI and state and local law enforcement agencies, in 2002 and 2003, the FBI increased the number of JTTFs and encouraged state and local officials to participate in this and other information-sharing initiatives. In addition, the FBI distributed terrorism-related bulletins to state and local agencies and has made terrorist threat-related information available via various FBI electronic networks. In response to an increased interest in information sharing between the FBI and state and local law enforcement agencies following the terrorist attacks of September 11, high-level FBI officials met with state and local law enforcement leaders to discuss ways to prevent or respond to terrorist attacks. These discussions included ways to improve information sharing between the FBI and state and local law enforcement agencies, as well as the FBI's requirements and process for granting security clearances. According to FBI officials, representatives of major state and local law enforcement groups continue to meet periodically with the FBI Director and other FBI officials. In addition, the FBI created the Office of Law Enforcement Coordination (OLEC), which is headed by a former city police chief, to address state and local officials' concerns. OLEC's general responsibilities include serving as the FBI's primary liaison to national law enforcement associations and communicating the perspectives of state and local law enforcement agencies to the FBI. In addition to participating in state and local law enforcement organizations' meetings with the FBI Director, OLEC staff regularly attend conferences of state and local law enforcement organizations and respond to inquiries from state and local officials. In addition to the FBI's direct consultation with state and local officials, after September 11, some state and local law enforcement organizations expressed their members' concerns regarding information sharing with the FBI and the FBI's security clearance application process. These organizations shared their members' views with the FBI via white papers, and through meetings and conversations with FBI officials, including OLEC representatives. Officials from the FBI's Security Division, which houses the units responsible for processing security clearance applications and granting access, also participated in many of these activities. According to FBI and state and local officials, initially following September 11, there was little understanding of, and some confusion regarding the security clearance process among both FBI field office and state and local officials. According to an FBI official, some FBI field office and state and local officials lacked guidance for identifying individuals in need of security clearances. According to an FBI official, some police chiefs or officers equated receiving a security clearance with status or importance, or believed they should be granted a clearance based solely on their status. According to an FBI official, failure to understand or follow FBI guidelines for identifying individuals in need of a security clearance initially resulted in an unnecessary increase in the number of applications submitted. For example, one FBI official stated that a police agency had asked for security clearances for most of its officers, rather than for the one or two officials who needed a clearance. In addition, according to representatives of some law enforcement professional organizations, some state and local officials said they did not have adequate guidance for filling out and submitting the appropriate application forms. According to FBI officials, in some cases, state and local officials were reluctant or refused to provide the information required to conduct the background investigation. For example, police chiefs sometimes omitted negative information because they feared it might affect their standing in the community (e.g., past drug use or poor credit). If an incomplete application was submitted, it had to be sent back to the individual for completion, extending the time required to investigate and process an application. State and local officials expressed discontent with the time frames for processing a security clearance application, as well as dissatisfaction with their inability to check the status of their security clearance applications. With the assistance of the newly created OLEC, in November 2002, the FBI distributed an informational brochure to state and local law enforcement agencies to help improve these officials' understanding of the FBI's security clearance requirements and process. The FBI also made this brochure available on its Web site. According to FBI guidance, this brochure, shown in figure 10, is included in the packet of application materials given to state and local security clearance applicants. In addition to distributing this brochure, FBI officials have attended conferences and meetings of national law enforcement organizations. OLEC officials have fielded requests for information, as well as complaints, from state and local officials. For example, state and local officials who wanted to know the status of their applications sometimes contacted OLEC officials. FBI officials acknowledged that it is extremely difficult to give status updates when a background investigation is under way; the FBI can tell an applicant simply whether the investigation is complete or is still being processed. This may not always satisfy the interests of state and local officials requesting updates on the status of the application. Representatives of some law enforcement professional organizations we interviewed stated that the FBI's guidance and consultation with these organizations has helped improve state and local officials' understanding of the security clearance application process. An OLEC official also said these efforts had reduced the number of calls it received from state and local officials. To clarify FBI field office officials' role in processing state and local security clearance applications, FBI headquarters developed policy guidance and a checklist of procedures for FBI field office officials. In an electronic communication sent in December 2002, FBI headquarters spelled out the necessary justification for granting security clearances to state and local officials and laid out processing procedures for various FBI officials. In addition, according to FBI officials, the FBI holds quarterly conference calls with FBI field office security officials to address any issues with the security clearance process. FBI officials cited staffing shortages as an impediment to the security clearance process. According to an FBI official, the unit responsible for state and local law enforcement security clearances initially was understaffed, despite experiencing an increase in workload after September 11. To address staffing needs, the FBI created a new unit within its Security Division Personnel Security Section specifically to handle state and local law enforcement security clearance applications. The FBI also requested increased funding for the division responsible for processing security clearances. FBI officials stated that additional staff had been added to this unit, and caseloads presently are not as heavy as in the period immediately following September 11. Following September 11, and the subsequent increase in state and local security clearance applications submitted to the FBI, the FBI Security Division designed databases to track the submission of applications and application completion dates, among other things. FBI officials said the databases have served as management tools for tracking state and local security clearance applications and monitoring application trends and percentages. These databases are to be integrated into an FBI-wide security clearance tracking database currently under development and set for rollout in the latter part of fiscal year 2004. The FBI credits its JTTFs with enhancing its ability to coordinate its counterterrorism efforts with state and local law enforcement agencies, as well as with other government organizations. Since 1996, the FBI has continued to increase the number of JTTFs in operation across the country. By the end of fiscal year 2001, 35 JTTFs were in operation at FBI field office locations. In response to the terrorist attacks of September 11, and with additional congressional support, the FBI expanded this number to 66 by the end of fiscal year 2002, and to 84 JTTFs by the end of 2003. According to an FBI report on the JTTF program, the FBI anticipates that the number of JTTFs will increase in coming years, depending on the availability of funding. According to one FBI official, the FBI received 30 requests for additional JTTF annexes in fiscal year 2003 and was able to grant 18 of these. As of fiscal year 2003, more than 800 state and local officials served full- time on these forces, along with FBI and other federal government officials. The FBI encourages state and local officials in cities with established or newly created JTTFs to join these forces. FBI field office executives work with their state and local law enforcement counterparts to make JTTF assignments according to staff and other resource availability. In addition, the FBI also established the National Joint Terrorism Task Force (National JTTF) in July 2002, to coordinate the FBI's local JTTFs. In addition to federal agency officials, state and local officials also serve on the National JTTF, which plans to establish a fellowship program for state and local law enforcement officers. In addition to the JTTFs and the LEO initiative, which was created to provide classified information to state and local officials, the FBI utilizes several means of disseminating terrorism-related information to agencies and individuals outside the FBI, including state and local officials. On a weekly basis, the FBI distributes Intelligence Bulletins, which are tailored specifically for state and local officials. According to a DOJ inspector general's report, the intent of sending these bulletins is to raise general awareness of terrorism-related issues, though some information may help state and local officials detect or uncover criminal activity related to international terrorism. The FBI also distributes Quarterly Terrorist Threat Assessments to state and local officials. These reports provide a general overview of the terrorist threat and provide summaries of events in different regions in the world that might have an impact on this threat. In addition to distributing these bulletins, the FBI grants state and local officials access to various unclassified networks and databases. State and local officials generally make use of the Law Enforcement Online database and network, as well as the National Law Enforcement Telecommunications System, over which the FBI sends e-mail messages. The FBI also posts names from its Terrorist Watch List on the National Crime Information Center database and state and local law enforcement personnel can access the National Instant Criminal Background Check System. Other efforts, though less widespread, include regular meetings of some FBI field office supervisory agents in charge with state and local officials to discuss terrorism-related investigations taking place in their jurisdictions. The Department of Justice and the FBI provided comments on a draft of this report. The Department of Justice and the FBI generally concurred with our findings, and the FBI provided technical comments, which were incorporated as appropriate. We are providing copies of this report to the Ranking Minority Member of the Senate Judiciary Subcommittee on Administrative Oversight and the Courts. We will also make copies available to others on 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, please contact me at (202) 512-8777 or by e-mail at [email protected] or Charles Michael Johnson, Assistant Director, at (202) 512-7331. Other key contributors to this report are Todd M. Anderson, Leo Barbour, Nettie Richards, and Jerry Sandau. To describe the FBI's processes for granting security clearances to state and local officials, we reviewed presidential executive orders, Security Council guidelines, and the Code of Federal Regulations for federal government-wide criteria for granting access to classified national security information (NSI). We reviewed Department of Justice (DOJ) guidance delegating the authority to grant access to classified NSI to the FBI. We also reviewed copies of the relevant sections of the FBI's Manual of Investigative Operations and Guidelines, as well as copies of guidance sent to FBI field office officials. We reviewed a copy of the brochure the FBI distributed to state and local law enforcement organizations and agencies. We also interviewed officials from DOJ, Justice Management Division. For background on classified information and granting access, we interviewed the Director of the Information Security Oversight Office at the National Archives and Records Administration, as well as staff from our Security and Safety office. We gathered additional information from interviews with officials from the FBI's Security Division Personnel Security Section, which oversees the unit responsible for granting security clearances to state and local officials. To determine the extent to which the FBI is meeting its timeliness goals for processing security clearances for state and local officials, we analyzed data from the FBI Security Division's state and local law enforcement security clearance databases collected between September 2001 and December 2003. These data generally included case numbers, beginning and ending dates of background investigations, adjudication resolution, and level of clearance granted, among other things. We determined that the data were suitable and sufficiently accurate for the purpose of our review. We obtained additional context for understanding the FBI's data through interviews with FBI Security Division officials. To describe the efforts undertaken by the FBI to enhance its state and local law enforcement security clearance and information-sharing processes, we reviewed a variety of reports and studies, including literature published by state and local law enforcement organizations. We also interviewed representatives of state and local law enforcement organizations, including the International Association of Chiefs of Police (IACP), Major Cities Chiefs Association, Police Executive Research Forum, National Association of Chiefs of Police, and the National Sheriffs Association. We also attended an IACP annual conference panel session on the FBI's information-sharing initiatives. We conducted interviews with FBI Security Division officials, as well as a representative of FBI's Office of Law Enforcement Coordination. We also obtained and reviewed planning, organization, budget, and staffing documentation from the FBI. We performed our work from July 2003 to March 2004 in Washington, D.C., in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Department of Justice and the FBI.
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The free flow of information among federal, state, and local law enforcement agencies could prove vital to fighting the war on terrorism. State and local law enforcement officials are key stakeholders in the United States' efforts to combat terrorism, and as such, they may require access to classified national security information to help prevent or respond to terrorist attacks. In order to gain access to such information, state and local law enforcement officials generally need federal security clearances. The Federal Bureau of Investigation (FBI) grants security clearances and shares classified information with state and local law enforcement officials. Immediately following September 11, 2001, some state and local law enforcement officials expressed frustration with the complexity of the process for obtaining security clearances. Others expressed frustration with the length of time it took to obtain a security clearance. These frustrations exacerbated the general concern among law enforcement stakeholders that the lack of security clearances could impede the flow of critical information from the FBI to the state and local level, from the state and local level to the FBI, and laterally from one state or local agency to another. In turn, this potential lack of access to critical terrorism-related information might place local law enforcement officials at a disadvantage in their efforts to respond to or combat a terrorist threat. The Ranking Minority Member, Subcommittee on Administrative Oversight and the Courts, Senate Committee on the Judiciary asked us to examine several issues regarding the FBI's process for granting security clearances to state and local law enforcement officials. This report provides information on: (1) the FBI's process for granting security clearances to state and local law enforcement officials, (2) the extent to which the FBI has met its time frame goals for processing security clearance applications for state and local law enforcement officials and factors that could affect the timely processing of security clearance applications, and (3) efforts undertaken by the FBI to enhance its security clearance and information-sharing processes with state and local law enforcement officials. The FBI's process for granting access to classified information requires state and local law enforcement officials to undergo the same background investigation and adjudication procedures as do individuals who have an employment relationship with the federal government and require access to classified national security information. The FBI's goal is to complete the processing for secret security clearances within 45 to 60 days and top secret security clearances within 6 to 9 months, beginning with the FBI headquarters' receipt of the application from the FBI field office. Since September 11, about 92 percent of applications for top secret security clearances were processed within the FBI's time frame goals. During this same period, about 26 percent of secret security clearance applications were processed within the FBI's time frame goals, although substantial improvements have been made in the most recent quarters for which we have data. The FBI was more successful with processing top secret security clearances within its stated time frame goals than secret security clearances, in part because the FBI often assigns greater priority to processing applications for state and local Joint Terrorism Task Force (JTTF) members, who are required to have top secret clearances. For either secret or top secret security clearance applications, processing timeframes can vary depending on the complexity of individual cases. The FBI has taken a number of steps to enhance its process for granting security clearances to, and sharing information with, state and local law enforcement officials. One of the impediments highlighted was the state and local officials' and the FBI field office staff's lack of a clear understanding of the FBI's security clearance granting process. In response to this impediment, the FBI headquarters widely distributed step-by- step guidance to state and local law enforcement officials and reeducated the FBI field staff on the FBI security clearance process and goals. In addition, the FBI added staff to its headquarters unit responsible for adjudicating state and local security clearance applications and created databases to track state and local security clearance applications. Efforts undertaken by the FBI to enhance information sharing with state and local officials include increasing the number of JTTFs from 35 to 84 and increasing state and local law enforcement officials' participation on these forces. Serving on JTTFs provides state and local law enforcement officials the opportunity to interact with the FBI on a daily basis. The FBI also circulates declassified intelligence through a weekly bulletin and provides threat information to state and local law enforcement officials via various database networks.
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The U.S. Department of Commerce controls the export of U.S. dual-use commodities, software, and technology by requiring validated licenses prior to shipment unless a license exception applies. A license exception, formerly known as a general license, is a broad grant of authority to export certain goods and technology without prior government review. Dual-use telecommunications items are controlled under the Commerce Control List, which specifies the items that require validated licenses, generally for reasons of national security. During the Cold War, the United States sought international coordination of export controls through the Coordinating Committee for Multilateral Export Controls (COCOM), which was made up primarily of North Atlantic Treaty Organization member countries. With the end of the Cold War, COCOM members pushed for liberalization of many dual-use items, including telecommunications equipment, computers, and machine tools. However, before COCOM ended on March 31, 1994, participant countries agreed to continue controlling dual-use items, at each country's discretion, after COCOM's expiration. The new U.S. export control arrangement, established in 1996, focuses export controls on several potential aggressor countries, such as Iraq, Libya, and North Korea, and away from former communist countries. Broadband telecommunications equipment, such as ATM and SDH, have numerous civilian and military applications and are becoming increasingly available in China as it strives to improve its telecommunications networks to meet international standards. According to U.S. government officials, overall improvements to China's telecommunications networks will likely benefit the Chinese military as well. Broadband networks employ ATM and SDH equipment to transfer data, voice, and video communications simultaneously at high rates of speed. ATM is a flexible switching technique used to transfer information over advanced telecommunications networks. SDH technology is used for high speed transmission of data, video, and voice traffic. Both ATM and SDH equipment were developed by commercial industry for civil applications, and they are now increasingly used worldwide on broadband telecommunications networks. Civil applications of ATM and SDH equipment generally allow work groups to collaborate quickly and efficiently over a computer network. These applications include holding a meeting simultaneously in several locations (video-conferencing), having people in different locations work simultaneously on the same document (virtual notebook), and transmitting X-rays and other medical records from one location to another (telemedicine). ATM and SDH equipment are necessary to have the speed of delivery, quick data retrieval, and clear video images that are needed for these applications to operate. Military applications for ATM and SDH equipment are similar to civilian applications. These applications include sharing of intelligence, imagery and video between several locations, command and control of military operations using video-conferencing, and medical support and telemedicine between the battlefield and remote hospitals. When used in a military application, both types of equipment requires encryption devices to protect communications from interception. The Department of Defense buys such equipment "off-the-shelf" and is still testing it for potential military uses. According to Defense officials, ATM and SDH equipment will be beneficial to military functions, such as command and control, and will form the basis for future Defense Department communications networks. Both ATM and SDH equipment are considered to be advanced technologies in the telecommunications industry and are now increasingly deployed worldwide. While ATM equipment has only recently become readily available, SDH has been commercially available for at least the last 5 years. In 1993, a U.S. company claimed that foreign producers of SDH equipment were marketing to China and urged the Commerce Department to reduce its controls on such equipment. SDH equipment was found to be foreign available by the Commerce Department in 1994. Former COCOM member countries tightly controlled the export of such equipment until 1994, when controls on telecommunications items were relaxed. Prior to the liberalization of exports of dual-use telecommunications equipment in April 1994, the export of ATM and SDH equipment to China would have required a validated license from the Commerce Department. According to company officials, since the removal of most export restrictions on telecommunications equipment, the market for such equipment in China has grown quickly and large quantities of SDH equipment have been sold to China to modernize its commercial long-distance telecommunications network. Advanced telecommunications equipment, particularly SDH, is increasingly used to be consistent with the emerging international communications standards, and it should vastly improve China's outdated and underdeveloped telecommunications systems. According to industry officials, U.S. companies sold tens of millions of dollars worth of SDH equipment in China in 1994, and several joint ventures are currently manufacturing SDH equipment in China to build China's telecommunications network. In contrast, there is little demand for ATM equipment in China and there is no in-country production of such equipment. Company officials noted the demand for ATM equipment in the United States is also limited. Officials at the Defense Department told us that the Chinese military would like to improve its telecommunications capabilities. According to these officials, the Chinese military is seeking to acquire ATM and SDH equipment, which may increase their operational readiness by the end of the next decade. Defense Department officials told us that broadband telecommunications equipment could be used to improve the Chinese military's command and control communications networks. These officials also observed that the Chinese military will benefit from the improvements to China's overall public telecommunications system, since they also make use of that system. The Chinese military may also benefit from the use of broadband equipment in its nonmilitary activities. For example, Chinese Army hospitals, which also serve civilians, are interested in acquiring high-speed telecommunications links using ATM switches to develop telemedicine capabilities and to extend health care to rural areas. The Chinese military operates at least one-third of the hospitals in China. The Commerce Department created GLX in 1994, allowing nearly all dual-use telecommunications items to be exported to Chinese civil end users without validated licenses. As a result, the ATM and SDH equipment exported to HuaMei did not require prior government approval before being shipped. According to U.S. government officials, the Commerce Department created GLX in April 1994 to ease export restrictions and reduce administrative burdens on U.S. exporters. In September 1993, the Trade Promotion Coordinating Committee, chaired by the Secretary of Commerce, recommended removing export controls on computers and telecommunications products to aid key U.S. industries. Commerce officials noted that there was an interagency effort to determine which items to decontrol before COCOM expired at the end of March 1994. The Commerce Department used the advisory notes from the Commerce Control List as a basis for what items were to be included under GLX. Advisory notes are included in the list to advise exporters of the items likely to be approved for export to certain locations. The Commerce Department removed the requirement for a validated license and prior government review on all items with advisory notes because it viewed the items as being less sensitive. According to a Commerce Department official, the advisory note items included under GLX did not necessarily include the entire category of equipment, nor did they apply to China. For example, one advisory note stated that licenses would likely be approved for the export of telecommunications transmission equipment, such as SDH, to China, provided that such equipment did not exceed certain capabilities. Under GLX, all SDH equipment is eligible for export to China, regardless of capability. Another advisory note stated that licenses would likely be approved for the export of all controlled dual-use telecommunications equipment, including ATM, for civil end use in Estonia, Latvia, and Lithuania. According to a Commerce Department official, since ATM equipment was included in this advisory note, it became eligible for export under GLX, even though the note did not apply to China. Our analysis of the telecommunications items included under GLX showed that each item category was covered by some advisory note on the Commerce Control List. Because most of the telecommunications items on the list were covered by advisory notes, they became eligible for export under GLX. The only telecommunications items covered by an advisory note that were not included under GLX were radio frequency hopping equipment and radio receivers with certain scanning and frequency switching capabilities. Items included under GLX were telecommunications transmission equipment, switching equipment, optical fiber communication cables, and phased array antennas. However, technology for the development and production of the telecommunications equipment may not be exported under GLX. The Commerce Department officially requested comments from other agencies on GLX on March 17, 1994, and the creation of GLX was announced in the Federal Register on April 4, 1994. According to government officials, the period of time given to other agencies to comment on the new license category was limited due to the expiration of COCOM at the end of March 1994. Senior Commerce and Defense Department officials stated that while the comment period provided to the agencies for approving GLX was limited, the items included under GLX were less sensitive and had been previously considered for liberalization under earlier COCOM-related negotiations. The Departments of Defense, Energy, and State all approved the new license category. At the time that AT&T exported U.S. telecommunications equipment to HuaMei in 1994, the Commerce Department had already created GLX, so AT&T did not need to apply for a license to ship ATM and SDH equipment to China. In 1993, SCM Brooks Telecommunications entered into a joint venture with Galaxy New Technology, a Chinese company controlled by the Commission of Science, Technology, and Industry for National Defense (COSTIND), an agency of the Chinese military, to form Guangzhou HuaMei Communications Limited. The purpose of the HuaMei project was to demonstrate the commercial capabilities of a broadband telecommunications network, using several hotels in Guangzhou. The demonstration included video-conferencing, virtual notebook, and teleradiology applications. HuaMei contracted with AT&T to provide the equipment necessary for the project. AT&T exported three ATM switches from the United States under a general license and four SDH transmission systems from the Netherlands under a Dutch validated license to Guangzhou in the fall of 1994. GLX allows the export of ATM and SDH equipment to China without a validated license, if the exports are going to "civil end-users for civil end-uses." However, Commerce Department regulations do not define a "civil end-user" or offer any guidance on how an exporter is to determine who is a civil end user in China. U.S. company and government officials stated that determining end users in China is problematic because the Chinese military is often involved in commercial activities. The Chinese military invests in and owns numerous commercial entities in China to obtain profits and to help fund its military activities. For example, according to industry officials, the military has investments in such enterprises as the Palace Hotel in Beijing, various entertainment projects, and even restaurants. HuaMei, while a commercial enterprise, has as its principal Chinese partner, a company controlled by the Chinese military. As shown in figure 1, SCM Brooks Telecommunications and Galaxy New Technology each own 50 percent of HuaMei. However, the Chinese military is the primary shareholder of Galaxy New Technology, with two other Chinese government agencies each holding a minority interest in the company. Several members of the HuaMei board of directors are military officers or have direct ties to the Chinese military. Such a high degree of involvement in HuaMei could indicate a strong military interest in this company. U.S. company and government officials stated that HuaMei was a civil end user. In determining that, company officials considered the end use of the equipment, the location of the installed equipment, and the customers for the equipment. Since the equipment was being used for video-conferencing among several Chinese hotels to demonstrate the commercial applications of this technology, company officials were confident that the export of this equipment would satisfy the civil end-user requirement of GLX. According to Commerce Department officials, the agency does not have guidance for its staff to use in making civil end-user determinations for exports under GLX (or its successor, CIV), nor has it issued guidelines on end-user determination for exporters. For an export to China that requires a validated license, the Commerce Department normally conducts a review of the application and determines if the export is going to a military or civil end user on a case-by-case basis, using available government resources such as embassy personnel and intelligence reports. Exporters do not have such resources available to them when making a civil end-user determination. Currently, there is no guidance or criteria available to exporters on how much military involvement in a commercial entity is needed before it is considered a military end user. According to Commerce Department officials, an exporter is responsible for knowing its end user when exporting under GLX (or CIV). An exporter is encouraged to come to the Commerce Department for an end-user check if there are any abnormal circumstances in a transaction that indicate the export may be going to an inappropriate end user. According to Commerce Department guidance, these circumstances can include orders for items that are inconsistent with the purchaser's needs or a customer declining installation and testing when included in the sale price. If there are no suspicious circumstances, the exporter is not required to verify the buyer's representations of civil end use. AT&T officials stated that they did not ask the Commerce Department to determine if HuaMei was a civil end user, nor were they required to under GLX. Commerce officials stated that the civil end-user requirement in GLX was specifically included to allow Commerce to review exports going to the military. However, in the export of telecommunications equipment to HuaMei, the Commerce Department did not have an opportunity to review the end user because prior government review is not required under GLX. Consequently, the equipment was exported to HuaMei without Commerce review, even though the company was partially controlled by several high-level members of the Chinese military. In commenting on a draft of this report, the Departments of Commerce, Defense, and State generally agreed with the information we presented. Commerce noted that our suggestion that it assess the need to provide additional guidance to exporters on determining civil end users as it gains experience under CIV (formerly known as GLX) was helpful. Commerce also asserted that our report confirmed that its decision to make certain telecommunications equipment available to China without requiring a validated license was consistent with both U.S. national security and economic interests. However, it should be noted that determining consistency with U.S. interests was not within the scope of our work. We made minor technical corrections to the report where appropriate based on suggestions provided by the Departments of Commerce and Defense. Comments from the Departments of Commerce, Defense, and State are presented in appendixes I, II, and III, respectively. To obtain information about the HuaMei project--when it was created, its purpose, and the equipment it employed--we interviewed SCM Brooks and AT&T officials and examined company agreements and project descriptions. To determine civil and military applications of ATM and SDH equipment, availability of the equipment, and the importance of those applications to China's military, we interviewed officials from AT&T and SCM Brooks and obtained technical descriptions of the products and potential applications. We also interviewed officials from the National Security Agency, the Defense Technology Security Administration, the Defense Intelligence Agency, and the Defense Information Security Agency, as well as the Commerce Department Bureau of Export Administration to get expert assessments of advanced telecommunications equipment and data on telecommunications equipment availability in China. In addition, we interviewed telecommunications industry and U.S. embassy officials in China to obtain information about the applications and availability of ATM and SDH equipment in China. To examine the process and rationale for liberalizing the export of broadband telecommunications equipment, we reviewed a chronology of the export of AT&T equipment. We also interviewed officials from the Departments of Defense, Commerce, and State, and the National Security Agency to obtain data on the rationale and purposes of creating the GLX license category, as well as agency positions on the inclusion of telecommunications equipment under GLX. We reviewed Defense and Commerce Department documentation on the development of GLX. We also compared the items on GLX with the Commerce Control List items covered by advisory notes to confirm the method used to develop GLX. We performed our review from March to October 1996 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 10 days after its issue date. At that time, we will send copies to other congressional committees and the Secretaries of Defense, Commerce, and State. We will also make copies available to other interested parties upon request. Please contact me at (202) 512-4383 if you or your staff have any questions concerning this report. Major contributors to this report were Karen Zuckerstein, David C. Trimble, and John Neumann. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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Pursuant to a congressional request, GAO reviewed the transfer of broadband telecommunication equipment to HuaMei, a joint venture between SCM Brooks Telecommunications, a U.S. limited partnership, and Galaxy New Technology, a Chinese company primarily owned by an agency of the Chinese military, focusing on the: (1) civil and military applications of the exported telecommunications equipment, its availability, and the importance of these applications to China's military; and (2) process and rationale for liberalizing the export of telecommunications equipment shipped to China. GAO found that: (1) there are numerous civil and military applications for broadband telecommunications equipment, such as Asynchronous Transfer Mode (ATM) and Synchronous Digital Hierarchy (SDH) equipment, including video-conferencing, remote command and control, and telemedicine; (2) since the liberalization of exports of advanced telecommunications equipment, such equipment is now readily available in China; (3) SDH equipment, in particular, is being manufactured and used to upgrade China's telecommunications networks to international standards; (4) according to U.S. government officials, the Chinese military is seeking to acquire ATM and SDH equipment, which may benefit its command and control networks by the end of the next decade; (5) furthermore, these officials stated that as China's telecommunications infrastructure is modernized, the Chinese military will also benefit; (6) the creation of the new General License category, GLX, by the Commerce Department in April 1994, allowed the export of ATM and SDH equipment to HuaMei without a validated license having to be issued by the Commerce Department; (7) ATM and SDH equipment were two of a number of dual-use telecommunications items that were included under GLX; (8) GLX includes many items that would have been typically approved for export to civil end users in the licensing process; (9) according to U.S. government officials, GLX was created in response to the end of the Cold War and the expiration of the Coordinating Committee for Multilateral Export Controls, to ease export restrictions and reduce administrative burdens on U.S. exporters; (10) determining who is a civil end user under GLX is the responsibility of the exporting companies; (11) however, this is particularly difficult in China because of the Chinese military's significant involvement in various commercial ventures; (12) there is no information readily available to exporters on how much military involvement in a commercial entity constitutes a military end user; and (13) based on this one case, GAO is not making any recommendations; however, as the Commerce Department gains experience under GLX, it may want to assess the need to provide additional information or guidance to exporters to help them determine when they should request a government review of an end user.
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In the past, the ICC regulated almost all of the rates that railroads charged shippers. The Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980 greatly increased reliance on competition to set rates in the railroad industry. Specifically, these acts allowed railroads and shippers to enter into confidential contracts that set rates and prohibited ICC from regulating rates where railroads had either effective competition or rates negotiated between the railroad and the shipper. Furthermore, the ICC Termination Act of 1995 abolished ICC and transferred its regulatory functions to STB. Taken together, these acts anchor the federal government's role in the freight rail industry by establishing numerous goals for regulating the industry, including to allow, to the maximum extent possible, competition and demand for services to establish reasonable rates for transportation by rail; minimize the need for federal regulatory control over the rail transportation system and require fair and expeditious regulatory decisions when regulation is required; promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate revenues, as determined by STB; ensure the development and continuation of a sound rail transportation system with effective competition among rail carriers and with other modes to meet the needs of the public and the national defense; foster sound economic conditions in transportation and ensure effective competition and coordination between rail carriers and other modes; maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues that exceed the amount necessary to maintain the rail system and attract capital; prohibit predatory pricing and practices to avoid undue concentrations of market power; and provide for the expeditious handling and resolution of all proceedings. While the Staggers Rail and ICC Termination Acts reduced regulation in the railroad industry, they maintained STB's role as the economic regulator of the industry. The federal courts have upheld STB's general powers to monitor the rail industry, including its ability to subpoena witnesses and records and to depose witnesses. In addition, STB can revisit its past decisions if it discovers a material error, or new evidence, or if circumstances have substantially changed. Two important components of the current regulatory structure for the railroad industry are the concepts of revenue adequacy and demand-based differential pricing. Congress established the concept of revenue adequacy as an indicator of the financial health of the industry. STB determines the revenue adequacy of a railroad by comparing the railroad's return on investment with the industrywide cost of capital. For instance, if a railroad's return on investment is greater than the industrywide cost of capital, STB determines that railroad to be revenue adequate. Historically, ICC and STB have rarely found railroads to be revenue adequate--a result that many observers relate to characteristics of the industry's cost structure. Railroads incur large fixed costs to build and operate networks that jointly serve many different shippers. Some fixed costs can be attributed to serving particular shippers, and some costs vary with particular movements, but other costs are not attributable to particular shippers or movements. Nonetheless, a railroad must recover these costs if the railroad is to continue to provide service over the long run. To the extent that railroads have not been revenue adequate, they may not have been fully recovering these costs. The Staggers Rail Act recognized the need for railroads to use demand- based differential pricing to promote a healthy rail industry and enable it to raise sufficient revenues to operate, maintain and, if necessary, expand the system in a deregulated environment. Demand-based differential pricing, in theory, permits a railroad to recover its joint and common costs--those costs that exist no matter how many shipments are transported, such as the cost of maintaining track-- across its entire traffic base by setting higher rates for traffic with fewer transportation alternatives than for traffic with more alternatives. Differential pricing recognizes that some customers may use rail if rates are low--and have other options if rail rates are too high or service is poor. Therefore, rail rates on these shipments generally cover the directly attributable (variable) costs, plus a relatively low contribution to fixed costs. In contrast, customers with little or no practical alternative to rail--"captive" shippers--generally pay a much larger portion of fixed costs. Moreover, even though a railroad might incur similar incremental costs while providing service to two different shippers that move similar volumes in similar car types traveling over similar distances, the railroad might charge the shippers different rates. Furthermore, if the railroad is able to offer lower rates to the shipper with more transportation alternatives, that shipper still pays some of the joint and common costs. By paying even a small part of total fixed cost, competitive traffic reduces the share of those costs that captive shippers would have to pay if the competitive traffic switched to truck or some other alternative. Consequently, while the shipper with fewer alternatives makes a greater contribution toward the railroad's joint and common costs, the contribution is less than if the shipper with more alternatives did not ship via rail. The Staggers Rail Act further requires that the railroads' need to obtain adequate revenues to be balanced with the rights of shippers to be free from, and to seek redress from, unreasonable rates. Railroads incur variable costs--that is, the costs of moving particular shipments--in providing service. The Staggers Rail Act stated that any rate that was found to be below 180 percent of a railroad's variable cost for a particular shipment could not be challenged as unreasonable and authorized ICC, and later STB, to establish a rate relief process for shippers to challenge the reasonableness of a rate. STB may consider the reasonableness of a rate only if it finds that the carrier has market dominance over the traffic at issue--that is, if (1) the railroad's revenue is equal to or above 180 percent of the railroad's variable cost (R/VC) and (2) the railroad does not face effective competition from other rail carriers or other modes of transportation. The changes that have occurred in the railroad industry since the enactment of the Staggers Rail Act are widely viewed as positive. In addition, rail rates have generally declined since 1985, even though rates began to increase in 2001 and experienced a 9 percent annual increase between 2004 and 2005--the largest annual increase in 20 years. Likewise, rail rates have declined since 1985 for certain commodity groups and routes despite some increases since 2001, but rates have not declined uniformly. Railroads have also shifted other costs to shippers, such as the cost of rail car ownership, and have increased the revenue they report as miscellaneous more than 10-fold between 2000 and 2005. There is widespread consensus that the freight rail industry has benefited from the Staggers Rail Act. Various measures indicate an increasingly strong freight railroad industry. Freight railroads have also cut costs by streamlining their workforces; right-sizing their rail networks; and reducing track miles, equipment, and facilities to more closely match demand. Freight railroads have also expanded their business into new markets--such as the intermodal market--and implemented new technologies, including larger cars, and are currently developing new scheduling and train control systems. Rail rates across the freight railroad industry have generally declined since 1985 despite a recent increase. Rates began to rise in 2001 and experienced a 9 percent annual increase from 2004-2005, which represents the largest annual increase in rates during the 20-year period from 1985 through 2005. This increase also outpaced inflation--about 3 percent in 2005. However, despite these increases, rates for 2005 remain below their 1985 levels and below the rate of inflation. Because the set of rail rate indexes we used to examine trends in rail rates over time does not account for inflation we also included the price index for the gross domestic product (GDP) in figure 1. Rates for several commodities in 2005 remain lower than in 1985. Similar to overall industry trends, rates for individual commodities have increased from 2004-2005. In 2005, rates increased for all 13 commodities that we reviewed. Figure 2 depicts rate changes for coal, grain, miscellaneous mixed shipments, and motor vehicles from 1985 through 2005. Over 20 years, freight railroad companies have shifted other costs to shippers. Our analysis shows a 20 percent shift in railcar ownership (measured in tons carried) since 1987. In 1987, railcars owned by freight railroad companies moved 60 percent of tons carried. In 2005, they moved 40 percent of tons carried, meaning that freight railroad company railcars no longer carry the majority of tonnage (see fig. 3). In 2005 the amount of industry revenue reported as miscellaneous increased ten-fold over 2000 levels, rising from about $141 million to over $1.7 billion (see fig. 4). Miscellaneous revenue is a category in the Carload Waybill Sample for reporting revenue outside the standard rate structure. This miscellaneous revenue can include some fuel surcharges, as well as revenues such as those derived from congestion fees and railcar auctions (in which the highest bidder is guaranteed a number of railcars at a specified date). In 2004, miscellaneous revenue accounted for 1.5 percent of freight railroad revenue reported. In 2005, this percentage had risen to 3.7 percent. Also, in 2005, 20 percent of all tonnage moved in the United States generated miscellaneous revenue. In October 2006, we reported that captive shippers are difficult to identify and STB's efforts to protect captive shippers have resulted in little effective relief for those shippers. We also reported that economists and shipper groups have proposed a number of alternatives to address remaining concerns about competition - however, each of these alternative approaches have costs and benefits and should be carefully considered to ensure the approach will achieve the important balance set out in the Staggers Act. It remains difficult to determine precisely how many shippers are "captive" to one railroad because the proxy measures that provide the best indication can overstate or understate captivity. One measure of potential captivity--traffic traveling at rates equal to or greater than 180 percent R/VC--is part of the statutory threshold for bringing a rate relief case before STB. STB regards traffic at or above this threshold as "potentially captive," but, like other measures, R/VC levels can understate or overstate captivity. Since 1985, tonnage and revenue from traffic traveling at rates over 180 percent R/VC have generally declined. (see fig. 5). In 2005, industry revenue generated by traffic traveling at rates over 180 percent R/VC dropped by roughly half a percent. Tonnage traveling at rates over 180 percent R/VC dropped by a smaller percentage. While traffic traveling at rates over 180 percent R/VC has generally declined, traffic traveling at rates substantially over the threshold for rate relief has generally increased from 1985 to 2005 (see fig. 6). This traffic declined in 2003 and 2004, but rose in 2005. Some areas with access to one Class I railroad also have more than half of their traffic traveling at rates that exceed the statutory threshold for rate relief. For example, parts of New Mexico and Idaho with access to one Class I railroad had more than half of all traffic originating in those same areas traveling at rates over 180 percent R/VC. However, we also found instances in which an economic area may have access to two or more Class I railroads and still have more than 75 percent of its traffic traveling at rates over 180 percent R/VC, as well as other instances in which an economic area may have access to one Class I railroad and have less than 25 percent of its traffic traveling at rates over 180 percent R/VC. STB has taken a number of actions to provide relief for captive shippers. While the Staggers Rail and ICC Termination Acts encourage competition as the preferred way to protect shippers and to promote the financial health of the railroad industry, they also give STB the authority to adjudicate rate cases to resolve disputes between captive shippers and railroads upon receiving a complaint from a shipper; approve rail transactions, such as mergers, consolidations, acquisitions, and trackage rights; prescribe new regulations, such as rules for competitive access and merger approvals; and inquire into and report on rail industry practices, including obtaining information from railroads on its own initiative and holding hearings to inquire into areas of concern, such as competition. Under its adjudicatory authority, STB has developed standard rate case guidelines, under which captive shippers can challenge a rail rate and appeal to STB for rate relief. Under the standard rate relief process, STB assesses whether the railroad dominates the shipper's transportation market and, if it finds market dominance, proceeds with further assessments to determine whether the actual rate the railroad charges the shipper is reasonable. STB requires that the shipper demonstrate how much an optimally efficient railroad would need to charge the shipper and construct a hypothetical, perfectly efficient railroad that would replace the shipper's current carrier. As part of the rate relief process, both the railroad and the shipper have the opportunity to present their facts and views to STB, as well as to present new evidence. STB also created alternatives to the standard rate relief process, developing simplified guidelines, as Congress required, for cases in which the standard rate guidelines would be too costly or infeasible given the value of the cases. Under these simplified guidelines, captive shippers who believe that their rate is unreasonable can appeal to STB for rate relief, even if the value of the disputed traffic makes it too costly or infeasible to apply the standard guidelines. Despite STB's efforts, we reported in 2006 that there was widespread agreement that STB's standard rate relief process was inaccessible to most shippers and did not provide for expeditious handling and resolution of complaints. The process remained expensive, time consuming, and complex. Specifically, shippers we interviewed agreed that the process could cost approximately $3 million per litigant. In addition, shippers said that they do not use the process because it takes so long for STB to reach a decision. Lastly, shippers stated that the process is both time consuming and difficult because it calls for them to develop a hypothetical competing railroad to show what the rate should be and to demonstrate that the existing rate is unreasonable. We also reported that the simplified guidelines also had not effectively provided relief for captive shippers. Although these simplified guidelines had been in place since 1997, a rate case had not been decided under the process set out by the guidelines when we issued our report in 2006. STB had held public hearings in April 2003 and July 2004 to examine why shippers have not used the guidelines and to explore ways to improve them. At these hearings, numerous organizations provided comments to STB on measures that could clarify the simplified guidelines, but no action was taken. STB observed that parties urged changes to make the process more workable, but disagreed on what those changes should be. We reported that several shipper organizations told us that shippers were concerned about using the simplified guidelines because they believe the guidelines will be challenged in court, resulting in lengthy litigation. STB officials told us that they--not the shippers--would be responsible for defending the guidelines in court. STB officials also said that if a shipper won a small rate case, STB could order reparations to the shipper before the case was appealed to the courts. Since our report in October 2006, STB has taken steps to refine the rate relief process. Specifically, in October 2006, STB revised procedures for deciding large rate relief cases. By placing restraints on the evidence and arguments allowed in these cases, STB predicted that the expense and delay in resolving these rate disputes would be reduced substantially. In September 2007, STB altered its simplified guidelines for small shippers to enable shippers who are seeking up to $1 million in rate relief over a 5- year period to receive a STB decision within 8 months of filing a complaint. STB also created a new rate relief process for medium size shipments to allow shippers who are seeking up to $5 million in rate relief over a 5-year period to receive a STB decision within 17 months of filing a complaint. Additionally, STB also stated that all rail rate disputes would require nonbinding mediation. Shipper groups, economists, and other experts in the rail industry have suggested several alternative approaches as remedies that could provide more competitive options to shippers in areas of inadequate competition or excessive market power. These groups view these approaches as more effective than the rate relief process in promoting a greater reliance on competition to protect shippers against unreasonable rates. Some proposals would require legislative change, or a reopening of past STB decisions. These approaches each have potential costs and benefits. On the one hand, they could expand competitive options, reduce rail rates, and decrease the number of captive shippers as well as reduce the need for both federal regulation and a rate relief process. On the other hand, reductions in rail rates could affect railroad revenues and limit the railroads' ability and potential willingness to invest in their infrastructure. In addition, some markets may not have the level of demand needed to support competition among railroads. It will be important for policymakers, in evaluating these alternative approaches, to carefully consider the impact of each approach on the balance set out in the Staggers Act. The targeted approaches frequently proposed by shipper groups and others include the following: Reciprocal switching: This approach would allow STB to require railroads serving shippers that are close to another railroad to transport cars of a competing railroad for a fee. The shippers would then have access to railroads that do not reach their facilities. This approach is similar to the mandatory interswitching in Canada, which enables a shipper to request a second railroad's service if that second railroad is within approximately 18 miles. Some Class I railroads already interchange traffic using these agreements, but they oppose being required to do so. Under this approach, STB would oversee the pricing of switching agreements. This approach could also reduce the number of captive shippers by providing a competitive option to shippers with access to a proximate but previously inaccessible railroad and thereby reduce traffic eligible for the rate relief process (see fig. 7). Terminal agreements: This approach would require one railroad to grant access to its terminal facilities or tracks to another railroad, enabling both railroads to interchange traffic or gain access to traffic coming from shippers off the other railroad's lines for a fee. Current regulation requires a shipper to demonstrate anticompetitive conduct by a railroad before STB will grant access to a terminal by a nonowning railroad unless there is an emergency or when a shipper can demonstrate poor service and a second railroad is willing and able to provide the service requested. This approach would require revisiting the current requirement that railroads or shippers demonstrate anticompetitive conduct in making a case to gain access to a railroad terminal in areas where there is inadequate competition. The approach would also make it easier for competing railroads to gain access to the terminal areas of other railroads and could increase competition between railroads. However, it could also reduce revenues to all railroads involved and adversely affect the financial condition of the rail industry. Also, shippers could benefit from increased competition but might see service decline (see fig. 8). to its tracks to another railroad, enabling railroads to interchange traffic beyond terminal facilities for a fee. In the past, STB has imposed conditions requiring that a merging railroad must grant another railroad trackage rights to preserve competition when a merger would reduce a shipper's access to railroads from two to one. While this approach could potentially increase rail competition and decrease rail rates, it could also discourage owning railroads from maintaining the track or providing high- quality service, since the value of lost use of track may not be compensated by the user fee and may decrease return on investment (see fig. 9). "Bottleneck" rates: This approach would require a railroad to establish a rate, and thereby offer to provide service, for any two points on the railroad's system where traffic originates, terminates, or can be interchanged. Some shippers have more than one railroad that serves them at their origin and/or destination points, but have at least one portion of a rail movement for which no alternative rail route is available. This portion is referred to as the "bottleneck segment." STB's decision that a railroad is not required to quote a rate for the bottleneck segment has been upheld in federal court. STB's rationale was that statute and case law precluded it from requiring a railroad to provide service on a portion of its route when the railroad serves both the origin and destination points and provides a rate for such movement. STB requires a railroad to provide service for the bottleneck segment only if the shipper had prior arrangements or a contract for the remaining portion of the shipment route. On the one hand, requiring railroads to establish bottleneck rates would force short-distance routes on railroads when they served an entire route and could result in loss of business and potentially subject the bottleneck segment to a rate complaint. On the other hand, this approach would give shippers access to a second railroad, even if a single railroad was the only railroad that served the shipper at its origin and/or destination points, and could potentially reduce rates (see fig. 10). Paper barriers: This approach would prevent or, put a time limit on, paper barriers, which are contractual agreements that can occur when a Class I railroad either sells or leases long term some of its track to other railroads (typically a short-line railroad and/or regional railroad). These agreements stipulate that virtually all traffic that originates on that line must interchange with the Class I railroad that originally leased the tracks or pay a penalty. Since the 1980s, approximately 500 short lines have been created by Class I railroads selling a portion of their lines; however, the extent to which paper barriers are a standard practice is unknown because they are part of confidential contracts. When this type of agreement exists, it can inhibit smaller railroads that connect with or cross two or more Class I rail systems from providing rail customers access to competitive service. Eliminating paper barriers could affect the railroad industry's overall capacity since Class I railroads may abandon lines instead of selling them to smaller railroads and thereby increase the cost of entering a market for a would-be competitor. In addition, an official from a railroad association told us that it is unclear if a federal agency could invalidate privately negotiated contracts (see fig. 11). STB has taken some actions to address our past recommendations, but it is too soon to determine the effect of these actions. In October 2006 we reported that the continued existence of pockets of potential captivity at a time when the railroads are, for the first time in decades, experiencing increasing economic health, raises the question whether rail rates in selected markets reflect justified and reasonable pricing practices, or an abuse of market power by the railroads. While our analysis provided an important first step, we noted that STB has the statutory authority and access to information to inquire into and report on railroad practices and to conduct a more rigorous analysis of competition in the freight rail industry. As a result, we recommended that the Board undertake a rigorous analysis of competitive markets to identify the state of competition nationwide and to determine in specific markets whether the inappropriate exercise of market power is occurring and, where appropriate, to consider the range of actions available to address such problems. STB initially disagreed with our recommendation because it believed the findings underlying the recommendation were inconclusive, their on-going efforts would address many of our concerns, and a rigorous analysis would divert resources from other efforts. However, in June 2007, STB stated that it intended to implement our recommendation using funding that was not available at the time of our October report to solicit proposals from analysts with no connection to the freight railroad industry or STB proceedings to conduct a rigorous analysis of competition in the freight railroad industry. On September 13, 2007, STB announced that it had awarded a contract for a comprehensive study on competition, capacity, and regulatory policy issues to be completed by the fall of 2008. We commend STB for taking this action. It will be important that these analysts have the ability that STB has through its statutory authority to inquire into railroad practices as well as sufficient access to information to determine whether rail rates in selected markets reflect justified and reasonable pricing practices, or an abuse of market power by the railroads. We also recommended that STB review its method of data collection to ensure that all freight railroads are consistently and accurately reporting all revenues collected from shippers, including fuel surcharges and other costs not explicitly captured in all railroad rate structures. In January 2007, STB finalized rules that require railroads to ensure that fuel surcharges are based on factors directly affecting the amount of fuel consumed. In August 2007, STB finalized rules that require railroads to report their fuel costs and revenue from fuel surcharges. While these are positive steps, these rules did not address how surcharges are reported in the Carload Waybill Sample. In addition, STB has not taken steps to address collection and reporting of other miscellaneous revenues-- revenues deriving from sources other than fuel surcharges. As stated earlier, STB has also taken steps to refine the rate relief process since our 2006 report. STB has made changes to the rate relief process that it believes will reduce the expense and delay of obtaining rate relief. While these appear to be positive steps that could address longstanding concerns with the rate relief process, it is too soon to determine the effect of these changes to the process, and we have not evaluated the effect of these changes. Mr. Chairman, this concluded my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For questions regarding this testimony, please contact JayEtta Z. Hecker on (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Steve Cohen (Assistant Director), Yumiko Jolly, and John W. Shumann. Freight Railroads: Industry Health Has Improved, but Concerns About Competition and Capacity Should Be Addressed. GAO-07-94. Washington, D.C.: Oct. 6, 2006). Freight Railroads: Updated Information on Rates and Other Industry Trends. GAO-07-291R. Washington, D.C.: Aug. 15, 2007. Freight Railroads: Preliminary Observations on Rates, Competition, and Capacity Issues. GAO-06-898T. Washington, D.C.: June 21, 2006. Freight Transportation: Short Sea Shipping Option Shows Importance of Systematic Approach to Public Investment Decisions. GAO-05-768. Washington, D.C.: July 29, 2005. Freight Transportation: Strategies Needed to Address Planning and Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003. Railroad Regulation: Changes in Freight Railroad Rates from 1997 through 2000. GAO-02-524. Washington, D.C.: June 7, 2002. Freight Railroad Regulation: Surface Transportation Board's Oversight Could Benefit from Evidence Better Identifying How Mergers Affect Rates. GAO-01-689. Washington, D.C.: July 5, 2001. Railroad Regulation: Current Issues Associated with the Rate Relief Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999. Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999. Interstate Commerce Commission: Key Issues Need to Be Addressed in Determining Future of ICC's Regulatory Functions. GAO-T-RCED-94-261 Washington, D.C.: July 12, 1994. Railroad Competitiveness: Federal Laws and Policies Affect Railroad Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991. Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990. Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September 9, 1987. Railroad Regulation: Competitive Access and Its Effects on Selected Railroads and Shippers. GAO/RCED-87-109, Washington, D.C.: June 18, 1987. Railroad Revenues: Analysis of Alternative Methods to Measure Revenue Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986. Shipper Rail Rates: Interstate Commerce Commission's Handling of Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986. 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 Staggers Rail Act of 1980 largely deregulated the freight railroad industry, giving the railroads freedom to price their services according to market conditions and encouraging greater reliance on competition to set rates. The act recognized the need for railroads to recover costs by setting higher rates for shippers with fewer transportation alternatives. The act also recognized that some shippers might not have access to competitive alternatives and might be subject to unreasonably high rates. It established a threshold for rate relief and granted the Interstate Commerce Commission and the Surface Transportation Board (STB) the authority to develop a rate relief process for those "captive" shippers. GAO's reported on rates, competition, and other industry trends in reports issued in October 2006 and August 2007. This statement is based on those reports and discusses (1) the changes that have occurred in the railroad industry since the enactment of the Staggers Rail Act, including changes in rail rates since 1985, (2) the extent of captivity in the industry and STB's efforts to protect captive shippers, and (3) STB's actions to address GAO's recent recommendations. The changes that have occurred in the railroad industry since the enactment of the Staggers Rail Act are widely viewed as positive, since the financial health of the industry has improved and most rates have declined since 1985. The freight railroad industry's financial health improved substantially as railroads cut costs through productivity improvements and new technologies. However, rates began to increase in 2001, and in 2005 rates jumped nearly 9 percent--the largest annual increase in twenty years--and rates increased for all 13 commodities that we reviewed. Revenues that railroads report as "miscellaneous revenue"--a category that includes some fuel surcharges--increased more than ten-fold from $141 million in 2000 to over $1.7 billion in 2005. It is difficult to precisely determine how many shippers are "captive" because available proxy measures can overstate or understate captivity. However some data indicate that potentially captive traffic appears to have decreased, while at the same time, data also indicates that traffic traveling at rates significantly above the threshold for rate relief has increased. In October 2006, we reported that STB's rate relief process to protect captive shippers have resulted in little effective relief for those shippers. We also reported that economists and shipper groups have proposed a number of alternatives to address remaining concerns about competition--however, each of these alternative approaches have costs and benefits and should be carefully considered. STB has taken some actions to address our past recommendations, but it is too soon to determine the effect of these actions. Our October 2006 report noted that the continued existence of pockets of potentially "captive shippers" raised questions as to whether rail rates in selected markets reflected reasonable pricing practices, or an abuse of market power. We recommended that the Board undertake a rigorous analysis of competitive markets to identify the state of competition. STB has awarded a contract to conduct this study; while this is an important step, it will be important that these analysts have STB's authority and access to information to determine whether rail rates in selected markets reflect reasonable pricing practices. We also recommended that STB ensure that freight railroads are consistently reporting all revenues, including miscellaneous revenues. While STB has revised its rules on fuel surcharges, these rules did not address how fuel surcharges are reported and STB has not yet taken steps to accurately collect data on other miscellaneous revenues. STB has also taken a number of steps to revise its rate relief process. While these appear to be promising steps, it is too soon to tell what effect these changes will have and we have not evaluated them.
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The Great Lakes Basin is a large area that extends well beyond the five lakes proper to include their watersheds, tributaries, connecting channels, and a portion of the St. Lawrence River. The basin encompasses nearly all of the state of Michigan and parts of Illinois, Indiana, Minnesota, New York, Ohio, Pennsylvania, Wisconsin, and the Canadian province of Ontario. The lakes form the largest freshwater system on earth, accounting for 20 percent of the world's fresh surface water and over 95 percent of the U.S. fresh surface water supply for the contiguous 48 states. Millions of people in the United States and Canada rely on the five Great Lakes--Superior, Michigan, Erie, Huron, and Ontario--as a principal source of their drinking water, recreation, and economic livelihood. Over time, industrial, agricultural, and residential development on lands adjacent to the lakes has seriously degraded the lakes' water quality, posing threats to human health and the environment, and forcing restrictions on activities such as swimming and fish consumption. To protect the Great Lakes Basin and to address water quality problems, the governments of the United States and Canada entered into the bilateral Great Lakes Water Quality Agreement in 1972. In the agreement, the United States and Canada agreed to restore and maintain the chemical, physical, and biological integrity of the Great Lakes Basin. A new agreement with the same name was reached in 1978 and amended in 1983 and 1987. The agreement prescribes prevention and cleanup measures to improve environmental conditions in the Great Lakes. The agreement obligates the International Joint Commission (IJC), an international body, to assist in and report on the implementation of the agreement. The Clean Water Act directs EPA to lead efforts to meet the goals of the Great Lakes Water Quality Agreement and establishes GLNPO within EPA, charging it with, among other things, cooperating with federal, state, tribal, and international agencies to develop action plans to carry out the responsibilities of the U.S. under the agreement. GLNPO is further responsible for coordinating the agency's actions both in headquarters and in the regions to improve Great Lakes' water quality. In addition to GLNPO, numerous federal, state, binational, and nonprofit organizations conduct activities that focus on improving the overall Great Lakes Basin environment or some specific environmental issue within the basin. About 200 programs--148 federal and 51 state--fund restoration activities within the Great Lakes Basin. Most of these programs, however, involve the localized application of national or state environmental initiatives and do not specifically focus on basin concerns. Officials from 11 federal agencies identified 115 of these broadly scoped federal programs, and officials from seven of the eight Great Lakes states identified 34 similar state programs. EPA administers the majority of the federal programs that provide a broad range of environmental activities involving research, cleanup, restoration, and pollution prevention. For example, EPA's nationwide Superfund program funds cleanup activities at contaminated areas throughout the basin. While these broadly scoped federal and state programs contribute to basin restoration, program officials do not track or try to isolate the portion of funding directed toward specific areas, such as the basin, which makes it difficult to determine their contributions to total Great Lakes spending. However, basin-specific information was available on some of these programs. Specifically, basin-related expenditures for 53 of the 115 broadly scoped federal programs totaled about $1.8 billion in fiscal years 1992 through 2001. Expenditures for 14 broadly scoped state- funded programs totaled $461.3 million during approximately the same time period. Several federal and state programs were specifically designed to focus on environmental conditions across the Great Lakes Basin. Officials from seven federal agencies identified 33 Great Lakes specific programs that had expenditures of $387 million in fiscal years 1992 through 2001. Most of these programs funded a variety of activities, such as research, cleanup, or pollution prevention. An additional $358 million was expended for legislatively directed Corps of Engineers projects in the basin, such as a $93.8 million project to restore Chicago's shoreline. Officials from seven states reported 17 Great Lakes specific programs that expended about $956 million in 1992 through 2001, with Michigan's programs accounting for 96 percent of this amount. State programs focused on unique state needs, such as Ohio's program to control shoreline erosion along Lake Erie and Michigan's program to provide bond funding for environmental activities. Besides federal and state government agencies, other organizations, such as foundations, fund a variety of restoration activities in the Great Lakes Basin by approving grants to nonprofit and other organizations. Other governmental and nongovernmental organizations fund restoration activities. For example, individual municipalities, township governments, counties, and conservation districts are involved in various restoration activities. Restoration of the Great Lakes Basin is a major endeavor involving many environmental programs and organizations. The magnitude of the area comprising the basin and the numerous environmental programs operating within it require the development of one overarching strategy to address and manage the complexities of restoring the basin's environmental health. The Great Lakes region cannot hope to successfully receive support as a national priority without a comprehensive plan for restoring the Great Lakes. In lieu of such a plan, organizations at the binational, federal, and state levels have developed their own strategies for the Great Lakes, which have inadvertently made the coordination of the various programs operating in the basin more challenging. The Great Lakes Basin needs a comprehensive strategy or plan similar to the plans developed for other large ecosystem restoration efforts, such as those for the South Florida ecosystem and the Chesapeake Bay. In South Florida, federal, state, local and tribal organizations joined forces to participate on a centralized task force formalized in the Water Resource Development Act of 1996. The strategic plan developed for the South Florida ecosystem by the task force made substantial progress in guiding the restoration activities. The plan identifies the resources needed to achieve restoration and assigns accountability for specific actions for the extensive restoration effort, estimated to cost $14.8 billion. The Chesapeake Bay watershed also has an overarching restoration strategy stemming from a 1983 agreement signed by Maryland, Virginia, and Pennsylvania; the District of Columbia; the Chesapeake Bay Commission; and EPA. The implementation of this strategy has resulted in improvements in habitat restoration and aquatic life, such as increases in bay grasses and in the shad population. Several organizations have developed strategies for the basin at the binational, federal, or state levels that address either the entire basin or the specific problems in the Great Lakes. EPA's Great Lakes Strategy 2002, developed by a committee of federal and state officials, is the most recent of these strategies. While this strategy identified restoration objectives and planned actions by various federal and state agencies, it is largely a description of existing program activity relating to basin restoration. State officials told us that the states had already planned the actions described in it, but that these actions were contingent on funding for specific environmental programs. The strategy included a statement that it should not be construed as a commitment for additional funding or resources, and it did not provide a basis for prioritizing activities. In addition, we identified other strategies that addressed particular contaminants, the restoration of individual lakes, or the cleanup of contaminated areas. Ad hoc coordination takes place among federal agencies, states, and other environmental organizations in developing these strategies or when programmatic activity calls for coordination. Other Great Lakes strategies address unique environmental problems or specific geographical areas. For example, a strategy for each lake addresses the open lake waters through Lakewide Management Plans (LaMP), which EPA is responsible for developing. Toward this end, EPA formed working groups for each lake to identify and address restoration activities. For example, the LaMP for Lake Michigan, issued in 2002, includes a summary of the lake's ecosystem status and addresses progress in achieving the goals described in the previous plan, with examples of significant activities completed and other relevant topics. However, EPA has not used the LaMPs to assess the overall health of the ecosystem. The Binational Executive Committee for the United States and Canada issued its Great Lakes Binational Toxics Strategy in 1997 that established a collaborative process by which EPA and Environment Canada, in consultation with other federal departments and agencies, states, tribes and the province of Ontario work toward the virtual elimination of persistent toxic substances in the Great Lakes. The strategy was designed to address particular substances that bioaccumulate in fish or animals and pose a human health risk. Michigan developed a strategy for environmental cleanup called the Clean Michigan Initiative. This initiative provides funding for a variety of environmental, parks, and redevelopment programs. It includes nine components, including Brownfields redevelopment and environmental cleanups, nonpoint source pollution control, clean water, cleanup of contaminated sediments, and pollution prevention. The initiative is funded by a $675 million general obligation bond and, as of early 2003, most of the funds had not been distributed. Although there are many strategies and coordination efforts ongoing, no one organization coordinates restoration efforts. We found that extensive strategizing, planning, and coordinating have not resulted in significant restoration. Thus, the ecosystem remains compromised and contaminated sediments in the lakes produce health problems, as reported by the IJC. In addition to the absence of a coordinating agency, federal and state officials cited a lack of funding commitments as a principal barrier that impedes restoration progress. Inadequate funding has also contributed to the failure to restore and protect the Great Lakes, according to the IJC biennial report on Great Lakes water quality issued in July 2000. The IJC restated this position in a 2002 report, concluding that any progress to restore the Great Lakes would continue at a slow incremental pace without increased funding. In its 1993 biennial report, the IJC concluded that remediation of contaminated areas could not be accomplished unless government officials came to grips with the magnitude of cleanup costs and started the process of securing the necessary resources. Despite this warning, however, as we reported in 2002, EPA reduced the funding available for ensuring the cleanup of contaminated areas under the assumption that the states would fill the funding void. States, however, did not increase their funding, and restoration progress slowed or stopped altogether. Officials for 24 of 33 federal programs and for 3 of 17 state programs reported insufficient funding for federal and state Great Lakes specific programs. The ultimate responsibility for coordinating Great Lakes restoration programs rests with GLNPO; however, GLNPO has not fully exercised this authority. Other organizations or committees have been formed to assume coordination and strategy development roles. The Clean Water Act provides GLNPO with the authority to fulfill the responsibilities of the U.S. under the GLWQA. Specifically, the act directs EPA to coordinate the actions of EPA's headquarters and regional offices aimed at improving Great Lakes water quality. It also provides GLNPO authority to coordinate EPA's actions with the actions of other federal agencies and state and local authorities for obtaining input in developing water quality strategies and obtaining support in achieving the objectives of the GLWQA. The act also provides that the EPA Administrator shall ensure that GLNPO enters into agreements with the various organizational elements of the agency engaged in Great Lakes activities and with appropriate state agencies. The agreements should specifically delineate the duties and responsibilities, time periods for carrying out duties, and resources committed to these duties. GLNPO officials stated that they do not enter into formal agreements with other EPA offices but rather fulfill their responsibilities under the act by having federal agencies and state officials agree to the restoration activities contained in the Great Lakes Strategy 2002. However, the strategy does not represent formal agreements to conduct specific duties and responsibilities with committed resources. EPA's Office of Inspector General reported the absence of these agreements in September 1999. The report stated that GLNPO did not have agreements as required by the act and recommended that such agreements be made to improve working relationships and coordination. To improve coordination of Great Lakes activities and ensure that federal dollars are effectively spent, we recommended that the Administrator, EPA, ensure that GLNPO fulfills its responsibility for coordinating programs within the Great Lakes Basin; charge GLNPO with developing, in consultation with the governors of the Great Lakes states, federal agencies, and other organizations, an overarching strategy that clearly defines the roles and responsibilities for coordinating and prioritizing funding for projects; and submit a time-phased funding requirement proposal to the Congress necessary to implement the strategy. The Great Lakes Water Quality Agreement, as amended in 1987, calls for establishing a monitoring system to measure restoration progress and assess the degree to which the United States and Canada are complying with the goals and objectives of the agreement. However, implementation of this provision has not progressed to the point that overall restoration progress can be measured or determined based on quantitative information. Recent assessments of overall progress, which rely on a mix of quantitative data and subjective judgments, do not provide an adequate basis for making an overall assessment. The current assessment process has emerged from a series of biennial State of the Lakes Ecosystem Conferences (SOLEC) initiated in 1994 for developing indicators agreed upon by conference participants. Prior to the 1987 amendments to the GLWQA, the 1978 agreement between the two countries also contained a requirement for surveillance and monitoring and for the development of a Great Lakes International Surveillance Plan. The IJC Water Quality Board was involved in managing and developing the program until the 1987 amendments gave this responsibility to the United States and Canada. This change resulted in a significant reduction in the two countries' support for surveillance and monitoring. In fact, the organizational structure to implement the surveillance plan was abandoned in 1990, leaving only one initiative in place--the International Atmospheric Deposition Network (IADN), which involved a network of 15 air-monitoring stations located throughout the basin. With the surveillance and monitoring efforts languishing, IJC established the Indicators for Evaluation Task Force in 1993 to identify the appropriate framework to evaluate progress in the Great Lakes. In 1996, the task force proposed that nine desired measurements and outcomes be used to develop indicators for measuring progress in the Great Lakes. Shortly before the task force began its work, the United States and Canada had agreed to hold conferences every 2 years to assess the environmental conditions in the Great Lakes in order to develop binational reports on environmental conditions to measure progress under the agreement. Besides assessing environmental conditions, the conferences were focused on achieving three other objectives, including providing a forum for communication and networking among stakeholders. Conference participants included U.S. and Canadian representatives from federal, state, provincial, and tribal agencies, as well as from other organizations with environmental restoration or pollution prevention interests in the Great Lakes Basin. The 1994 SOLEC conference culminated in a "State of the Great Lakes 1995" report, which provided an overview of the Great Lakes ecosystem at the end of 1994 and concluded that overall the aquatic community health was mixed or improving. This same assessment was echoed in the 1997 state of the lakes report. Meanwhile the IJC agreed that the nine desired outcome areas recommended by the task force would help assess overall progress. It recommended that SOLEC, during the conference in 2000, establish environmental indicators that would allow the IJC to evaluate what had been accomplished and what needed to be done for three of the nine indicators--the public's ability to eat the fish, drink the water, and swim in the water without any restrictions. However, the indicators developed through the SOLEC process and the accomplishments reported by federal and state program managers do not provide an adequate basis for making an overall assessment for Great Lakes restoration progress. The SOLEC process is ongoing, and the indicators that are still being developed are not generally supported by sufficient underlying data for making progress assessments. The number of indicators considered during the SOLEC conferences has been pared down from more than 850 indicators in 1998 to 80 indicators in 2000, although data was available for only 33 of them. After the SOLEC 2000 conference, IJC staff assessed the indicators supported by data that measured the desired outcomes of swimmability, drinkability, and the edibility of fish in the Great Lakes. Overall, the IJC commended SOLEC's quick response that brought together information regarding the outcomes and SOLEC's ongoing efforts. The IJC, however, recognized that sufficient data were not being collected throughout the Great Lakes Basin and that the methods of collection, the data collection time frames, the lack of uniform protocols, and the incompatible nature of some data jeopardized their use as indicators. Specifically, for the desired outcome of swimmability, the IJC concurred that it was not always safe to swim at certain beaches but noted that progress for this desired outcome was limited because beaches were sampled by local jurisdictions without uniform sampling or reporting methods. At the 2002 SOLEC conference, the number of indicators assessed by conference participants increased from 33 to 45. The IJC expressed concern that there are too many indicators, insufficient supporting backup data, and a lack of commitment and funding from EPA to implement and make operational the agreed upon SOLEC baseline data collection and monitoring techniques. The IJC recommended in its last biennial report that any new indicators should be developed only where resources are sufficient to access scientifically valid and reliable information. The ultimate successful development and assessment of indicators for the Great Lakes through the SOLEC process are uncertain because insufficient resources have been committed to the process, no plan provides completion dates for indicator development and implementation, and no entity is coordinating the data collection. Even though the SOLEC process has successfully engaged a wide range of binational parties in developing indicators, the resources devoted to this process are largely provided on a voluntary basis without firm commitments to continue in the future. GLNPO officials described the SOLEC process as a professional, collaborative process dependent on the voluntary participation of officials from federal and state agencies, academic institutions, and other organizations attending SOLEC and developing information on specific indicators. Because SOLEC is a voluntary process, the indicator data resides in a diverse number of sources with limited control by SOLEC organizers. GLNPO officials stated that EPA has neither the authority nor the responsibility to direct the data collection activities of federal, state, and local agencies as they relate to the surveillance and monitoring of technical data elements that are needed to develop, implement, and assess Great Lakes environmental indicators. Efforts are underway for the various federal and state agencies to take ownership for collecting and reporting data outputs from their respective areas of responsibility and for SOLEC to be sustained and implemented; each indicator must have a sponsor. However, any breakdown in submitting this information would leave a gap in the SOLEC indicator process. EPA supports the development of environmental indicators as evidenced by the fact that, since 1994, GLNPO has provided about $100,000 annually to sponsor the SOLEC conferences. Additionally, GLNPO spends over $4 million per year to collect surveillance data for its open-lake water quality monitoring program, which also provides supporting data for some of the indicators addressed by SOLEC. A significant portion of these funds, however, supports the operation of GLNPO's research vessel, the Lake Guardian, an offshore supply vessel converted for use as a research vessel. GLNPO also supports activities that are linked or otherwise feed information into the SOLEC process, including the following: collecting information on plankton and benthic communities in the Great Lakes for open water indicator development; sampling various chemicals in the open-lake waters, such as phosphorus for the total phosphorus indicator; monitoring fish contaminants in the open waters, directly supporting the indicator for contaminants in whole fish and a separate monitoring effort for contaminants in popular sport fish species that supports the indicator for chemical contaminants in edible fish tissue; and operating 15 air-monitoring stations with Environment Canada comprising the IADN that provides information for establishing trends in concentrations of certain chemicals and loadings of chemicals into the lakes. EPA uses information from the network to take actions to control the chemicals and track progress toward environmental goals. In November 2001, EPA committed to an agencywide initiative to develop environmental indicators for addressing the agency's nationwide environmental conditions, stating that "indicators help measure the state of our air, water and land resources and the pressures placed on them, and the resulting effects on ecological and human health." However, this initiative does not specifically relate to the Great Lakes. The short-term goal for this initiative is to develop information that will indicate current nationwide environmental conditions and to help EPA make sound decisions on what needs to be done. The long-term goal is to bring together national, regional, state, and tribal indicator efforts to describe the condition of critical environmental areas and human health concerns. Program officials frequently cite output data as measures of success rather than actual program accomplishments in improving environmental conditions in the basin. As a rule, program output data describe activities, such as projects funded, and are of limited value in determining environmental progress. For example, in reporting the accomplishments for Michigan's Great Lakes Protection Fund, officials noted that the program had funded 125 research projects over an 11-year period and publicized its project results at an annual forum and on a Web site. Similarly, the Lake Ontario Atlantic Salmon Reintroduction Program administered by the U.S. Department of the Interior's Fish and Wildlife Service listed under its accomplishments the completion of a pilot study and technical assistance provided to a Native American tribe. Of the 50 federal and state programs created specifically to address conditions in the basin, 27 reported accomplishments in terms of outputs, such as reports or studies prepared or presentations made to groups. Because research and capacity building programs largely support other activities, it is particularly difficult to relate reported program accomplishments to outcomes. The federal and state environmental program officials who responded to our evaluation generally provided output data or, as reported for 15 programs, reported that the accomplishments had not been measured for the programs. Only eight of the federal or state Great Lakes specific programs reported outcome information, much of which generally described how effective the programs' activities or actions had been in improving environmental conditions. For example, EPA's Region II program for reducing toxic chemical inputs into the Niagara River, which connects Lake Erie to Lake Ontario, reported reductions in priority toxics from 1986 through 2002 from ambient water quality monitoring. Other significant outcomes reported as accomplishments for the Great Lakes included (1) reducing phosphorus loadings by waste treatment plants and limiting phosphorus use in household detergents; (2) prohibiting the release of some toxicants into the Great Lakes, and reducing to an acceptable level the amount of some other toxicants that could be input; (3) effectively reducing the sea lamprey population in several invasive species-infested watersheds; and (4) restocking the fish-depleted populations in some watersheds. To fulfill the need for a monitoring system called for in the GLWQA and to ensure that the limited funds available are optimally spent, we recommended that the Administrator, EPA, in coordination with Canadian officials and as part of an overarching Great Lakes strategy, (1) develop environmental indicators and a monitoring system for the Great Lakes Basin that can be used to measure overall restoration progress and (2) require that these indicators be used to evaluate, prioritize, and make funding decisions on the merits of alternative restoration projects. Mr. Chairman, this completes my prepared statement. I would be happy to answer any questions that 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 were Willie Bailey, Karen Keegan, Rosemary Torres-Lerma, Jonathan McMurray, Margaret Reese, and John Wanska. 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 five Great Lakes, which comprise the largest system of freshwater in the world, are threatened on many environmental fronts. To address the extent of progress made in restoring the Great Lakes Basin, which includes the lakes and surrounding area, GAO (1) identified the federal and state environmental programs operating in the basin and the funding devoted to them, (2) evaluated the restoration strategies used and how they are coordinated, and (3) assessed overall environmental progress made in the basin restoration effort. There are 148 federal and 51 state programs funding environmental restoration activities in the Great Lakes Basin. Most of these programs are nationwide or statewide programs that do not specifically focus on the Great Lakes. However, several programs specifically address environmental conditions in the Great Lakes. GAO identified 33 federal Great Lakes specific programs, and states funded 17 additional unique Great Lakes specific programs. Although Great Lakes funding is not routinely tracked for many of these programs, we identified a total of about $3.7 billion in basin-specific projects for fiscal years 1992 through 2001. GAO identified several Great Lakes environmental strategies being used at the binational, federal, and state levels. These strategies are not coordinated or unified in a fashion comparable to other large restoration projects, such as the South Florida ecosystem. Without an overarching plan for these strategies, it is difficult to determine overall progress. The Water Quality Act of 1987 charged EPA's Great Lakes National Program Office with the responsibility for coordinating federal actions for improving the Great Lakes' water quality, however, it has not fully exercised this authority to this point. With available information, it is not possible to comprehensively assess restoration progress in the Great Lakes. Current indicators rely on limited quantitative data and subjective judgments to determine whether conditions are improving, such as whether fish are safe to eat. The ultimate success of an ongoing binational effort to develop a set of overall indicators for the Great Lakes is uncertain because it relies on the resources voluntarily provided by several organizations. Further, no date for completing a final list of indicators has been established.
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Our May 2009 report on the then-current round of ASP testing found that DHS increased the rigor of ASP testing over that of previous tests, and that a particular area of improvement was in the performance testing at the Nevada Test Site, where DNDO compared the capability of ASP and current-generation equipment to detect and identify nuclear and radiological materials. For example, unlike in prior tests, the plan for the 2008 performance test stipulated that the contractors who developed the equipment would not be involved in test execution. This improvement addressed concerns we previously raised about the potential for bias and provided increased credibility to the results. Nevertheless, based on the following factors, in our report we questioned whether the benefits of the new portal monitors justify the high cost: The DHS criteria for a significant increase in operational effectiveness. Our chief concern with the criteria is that they require only a marginal improvement over current-generation portal monitors in the detection of certain weapons-usable nuclear materials during primary screening. DNDO considers detection of such materials to be a key limitation of current-generation portal monitors. The marginal improvement required of ASPs to meet the DHS criteria is problematic because the detection threshold for the current-generation portal monitors does not specify a level of radiation shielding that smugglers could realistically use. Officials from the Department of Energy (DOE), which designed the threat guidance DHS used to set the detection threshold, and national laboratory officials told us that the current threshold is based not on an analysis of the capabilities of potential smugglers to take effective shielding measures but rather on the limited sensitivity of PVTs to detect anything more than certain lightly shielded nuclear materials. DNDO officials acknowledge that both the new and current-generation portal monitors are capable of detecting certain nuclear materials only when unshielded or lightly shielded. The marginal improvement in detection of such materials required of ASPs is particularly notable given that DNDO has not completed efforts to fine-tune PVTs' software using a technique called "energy windowing" that could improve the PVTs' sensitivity to nuclear materials. DNDO officials expect they can achieve small improvements in sensitivity through energy windowing, but DNDO has not yet completed efforts to fine-tune the PVTs' software. In contrast to the marginal improvement required in detection of certain nuclear materials, the primary screening requirement to reduce the rate of innocent alarms by 80 percent could result in hundreds of fewer secondary screenings per day, thereby reducing CBP's workload. In addition, the secondary screening criteria, which require ASPs to reduce the probability of misidentifying special nuclear material by one-half, address the limitations of relatively small handheld devices in consistently locating and identifying potential threats in large cargo containers. Results of performance testing and field validation. The results of performance tests that DNDO presented to us were mixed, particularly in the ASPs' capability to detect certain shielded nuclear materials during primary screening. The results of performance testing at the Nevada Test Site showed that the new portal monitors detected certain nuclear materials better than PVTs when shielding approximated DOE threat guidance, which is based on light shielding. In contrast, differences in system performance were less notable when shielding was slightly increased or decreased: both the PVTs and ASPs were frequently able to detect certain nuclear materials when shielding was below threat guidance, and both systems had difficulty detecting such materials when shielding was somewhat greater than threat guidance. With regard to secondary screening, ASPs performed better than handheld devices in identification of threats when masked by naturally occurring radioactive material. However, the differences in the ability to identify certain shielded nuclear materials depended on the level of shielding, with increasing levels appearing to reduce any ASP advantages over the handheld identification devices. Other phases of testing uncovered multiple problems in meeting requirements for successfully integrating the new technology into operations at ports of entry. Of the two ASP contractors participating in the current round of testing, one has fallen behind due to severe problems encountered during testing of ASPs' readiness to be integrated into operations at ports of entry ("integration testing"); the problems may require that the vendor redo previous test phases to be considered for certification. The other vendor's system completed integration testing, but CBP suspended field validation testing in January 2009 after 2 weeks because of serious performance problems resulting in an overall increase in the number of referrals for secondary screening compared with existing equipment. DNDO's plans for computer simulations. As of May 2009, DNDO did not plan to complete injection studies--computer simulations for testing the response of ASPs and PVTs to simulated threat objects concealed in cargo containers--prior to the Secretary of Homeland Security's decision on certification even though delays to the ASP test schedule have allowed more time to conduct the studies. According to DNDO officials, injection studies address the inability of performance testing to replicate the wide variety of cargo coming into the United States and the inability to place special nuclear material and other threat objects in cargo during field validation. DNDO had earlier indicated that injection studies could provide information comparing the performance of the two systems as part of the certification process for both primary and secondary screening. However, DNDO subsequently decided that performance testing would provide sufficient information to support a decision on ASP certification. DNDO officials said they would instead use injection studies to support effective deployment of the new portal monitors. Lack of an updated cost-benefit analysis. DNDO had not updated its cost- benefit analysis to take into account the results of ASP testing. An updated analysis that takes into account the testing results, including injection studies, might show that DNDO's plan to replace existing equipment with ASPs is not justified, particularly given the marginal improvement in detection of certain nuclear materials required of ASPs and the potential to improve the current-generation portal monitors' sensitivity to nuclear materials, most likely at a lower cost. DNDO officials said they were updating the ASP cost-benefit analysis and planned to complete it prior to a decision on certification by the Secretary of Homeland Security. Our May report recommended that the Secretary of Homeland Security direct DNDO to (1) assess whether ASPs meet the criteria for a significant increase in operational effectiveness based on a valid comparison with PVTs' full performance potential and (2) revise the schedule for ASP testing and certification to allow sufficient time for review and analysis of results from the final phases of testing and completion of all tests, including injection studies. We further recommended that, if ASPs are certified, the Secretary direct DNDO to develop an initial deployment plan that allows CBP to uncover and resolve any additional problems not identified through testing before proceeding to full-scale deployment. DHS agreed to a phased deployment that should allow time to uncover ASP problems but disagreed with GAO's other recommendations, which we continue to believe remain valid. The results of DNDO's most recent round of field validation testing, which it undertook in July 2009, after our May report was released, raise new issues. In July 2009, DNDO resumed the field testing of ASPs at four CBP ports of entry that it initiated in January 2009 but suspended because of serious performance problems. However, the July tests also revealed ASP performance problems, including two critical performance deficiencies. First, the ASP monitors had an unacceptably high number of false positive alarms for the detection of certain high-risk nuclear materials. According to CBP officials, these false alarms are very disruptive in a port environment in that any alarm for this type of nuclear material would cause CBP to take enhanced security precautions because such materials (1) could be used in producing an improvised nuclear device and (2) are rarely part of legitimate or routine cargo. Furthermore, once receiving an alarm for this type of nuclear material, CBP officers are required to conduct a thorough secondary inspection to assure themselves that no nuclear materials are present before permitting the cargo to enter the country. Repeated false alarms for nuclear materials are also causes for concern because such alarms could eventually have the effect of causing CBP officers to doubt the reliability of the ASP and be skeptical about the credibility of future alarms. Secondly, during the July testing the ASP experienced a "critical failure," which stemmed from a problem with a key component of the ASP and caused the ASP to shut down. Importantly, during this critical failure, the ASP did not alert the CBP officer that it had shut down and was no longer scanning cargo. As a result, were this not in a controlled testing environment, the CBP officer would have permitted the cargo to enter the country thinking the cargo had been scanned, when it had not. According to CBP officials, resolving this issue is important in order to assure the stability and security of the ASP. In addition to these key performance problems, the ASP was not able to reduce referrals to secondary inspection by 80 percent as required by the DHS criteria for a significant increase in operational effectiveness. According to the report from the ASP Field Validation Advisory Panel, a panel made up of officials from CBP, DNDO, and a national laboratory, the ASP was able to reduce referrals to secondary inspection by about 69 percent rather than the 80 percent as required by the DHS criteria. While the performance of the ASP during the July field validation testing raises issues about its potential readiness for deployment, DNDO's proposed solutions to address these performance problems raise additional questions about whether this equipment will provide any meaningful increase in the ability to detect certain nuclear materials. Specifically, to address the problem of false positive alarms indicating the presence of certain nuclear materials, according to DNDO officials, DNDO has modified the ASP to make this equipment less sensitive to these nuclear materials. While this may address the issue of false positive alarms, it will also diminish the ASP capability of detecting a key high-risk nuclear material. Since the ASP modification, DNDO conducted computer simulations using a vendor-provided system called a "replay tool" to examine the effect of the modification on the ASP's performance. According to DNDO officials, the replay tool demonstrated that the modified ASP will still be able to detect certain nuclear materials better than the PVT. However, at this point, DNDO does not plan to retest the ASP at the Nevada Test Site where it can examine the effects of these modifications using actual nuclear materials. As we reported earlier this year, the results of the testing at the Nevada Test Site demonstrated that the ASPs represented a marginal improvement in detecting certain nuclear materials. By reducing the sensitivity to these materials and not retesting the modified ASPs against actual nuclear materials, it is uncertain exactly what improvement in detecting certain nuclear materials these costly portal monitors are providing. While DNDO is reducing the sensitivity of ASPs to certain nuclear materials, it has yet to complete efforts to improve the PVT's ability to detect these same materials through energy windowing. For several years, CBP officials have repeatedly urged DNDO officials to complete this research. However, it was not apparent from our discussions with DNDO officials if this effort is making meaningful progress with the development of energy windowing or when it will be completed. Furthermore, CBP officials stated that, depending on the outcome of this research, energy windowing could be the more cost effective way to improve detection of certain nuclear materials. In our view, ASPs being modified to diminish their capabilities to detect certain nuclear materials raises questions about whether energy windowing might be able to achieve a similar level of performance against these same materials from the PVTs that are already in place. Beyond reducing the sensitivity of ASPs to certain nuclear materials, DNDO also plans to address the issue of critical failures by, among other things, installing an indicator light on the ASP that will alert CBP officers that the ASP has experienced a mission-critical failure and is no longer scanning cargo. While this should address the issue of CBP officers not knowing that the ASP has suffered a critical failure, CBP officials stressed to us the need for the ASP to be stable and secure enough to avoid these shutdowns. In closing, the issues raised by the results of the July 2009 field validation tests provide even greater reason for DNDO to address recommendations from our May 2009 report. In particular, we reiterate the importance of our prior recommendation for DNDO to assess whether ASPs meet the criteria for a significant increase in operational effectiveness based on a valid comparison with PVTs' full performance potential, given that the ASPs will no longer be as effective in detecting certain nuclear materials. Mr. Chairman, 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 further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Dr. Timothy Persons (Chief Scientist), Ned Woodward (Assistant Director), Joseph Cook, and Kevin Tarmann made key contributions to this testimony. Kendall Childers, Karen Keegan, Carol Kolarik, Jonathan Kucskar, Omari Norman, Alison O'Neill, and Rebecca Shea also made important contributions. 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 Homeland Security's (DHS) Domestic Nuclear Detection Office (DNDO) is responsible for addressing the threat of nuclear smuggling. Radiation detection portal monitors are key elements in the nation's defenses against such threats. DHS has sponsored testing to develop new monitors, known as advanced spectroscopic portal (ASP) monitors, to replace radiation detection equipment being used at ports of entry. DNDO expects that ASPs may offer improvements over current-generation portal monitors, particularly the potential to identify as well as detect radioactive material and thereby to reduce both the risk of missed threats and the rate of innocent alarms, which DNDO considers to be key limitations of radiation detection equipment currently used by Customs and Border Protection (CBP) at U.S. ports of entry. However, ASPs cost significantly more than current generation portal monitors. Due to concerns about ASPs' cost and performance, Congress has required that the Secretary of Homeland Security certify that ASPs provide a significant increase in operational effectiveness before obligating funds for full-scale ASP procurement. In May 2009, GAO issued a report (GAO-09-655) on the status of the ongoing ASP testing round. This testimony (1) discusses the principal findings and recommendations from GAO's May report on ASP testing and (2) updates those findings based on information from DNDO and CBP officials on the results of testing conducted since the report's issuance. DHS, DNDO, and CBP's oral comments on GAO's new findings were included as appropriate. GAO's May 2009 report on ASP testing found that DHS increased the rigor in comparison with previous tests and thereby added credibility to the test results. However, GAO's report also questioned whether the benefits of the ASPs justify its high cost. In particular, the DHS criteria for a significant increase in operational effectiveness require only a marginal improvement in the detection of certain weapons-usable nuclear materials, which DNDO considers a key limitation of current-generation portal monitors. The marginal improvement required of ASPs is particularly notable given that DNDO has not completed efforts to fine-tune current-generation equipment to provide greater sensitivity. Moreover, the test results showed that ASPs performed better than current-generation portal monitors in detection of such materials concealed by light shielding approximating the threat guidance for setting detection thresholds, but that differences in sensitivity were less notable when shielding was slightly below or above that level. Finally, DNDO had not yet updated its cost-benefit analysis to take into account the results of ASP testing and did not plan to complete computer simulations that could provide additional insight into ASP capabilities and limitations prior to certification even though test delays have allowed more time to conduct the simulations. DNDO officials believed the other tests were sufficient for ASPs to demonstrate a significant increase in operational effectiveness. GAO recommended that DHS assess ASPs against the full potential of current-generation equipment and revise the program schedule to allow time to conduct computer simulations and to uncover and resolve problems with ASPs before full-scale deployment. DHS agreed to a phased deployment that should allow time to uncover ASP problems but disagreed with the other recommendations, which GAO believes remain valid. The results of DNDO's most recent round of field testing raise continuing issues. In July 2009, DNDO resumed the field testing of ASPs that it initiated in January 2009 but suspended because of serious performance problems. However, the July tests also revealed critical performance deficiencies. For example, the ASP had a high number of false positive alarms for the detection of certain nuclear materials. According to CBP, these false alarms are very disruptive in a port environment because any alarm for this type of nuclear material causes CBP to take enhanced security precautions. To address these false alarms, DNDO plans to modify the ASP to make these monitors less sensitive to these nuclear materials and thereby diminishing the ASPs' capability. As GAO reported earlier this year, previous testing results demonstrated that the ASPs represented a marginal improvement in detecting these materials. By reducing the sensitivity to nuclear materials even further, it is uncertain exactly what improvement in detecting these materials the ASPs are providing or whether DNDO might be able to achieve a similar level of performance as the modified ASPs by improving the current-generation portal monitors that are already in place. In addition, the July 2009 testing also identified a critical equipment failure, including an alert malfunction, which DNDO is taking steps to resolve for future testing.
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In our June 2015 report, we found that Interior uses a multistep review process to help ensure that tribal-state compacts, and any compact amendments, comply with IGRA, other federal laws not related to jurisdiction over gaming on Indian lands, and the trust obligation of the United States to Indians. Interior's Office of Indian Gaming is the lead agency responsible for managing the multistep process for reviewing compacts submitted by tribes and states. The Office of Indian Gaming coordinates its compact reviews with Interior's Office of the Solicitor. The Office of Indian Gaming submits a final analysis and recommendation regarding compact approval to the Assistant Secretary of Indian Affairs, who makes a final decision on whether to approve the compact. Interior has 45 days to approve or disapprove a compact once it receives a compact package from a state and tribe. Under IGRA, any compacts Interior does not approve or disapprove within 45 days of submission are considered to have been approved (referred to as deemed approved), but only to the extent they are consistent with IGRA. From 1998 through fiscal year 2014, Interior reviewed and approved most of the 516 compacts and compact amendments that states and tribes submitted. Specifically, 78 percent (405) were approved; 12 percent (60) were deemed approved; 6 percent (32) were withdrawn or returned; and about 4 percent (19) were disapproved. In the decision letters we reviewed for the few disapproved compacts (19 out of 516), the most common reason for disapproval was that compacts contained revenue sharing provisions Interior found to be inconsistent with IGRA. For example, Interior found the revenue sharing payment to the state in some compacts to be a tax, fee, charge, or assessment on the tribe, which is prohibited by IGRA. For one compact, Interior found the state's offer of support for the tribe's application to take land into trust did not provide a quantifiable economic benefit that justified the proposed revenue sharing payments. Consequently, Interior viewed the payment to the state as a tax or other assessment in violation of IGRA. Interior also disapproved compacts for other reasons, including that compacts were signed by unauthorized state or tribal officials, included lands to be used for gaming that were not Indian lands as defined by IGRA, or included provisions that were not directly related to gaming. Interior did not approve or disapprove 60 of the 516 compacts submitted by tribes and states within the 45-day review period. As a result, these compacts were deemed approved to the extent that they are consistent with IGRA. According to Interior officials, as a general practice, the agency only sends a decision letter to the tribes and state for deemed approved compacts to provide guidance on any provisions that raised concerns or may have potentially violated IGRA. We reviewed the decision letters for 26 of the 60 deemed approved compacts. In 19 of the 26 letters we reviewed, Interior described concerns about the compact's revenue sharing provisions, and most of these letters also noted concerns about the inclusion of provisions not related to gaming. The remaining 7 letters we reviewed cited other concerns, such as ongoing litigation, that could affect the compact. As we found in our June 2015 report, the roles of states and tribes in regulating Indian gaming are established in two key documents: (1) compacts for class III gaming and (2) tribal gaming ordinances for both class II and class III gaming. Compacts lay out the responsibilities of both tribes and states for regulating class III gaming. For example, compacts may include provisions allowing states to conduct inspections of gaming operations, certify employee licenses, review surveillance records, and impose assessments on tribes to defray the state's costs of regulating Indian gaming. Under IGRA, tribal gaming ordinances--which outline the general framework for tribes' regulation of class II and class III gaming--must be adopted by a tribe's governing body and approved by the Commission's Chair before a tribe can conduct class II or class III gaming, as required under IGRA. Tribal ordinances must contain certain required provisions that provide, among other things, that the tribe will have sole proprietary interest and responsibility for the conduct of gaming activity; that net gaming revenues will only be used for authorized purposes; and that annual independent audits of gaming operations will be provided to the Commission. IGRA allows states and tribes to agree on how each party will regulate class III gaming, and we found that regulatory roles vary among the 24 states that have class III Indian gaming operations. We identified states as having either an active, moderate, or limited role to describe their approaches in regulating class III Indian gaming, primarily based on information states provided on the extent and frequency of their monitoring activities. Monitoring activities conducted by states ranged from basic, informal observation of gaming operations to testing of gaming machine computer functions and reviews of surveillance systems and financial records. We also considered state funding and staff resources allocated for regulation of Indian gaming, among other factors, in our identification of a state's role. Based on our analysis of states' written responses to questions and interviews with states we found the following: Seven states have an active regulatory role: Arizona, Connecticut, Kansas, Louisiana, New York, Oregon, and Wisconsin. These states monitor gaming operations at least weekly, with most having a daily on-site presence. Over 17 percent (71 of 406) of class III Indian gaming operations are located in these seven states, accounting for about 25 percent of gross gaming revenue in fiscal year 2013. These states perform the majority of monitoring activities, including formal and informal inspection or observation of gaming operations; review of financial report(s); review of compliance with internal control systems; audit of gaming operation records; verification of gaming machines computer functions; review of gaming operator's surveillance; and observation of money counts. Eleven states have a moderate regulatory role: California, Florida, Iowa, Michigan, Minnesota, Nevada, New Mexico, North Dakota, Oklahoma, South Dakota, and Washington. Most of these states monitor operations at least annually, and all collect funds from tribes to support state regulatory activities. About 75 percent (303 of 406) of class III Indian gaming operations are located in these states and generated 69 percent of all gross Indian gaming revenue in fiscal year 2013. States with a moderate regulatory role have the broadest range of regulatory approaches. For example, according to Nevada officials, Nevada conducts comprehensive inspections of gaming operations once every 2 to 3 years and performs covert inspections, as needed, based on risk. In contrast, North Dakota officials told us they conduct monthly inspections of gaming operations and an annual review of financial reports. Six states have a limited regulatory role: Colorado, Idaho, Mississippi, Montana, North Carolina, and Wyoming. The role of these states is largely limited to negotiating compacts with tribes, and they do not incur substantial regulatory costs or regularly perform monitoring activities of class III Indian gaming operations. Eight percent (32 of 406) of class III Indian gaming operations are located in these states, and the operations accounted for about 4 percent of gross Indian gaming revenue in fiscal year 2013. Tribes take on the primary day-to-day role of regulating Indian gaming. For example, each of the 12 tribes that we visited had established tribal gaming regulatory agencies that perform various regulatory functions to ensure that their gaming facilities are operated in accordance with tribal laws and regulations and, for class III operations, compacts. The tribes' regulatory agencies were similar in their approaches to regulating their gaming operations. For example, all of the tribes' regulatory agencies had established procedures for developing licensing procedures for employees, obtaining annual independent outside audits, and establishing and monitoring gaming activities to ensure compliance with tribal laws and regulations. Among other things, representatives from tribal associations we contacted emphasized that tribal governments have worked diligently to develop regulatory systems to protect the integrity of Indian gaming and have dedicated significant resources to meet their regulatory responsibilities. For example, according to representatives of the National Indian Gaming Association, in 2013, tribal governments dedicated $422 million to regulate Indian gaming, including funding for tribal government gaming regulatory agencies, state gaming regulation, and Commission regulation and oversight of Indian gaming collected through fees required by IGRA. In our June 2015 report, a key difference we found between class II and class III gaming is that IGRA authorizes the Commission to issue and enforce minimum internal controls standards for class II gaming but not for class III gaming. Commission regulations require tribes to establish and implement internal control standards for class II gaming activities-- such as requirements for surveillance and handling money--that provide a level of control that equals or exceeds the Commission's minimum internal control standards. But, in 2006, a federal court ruled that IGRA did not authorize the Commission to issue and enforce regulations establishing minimum internal control standards for class III gaming. However, Commission regulations establishing minimum internal control standards, including standards for class III gaming, that were issued before the ruling were not struck down by the court or withdrawn by the Commission. The Commission issued these regulations in 1999 and last updated the standards in 2006, which we refer to as the 2006 regulations.gaming, the Commission continues to (1) conduct audits using the 2006 regulations at the request of tribes and (2) provide monitoring and enforcement of these regulations for 15 tribes in California with approved Since the court decision, for operations with class III tribal gaming ordinances that call for the Commission to have such a role. The Commission plans to issue guidance with updated minimum internal control standards for class III gaming and withdraw its 2006 regulations. Commission officials told us they have authority to issue such guidance, and tribes could voluntarily adopt them as best practices. According to Commission officials, issuing such guidance would be helpful because updated standards could be changed to reflect technology introduced since the standards were last updated. Commission officials told us that before the agency can make a decision on how to proceed with issuing guidance for class III minimum internal control standards, it first needs to consult with tribes. In February 2015, the Commission notified tribes of plans to seek comments on its proposal to draft guidance for updated class III minimum internal control standards during meetings in April and May 2015. States involved in the regulation of Indian gaming are also impacted by the Commission's proposal to draft updated guidance and withdraw its 2006 regulations; however, the Commission's plans for obtaining state input on this proposal are unclear. We found that many tribal-state compacts incorporate by reference the Commission's 2006 regulations establishing minimum internal control standards. For example, three states have tribal-state compacts that require tribes to comply with the Commission's 2006 regulations. If the Commission withdraws its 2006 regulations, it is not clear what minimum internal control standards the compacts would require tribes to meet. In addition, nine states have tribal- state compacts that require tribal internal control standards to be at least as stringent as the Commission's 2006 regulations. If the Commission withdraws its 2006 regulations, these states and tribes would no longer have a benchmark against which to measure the stringency of tribal internal control standards. Standards for Internal Control in the Federal Government call for management to ensure that there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. According to a Commission official, the Commission is considering conducting outreach to the states on its proposal but did not have any specific plan for doing so. Consistent with federal internal control standards, seeking state input is important, as it could aid the Commission in making an informed decision on how to proceed with issuing such guidance and whether withdrawal of its 2006 regulations would cause complications or uncertainty under existing tribal-state compacts. As a result of this finding, we recommended that the Commission seek input from states regarding its proposal to draft updated guidance on class III minimum internal control standards and withdraw its 2006 regulations. In its comments on our draft report, the Commission concurred with this recommendation. To help ensure compliance with IGRA and Commission regulations, the Commission conducts a broad array of monitoring activities--such as reviewing independent audit reports submitted annually by tribes, conducting site visits to tribal gaming operations to examine compliance with applicable Commission regulations, and assessing tribes' compliance with minimum internal control standards as part of Commission-led audits. In addition, as required by IGRA, the Commission's Chair reviews and approves various documents related to both class II and class III gaming operations, including tribal gaming ordinances or resolutions adopted by a tribe's governing body. Under its ACE initiative, the Commission has emphasized providing tribes with training and technical assistance as a means to build and sustain their ability to prevent, respond to, and recover from weaknesses in internal controls and violations of IGRA and Commission regulations. For instance, the Commission hosts two regular training events in each region. Commission staff also provide one-on-one training on specific topics, as needed, during site visits and offer technical assistance in the form of guidance and advice to tribes on compliance with IGRA; Commission regulations; and day-to-day regulation of Indian gaming operations through written advisory opinions and bulletins. Commission staff also respond to questions by phone and e-mail, among other activities. However, the effectiveness of the Commission's training and technical assistance efforts remains unclear. The Commission's strategic plan for fiscal years 2014 through 2018 includes two goals corresponding to its focus on training and technical assistance to achieve compliance with IGRA and Commission regulations: one for continuing its ACE initiative; and another for improving its technical assistance and training to tribes. Yet, the Commission's performance measures for tracking progress toward achieving these two goals are largely output-oriented rather than outcome-oriented, and overall do not demonstrate the effectiveness of the Commission's training and technical assistance efforts. Specifically, 12 of the 18 performance measures for these two goals include output-oriented measures describing the types of products or services delivered by the Commission. For example, they include the number of audits and site visits conducted and the number of training events and participants attending these training events. In prior work, we found that these types of measures do not fully provide agencies with the kind of information they need to determine how training and development efforts contribute to improved performance, reduced costs, or a greater capacity to meet new and emerging transformation challenges. In that work, we concluded that it is important for agencies to develop and use outcome-oriented performance measures to ensure accountability and assess progress toward achieving results aligned with the agency's mission and goals. This is consistent with Office of Management and Budget guidance, which encourages agencies to use outcome performance measures--those that indicate progress toward achieving the intended result of a program-- where feasible. The Commission's remaining 6 measures include outcome-oriented measures that track tribes' compliance with specific requirements, including the percentage of gaming operations that submit audit reports on time and have a Chair-approved tribal gaming ordinance. They do not, however, indicate the extent to which minimum internal control standards are implemented or reflect improvements in the overall management of Indian gaming operations. In addition, they do not correlate such compliance with the Commission's training and technical assistance efforts. Additional outcome-oriented performance measures would enable the Commission to better assess the effectiveness of its training and technical assistance efforts and its ACE initiative. Commission officials told us that they recognize they have more work to do on performance measures and are interested in taking steps to ensure that their ACE initiative is meeting its intended goals. In our June 2015 report,recommended that the Commission review and revise, as needed, its performance measures to include additional outcome-oriented measures. In its comments on our draft report, the Commission concurred with our recommendation. The Commission amended its regulations in August 2012 to formalize an existing practice of sending letters of concern to prompt tribes to voluntarily resolve potential compliance issues. A letter of concern outlines Commission concerns about a potential compliance issue and, according to Commission regulations, is not a prerequisite to an enforcement action.concern specify a time period by which a recipient must respond but do Commission regulations require that letters of not address which compliance issues merit a letter of concern or indicate when a letter should be sent once a potential compliance issue is discovered. The Commission also has not issued guidance or documented procedures on how to implement its regulation regarding letters of concern. In our review of letters of concern sent by the Commission in fiscal years 2013 and 2014, we found that the Commission sent 16 letters of concern to 14 tribes. Six of the 16 letters of concern did not include a time period by which the recipient was to respond, as required by Commission regulations. In addition, 12 letters did not specify in the subject line, or elsewhere in the letter, that they were letters of concern. By not including a time period for a response as required by Commission regulations and not consistently identifying its correspondence as a letter of concern, the Commission may not be able to ensure timely responses, and tribes may find it difficult to discern the significance of these letters. In addition, the Commission provided us with documentation to demonstrate whether a tribe took action to address the issues described in 8 letters of concern, but it did not provide documentation for the remaining 8 letters. Under federal internal control standards, federal agencies are to clearly document transactions and other significant events, and that documentation should be readily available for examination. Without guidance or documented procedures to inform its staff about how to complete letters of concern or maintain documentation tracking tribal actions, the Commission cannot ensure consistency in the letters that it sends to tribes, and it may be difficult to measure the effectiveness of the letters in encouraging tribal actions to address potential issues. As a result of these findings, we recommended and in its comment letter the Commission in our June 2015 report,generally agreed, that the Commission should develop documented procedures and guidance for letters of concern to (1) clearly identify letters of concern as such and to specify the type of information to be contained in them, such as time periods for a response; and (2) maintain and track tribes' responses to the Commission on potential compliance issues. IGRA authorizes the Commission Chair to take enforcement actions for violations of IGRA and applicable Commission regulations for both class II and class III gaming. Specifically, the Commission Chair may issue a notice of violation or a civil fine assessment for violations of IGRA, Commission regulations, or tribal ordinances and, for a substantial violation, a temporary closure order. The most common enforcement action taken by the Commission Chair in fiscal years 2005 through 2014 was a notice of violation. The Chair issued 107 notices of violations that cited 119 violations during this period. We found that the Chair issued 100 out of 107 notices of violation prior to fiscal year 2010. Since fiscal year 2010, fewer enforcement actions may have been taken because recent Commission chairs have emphasized seeking voluntary compliance with IGRA. Chairman Barrasso, Vice Chairman Tester, and Members of the Committee, this completes my prepared statement. I would be pleased to answer 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 statement. Other individuals who made key contributions to this testimony include Jeff Malcolm (Assistant Director), Cheryl Arvidson, Amy Bush, Jillian Cohen, John Delicath, Justin Fisher, Paul Kazemersky, Dan Royer, Jeanette Soares, Kiki Theodoropoulos, Swati Sheladia Thomas, and Lisa Turner. 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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Over the past 25 years, Indian gaming has become a significant source of revenue for many tribes, reaching $28 billion in fiscal year 2013. IGRA, the primary federal statute governing Indian gaming, provides a statutory basis for the regulation of Indian gaming. Tribes, states, Interior, and the Commission have varying roles in Indian gaming. This testimony highlights the key findings of GAO's June 2015 report ( GAO-15-355 ). Accordingly, it addresses (1) Interior's review process to help ensure that tribal-state compacts comply with IGRA; (2) how states and selected tribes regulate Indian gaming; (3) the Commission's authority to regulate Indian gaming; and (4) the Commission's efforts to ensure tribes' compliance with IGRA and Commission regulations. For the June 2015 report, GAO analyzed compacts and Commission data on training, compliance, and enforcement; and interviewed officials from Interior, the Commission, states with Indian gaming, and 12 tribes in six states GAO visited based on geography and gaming revenues generated. In its June 2015 report, GAO found that the Department of the Interior (Interior) has a multistep review process to help ensure that compacts--agreements between a tribe and state that govern the conduct of the tribe's class III (or casino) gaming--comply with the Indian Gaming Regulatory Act (IGRA). From 1998 through fiscal year 2014, Interior approved 78 percent of compacts; Interior did not act to approve or disapprove 12 percent; and the other 10 percent were disapproved, withdrawn, or returned. GAO also found that states and selected tribes regulate Indian gaming in accordance with their roles and responsibilities established in tribal-state compacts for class III gaming, and tribal gaming ordinances, which provide the general framework for day-to-day regulation of class II (or bingo) and class III gaming. In addition, the 24 states with class III Indian gaming operations vary in their approaches for regulating Indian gaming, from active (e.g., daily or weekly on-site monitoring) to limited (e.g., no regular monitoring). Further, all 12 selected tribes GAO visited had regulatory agencies responsible for the day-to-day operation of their gaming operations. In GAO's June 2015 report, GAO found that the National Indian Gaming Commission (Commission)--an independent agency within Interior created by IGRA--has authority to regulate class II gaming, but not class III gaming, by issuing and enforcing gaming standards. The Commission is considering issuing guidance with class III standards that may be used voluntarily by tribes and has held consultation meetings to obtain tribal input. However, in June 2015, GAO found the Commission does not have a clear plan for conducting outreach to affected states on its proposal. Federal internal control standards call for managers to obtain information from external stakeholders that may have a significant impact on the agency achieving its goals. Along with tribes, state input could aid the Commission in making an informed decision. Even with differences in its authority for class II and class III gaming, GAO found that the Commission helps ensure that tribes comply with IGRA and applicable federal and tribal regulations through various activities, including monitoring gaming operations during site visits to Indian gaming operations and Commission-led audits. In addition, since 2011, the Commission has emphasized efforts that encourage voluntary compliance with regulations, including providing training and technical assistance and alerting tribes of potential compliance issues using letters of concern. However, the effectiveness of these two approaches is unclear. GAO found in June 2015 that the Commission had a limited number of performance measures that assess outcomes achieved. With such additional measures, the Commission would be better positioned to assess the effectiveness of its training and technical assistance. Further, GAO found the Commission does not have documented procedures, consistent with federal internal control standards, about how to complete or track letters of concern to help ensure their effectiveness in encouraging tribal actions to address identified potential compliance issues. Without documented procedures, the Commission cannot ensure consistency or effectiveness of the letters it sends. In its June 2015 report, GAO recommended that the Commission: (1) obtain input from states on its plans to issue guidance on class III minimum internal control standards; (2) review and revise, as needed, its performance measures to better assess its training and technical assistance efforts; and (3) develop documented procedures and guidance to improve the use of letters of concern. The Commission generally agreed with GAO's recommendations.
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As we reported in 2000, commercial activities in school can generally be classified in four categories--product sales, direct advertising, indirect advertising, and market research--although each category encompasses a wide range of activities. For example, advertising activities could range from selling advertisements for a high school football game to selling naming rights to a school. Although this report synthesizes statutes, regulations, and proposed legislation addressing all four categories, our discussions of school district policies and Education's activities focus on the fourth category, market research, because of the amendments made by NCLBA that place requirements on districts that deal with the collection, disclosure, and use of student data for marketing and selling. (See table 1.) In recent years, the growth of the Internet has had a large impact on commercial activities, particularly market research, by enabling marketers to elicit aggregated and personally identifiable information directly from large numbers of students. For example, some Web filtering systems used in schools that block student access to certain Web sites also allow the company that maintains that software to measure and analyze how children use the Internet by tracking which Web sites they visit and how long they stay there. Although this information is aggregated and does not identify particular children, this information, especially when used with demographic data, can help businesses develop advertising plans that target particular audiences if districts allow the installation of the software. Also, Web sites directly elicit the participation of students in market research panels by offering them cash or prizes in exchange for information about themselves and their preferences. This makes it possible for companies to engage large-scale customized panels of students to test out marketing strategies and provide data to develop product lines and product loyalty without relying on schools. NCLBA addresses some concerns about commercial activities and student data by amending and expanding certain student data safeguards that were established in PPRA. Prior to NCLBA, PPRA generally prohibited requiring students to submit to a survey concerning certain personal issues without prior written parental consent. As amended, PPRA for the first time requires districts to develop and adopt new policies, in consultation with parents, for collecting, disclosing, and using student data for marketing or selling purposes. Districts are also required to directly notify parents of these policies and provide parents an opportunity to opt their child out of participation in such activities. Furthermore, districts are required to notify parents of specific activities involving the collection, disclosure, and use of student information for marketing or selling purposes and to provide parents with an opportunity to review the collection instruments. PPRA did not contain deadlines for districts to develop policies. Also, PPRA requires Education to annually inform each state education agency and local school districts of their new obligations under PPRA. Finally, PPRA continues to require Education to investigate, process, and adjudicate violations of the section. For the past 30 years, student and parent privacy rights related to students' education records have been protected primarily under the Family Educational Rights and Privacy Act (FERPA), which was passed in 1974. FERPA protects the privacy of students' education records by generally requiring written permission from parents before records are released. FERPA also allows districts to classify categories of information as publicly releasable directory information so long as the district has provided public notice of what will constitute directory information items and has allowed parents a reasonable period of time to advise the district that directory information pertaining to their child cannot be released without consent. Under FERPA, directory information may include a student's name, telephone number, place and date of birth, honors and awards, and athletic statistics. Unlike PPRA, FERPA does not address the participation of students in surveys or the collection, disclosure, or use of student data for marketing or selling purposes. (See table 2.) As a result of the NCLBA amendments, Education is required to annually inform each state and local education agency of the educational agency's obligations on PPRA and FERPA. State education laws are enacted by state legislatures and administered by each state's department of education, which is led by the state's chief state school officer. The Council of Chief State School Officers represents states' education interests in Washington, D.C., and acts as a conduit of information between the federal government and the states regarding federal education laws. Each state department of education provides guidance and regulations on state education laws to each school district. School district policies are generally set by local school boards according to the authority granted to them by state legislatures. The policies are then administered by the school district's superintendent and other school district staff. Local school boards in each state have come together to form a state school boards association. They provide a variety of services to their members including help on keeping their local school board policies current. For example, a partial list of services offered by one school board association includes policy development services, advocacy, legislative updates, legal services, executive search services, conferences and training, and business and risk management services. Since 2000, 13 states have established statutes, regulations, or both that address one or several categories of commercial activities in schools. Six of these states established provisions addressing market research by restricting the use of student data for commercial activities and for surveys. Other states passed statutes or issued regulations addressing product sales and advertising. In addition, as of February 2004, at least 25 states are considering proposed legislation that would affect commercial activities. Most of these proposals would affect product sales, particularly the sale of food and beverages. Prior to 2000, 28 states had passed provisions addressing commercial activities. At that time, most provisions addressed direct advertising and product sales. The seven districts we visited in 2000 continued to conduct a variety of commercial activities, particularly product sales, and three districts reported that they have increased the level of activities with local businesses. However, the types of activities in these districts have not substantially changed since our visit. Since our previous report in 2000, 13 states have enacted 15 statutory provisions and issued 3 regulatory provisions addressing one or more types of commercial activities in schools. Six states passed legislation affecting marketing research. Three of these 6 passed laws restricting the disclosure or use of student data for commercial purposes, and another 3 placed restrictions on students' participation in surveys. For example, an Illinois statute prohibited the disclosure of student data to businesses issuing credit or debit cards, and a New Mexico regulation prohibited the sale of student data for commercial reasons without the consent of the student's parent. Laws in Arizona, Arkansas, and Colorado prohibited student participation in surveys without the consent of their parents. Five states passed new provisions affecting product sales. In most cases, these laws targeted the sale of soft drinks and snack food. Other new provisions addressed direct and indirect advertising. Prior to 2000, 28 states had established one or more statutes or regulations that affected commercial activities in schools. Twenty-five states established provisions addressing advertising--in 19 states, measures affected direct advertising and in 6, indirect advertising. Sixteen states established provisions addressing product sales. Only 1 state established a measure that addressed market research. See appendix II for a state-by- state listing of provisions addressing commercial activities. Legislatures in 25 states have recently considered one or more bills that affect commercial activities in schools, with most having a particular focus on child nutrition. These bills are intended to improve child nutrition and reduce obesity, and to achieve this intention, place limitations, restrictions, or disincentives on the sale of beverages and food of limited nutritional value. Legislatures in 24 of the 25 states recently considered bills that restrict or ban the sale of beverages and food of limited nutritional value in schools. For example, a bill in New York would prohibit vending machines from selling food and drinks of minimal nutritional value. Additionally, legislatures in several states have considered bills that restrict the hours when students can buy products of limited nutritional value. For example, bills in Alaska and Ohio would restrict the sale of soft drinks during certain hours. Finally, pending legislation in Maryland would require schools to sell food of limited nutritional value at higher prices than nutritious food. Legislatures in seven states have recently proposed bills that focus on other aspects of commercial activities in schools. In three states-- Connecticut, Minnesota, and North Carolina--bills would restrict the ability of schools to enter into exclusive contracts with beverage and food venders. In two statesNew Jersey and North Carolinabills would place limits on the ability of schools to release or collect personal information about students, such as prohibiting the release of data from the student- testing program to any marketing organization without the written permission of the parent or guardian. Other proposed bills addressed a variety of issues, such as allowing schools to sell advertising and accept supplies bearing logos or other corporate images or requiring school boards to disclose the portion of proceeds from fundraising activities that is contributed to the school activity fund. See appendix III for a state-by- state listing of legislative proposals. In updating the site visit information we collected in 2000, we found only slight changes in commercial activities in all seven school districts. All districts reported they continued to engage in product sales and display advertising. As we found earlier, most commercial activities, particularly product sales and advertising, occurred in high schools. All the high schools we visited in 2000 still sold soft drinks, and most sold snack or fast food. To varying degrees, all displayed corporate advertising. High schools continued to report the receipt of unsolicited samples, such as toiletries, gum, razors, and candy, that they did not distribute to students. In contrast, the elementary schools we contacted did not sell carbonated soft drinks to students or display corporate advertising. Grocery and department store rebate programs continued to operate in almost all schools, but coupon redemption programs were largely an elementary school enterprise. As we found before, none of the districts reported using corporate-sponsored educational materials or engaging in market research for commercial purposes. Officials did report some changes in commercial activities. Three of these districts reported stronger ties with local businesses, and three schools in two districts reported they now sell healthier soft drinks. One district reported a new relationship with a computer firm headquartered in its area that provided tutors as well as cash donations to schools in the district. Under this relationship, company employees tutored students who were at risk of failing, and the company donated $20 to schools for each 10 hours of tutoring that its employees provided. A principal in this district reported that many students in her school benefit substantially from this relationship and her school earned between $6,000 and $9,000 per year in donations. Another district reported it had entered into a new contract with a local advertising agency to raise revenue to renovate sport concession stands, and a third had organized a new effort to sell advertisements to fund construction on the district's baseball field. Three principals told us that vending machines in their schools now offer a different mix of beverages--for example, more juice, milk, and water and fewer carbonated beverages--than they did when we visited in 2000. We estimate that about two-thirds of the districts in the nation were either developing or had developed policies addressing the new provisions on the use of student data for commercial purposes. However, only 19 of the 61 districts that provided us copies of their policies specifically addressed these provisions. Very few school districts reported releasing student data for marketing and selling, and all these releases were for student-related purposes. Of the seven districts we visited in 2000, three adopted new policies on the use of student data since our visit, and only one released data and that was for graduation pictures. Although districts reported they had developed policies, many of the policies they sent us did not fully address PPRA requirements. On the basis of the results of our surveys, we estimate about a third of districts were developing policies regarding the use of student data for commercial purposes; another third had developed policies; and about another third had not yet developed policies. However, when we analyzed policies that 61 districts sent to us, we found only 19 had policies that specifically addressed marketing and selling of student information. Of these, 11 policies addressed the collection, release, and use of student information for commercial purposes. Eight policies partially addressed the provisions by prohibiting the release of student data for these purposes. Policies in the 42 remaining districts did not address the new PPRA provisions. Many of these districts provided us policies concerning FERPA requirements. We telephoned all districts in our sample that reported they release data for commercial purposes and a subsample of districts that reported they had not. Of the 17 districts that released data for commercial purposes, all reported that they released data only for school-related purposes. For example, all 17 released students' names to photographers for graduation or class pictures. Two of these districts also released student data to vendors who supplied graduation announcements, class rings, and other graduation-related products, and another two districts released student information to parent-teacher organization officials who produced school directories that they sold to students' parents. Of the 16 districts that reported they did not release student data, one actually did release student data. As in the other cases, that district released it to a school photographer. Of the seven districts we visited in 2000, three adopted new policies on the use of student data. One of the districts we visited adopted new policies that incorporated PPRA provisions on the use of student data for commercial purposes. Two adopted policies with blanket prohibitions against some uses of student data for marketing and selling. In one of these districts, policies prohibited the release of students' data for any survey, marketing activity, or solicitation, and policies in the other banned the use of students to support any commercial activity. Officials in all seven districts reported that their district did not collect student data for marketing or selling purposes, and several expressed surprise or disbelief that this practice did in fact occur. However, a high school in one district reported that it disclosed information on seniors to vendors selected by the district to sell senior pictures, school rings, and graduation announcements. As required by NCLBA, Education has developed guidance and notified every school district superintendent and chief state school officer in the country of the new required student information protections and policies, and has charged the Family Policy Compliance Office to hear complaints on PPRA. Education issued guidance about the collection, disclosure, and use of student data for commercial purposes as part of its general guidance on FERPA and PPRA in 2003 and 2004. In addition, although not required by statute to do so, Education provided superintendents with model notification information that districts could use to inform parents of their rights, included information about PPRA in some of its training activities, and posted its guidance and other PPRA-related material prominently on its Web site. Education has charged its Family Policy Compliance Office to hear complaints and otherwise help districts implement the new student data requirements. Although the office has received some complaints about other provisions related to student privacy, as of June 2004, officials from that office reported they have received no complaints regarding the commercial uses of student data. Many districts did not appear to understand the new requirements, as shown by our analysis of the 61 policies sent to us by districts in our sample. Although we asked districts to send us their policies that addressed these new provisions, only 11 districts sent policies that addressed these new provisions comprehensively, and 8 sent policies that covered these provisions partially. The 42 remaining districts sent policies that did not contain specific language addressing the collection, release, or use of student data for commercial purposes, although districts sent them to us as documentation that the districts had developed such policies. Most of these policies contained only general prohibitions about the release of student records and concerned FERPA. Although Education is not required to issue its guidance to state school boards associations, four districts in two states in our survey offered unsolicited information that they relied on state school boards associations to develop policies for their consideration and adoption. Two districts in a third state that sent us policies used policies developed by their state school boards association to address commercial activities in schools. However, Education did not distribute its guidance to these associations. Although state laws both limit and support commercial activities in schools, many state legislatures have chosen to pass laws addressing only specific activities such as permitting or restricting advertising on school buses. In addition, many states have not enacted legislation concerning commercial activities or have passed the authority to regulate these activities to local districts, thus allowing district school boards, superintendents, or principals to determine the nature and extent of commercial activities at the local level. Not only do commercial activitiesproduct sales, direct advertising, indirect advertising, and market researchencompass a broad spectrum of activities, but also the levels of these activities and the levels of controversy attached to them vary substantially. For example, few would equate selling advertisements for a high school football program with selling the naming rights to a school, although both are examples of direct advertising. Because of these differences, as well as philosophical differences among districts and communities, it is probably not surprising that states legislatures have taken various approaches toward the regulation of commercial activities. Perhaps because providing student information for commercial purposes may have serious implications, few districts do so. In fact, some school officials said they were skeptical that schools would allow the use of student data for this purpose. In the past, marketers may have approached schools to survey students about commercial products or services. Today, however, technology, particularly the proliferation and availability of the Internet, provides marketers with quick and inexpensive access to very large numbers of children without involving the cooperation of schools. As Internet users, children often submit information about themselves and their personal product preferences in exchange for cash or prizes. Because of the disinclination of school officials to sell student data and the ability of marketers to get data directly from students without involving schools, it may be understandable that relatively few districts as yet have actually adopted policies that specifically address the selling and marketing provisions of PPRA. On the other hand, few would argue against the need to protect students' personal information. Many businesses, particularly local businesses catering to youth markets, might still profit from acquiring student information from schools. Although we found districts did not use student data for purposes generally viewed as offensive, this does not mean such use would not happen in the future in the absence of safeguards. It appears that some superintendents may not be aware of the new PPRA requirements or have not understood Education's guidance because many thought their district's policies reflected the latest federal requirements on use of student data when, in fact, they did not. Also, several districts told us that they relied on state school boards associations to develop policies. Unlike models or guidance that reflect only federal law, policies developed by these groups may be most useful to districts because they correspond to both federal and state requirements. These associations are not on Education's guidance dissemination list. We recommend that the Secretary of Education take additional action to assist districts in understanding that they are required to have specific policies in place for the collection, disclosure, and use of student information for marketing and selling purposes by disseminating its guidance to state school boards associations. We provided a draft of this report to the Department of Education for review and comment. Education concurred with our recommendation. Education's comments are reproduced in appendix V. Education also provided technical comments, which were incorporated as appropriate. Unless you publicly announce its contents earlier, we plan no further distribution until 30 days after the date of this letter. At that time, we will send copies of this report to the Secretary of Education, appropriate congressional committees, and others who are interested. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions, or wish to discuss this material further, please call me on (202) 512-7215. Other contacts and staff acknowledgments are listed in appendix VI. To conduct our work, we reviewed state statutes, regulations, and proposed legislation; received mail questionnaires from 219 school districts selected on the basis of a national stratified probability sample design; conducted additional brief telephone interviews with 36 of these districts; analyzed policies voluntarily provided by 61 districts; interviewed officials at Education; and examined guidance issued by the department. In addition, we conducted telephone interviews with district and school officials in the 7 districts that we visited in 2000 for our previous study on commercial activities in schools to update our previous findings. To update our compilation of state statutes and regulation contained in our 2000 report, we researched legal databases, including Westlaw and Lexis, to identify laws passed between January 2000 and May 2004. To identify pending laws, we researched information available on databases maintained by state legislatures or followed links provided by these databases to identify bills introduced between January 2003 and February 2004. However, there are inherent limitations in any global legal search, particularly when--as is the case here--different states use different terms or classifications to refer to commercial activities in schools. We selected a national probability sample of districts, taken from school districts contained in the Department of Education's Common Core of Data (CCD) Local Education Agency (LEA) file for the 2000-2001 school year. After removing districts from this list that were administered by state or federal authorities, we identified a population of 14,553 school districts. In the course of our study, we learned that some special education and other units in this list do not have legal authority to establish formal policies. As a result, we estimate that our study population consists of 13,866 districts in the 50 states and the District of Columbia. The sample design for the survey consisted of a stratified random probability sample design: 271 districts were drawn from the three strata shown in table 3. The strata were designed to draw relatively large numbers of districts from states likely to include districts that had engaged in or planned to engage in one or more specific activities involving the collection, disclosure, or use of student information for the purposes of marketing or selling or providing information to others for these purposes. Because we thought the activities of interest were low incidence activities, we wanted to maximize our ability to examine situations involving the use of student data for commercial purposes. The expected high-activity strata were defined as states that we identified as having laws that permitted commercial activities when we performed our work in 2000. As shown in table 4, the response rates were 76 percent, 83 percent, and 88 percent in the three sampling strata. The overall estimated response rate was 87 percent. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample might have provided different estimates, we express our confidence in the precision of our particular sample's results as a 95 percent confidence interval (for example, plus or minus 9 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. The practical difficulties of conducting any survey introduce nonsampling errors. For example, errors could be made in keying questionnaire data, some people may be more likely than others to respond, or questions may be misinterpreted. To minimize data-handling errors, data entry and programs were independently verified. To reduce the possibility of misinterpreting questions, we pretested the questionnaire in four districts. The full questionnaire is reproduced in appendix IV. We took additional steps to check answers for a subsample of respondents because of concerns about misinterpretation. We were concerned about possible misinterpretation of a question about implementing the law (question 1) because we discovered during our pretest that there was confusion between a narrow and (probably) little used portion of a student privacy law (PPRA) regarding selling and marketing of student data and a more familiar older law (FERPA) concerning student records. We were also concerned that there could be an underreporting of commercial activities because our question did not specify the activities ("During school year 2003-2004, did your LEA, or any school in your LEA, engage or plan to engage in one or more activity regarding the collection, disclosure, or use of student information for the purposes of marketing or selling or providing the information to others for these purposes?") and because very few schools reported using student information for commercial purposes. Further, our pretesting indicated a potential problem with respondents suggesting they would be hesitant to report commercial activities. Moreover, because 86 percent of our respondents answered "no" to question 2, a higher rate than expected, there was some question in our minds whether our respondents who answered no had really considered all the possible ways in which student information could be used for commercial purposes when formulating their answers. We attempted to verify the answers to our question about commercial practices by telephoning 36 districts, the 20 districts that reported using student data for commercial purposes, and the 16 randomly selected districts from among the districts that reported not using student data for commercial purposes. Three of the 20 districts originally reporting the use of student data were found not to be using the data for commercial purposes because they were supplying the data to military organizations or for scholarships, allowed uses. For the 16 sampled districts reporting not using students' data for commercial purposes, we asked the superintendent or other knowledgeable person in the district detailed questions about 20 possible commercial activities. We asked whether the school provides student addresses or phone numbers for specific activities (student pictures, letter jackets, any types of school uniforms, yearbooks, class rings, tuxedo rentals for prom, corsages for prom, musical instrument rentals, caps and gowns for commencement, preparation for Scholastic Aptitude Test or other tests, any other type of tutoring, transportation for school field trips, or travel for other trips such as spring break or ski trips), or to outside organizations for students to serve on an Internet or study panel, answer questionnaires, test or try out a product, or receive mailings from or talk with representatives of outside organizations who are selling services or products. One of these 16 districts was found to be using the data for commercial purposes in connection with photographers for school pictures. As a result of these telephone calls, we corrected the three incorrect records but did not make further adjustments for districts that were not contacted. We attempted to verify the answers about the development of policies by examining policies that were voluntarily submitted by districts in our sample. Sixty-one districts complied with our request to submit a copy of their policy. We analyzed these policies to determine if they specifically referred to marketing or commercial activities. We found 11 districts submitted policies that addressed these provisions and an additional 8 submitted policies that partially addressed the provisions in that they prohibited the release of student data for commercial purposes but did not address the collection or use of such data. Therefore, our questionnaire gathered relevant data about districts' perceptions of the extent to which they thought they were implementing the provision, rather than the extent to which these policies actually did so. This probably reflects confusion in interpreting the provision or lack of awareness of its existence. We interviewed officials at Education's Family Policy Compliance Office and the Office of the General Counsel. We examined in detail the guidance issued by the department to assist schools in implementing PPRA provisions on use of student data for marketing and selling purposes. We conducted telephone interviews with district and school officials in the seven districts we visited to collect information for Public Education: Commercial Activities in Schools (GAO-00-156), a report we issued in 2000, to discern changes in commercial activities in these districts. (See table 5.) We selected these districts because they engaged in a variety of commercial activities, served diverse populations--ranging from large numbers of poor students to children from affluent families--and varied in terms of geography and urbanicity. In updating that information for this report, we interviewed district-level officials, including superintendents and business managers, and elementary, middle school, and high school principals. This appendix lists state statutory and regulatory provisions relating to commercial activities as of May 2004. Shaded entries were enacted since 2000. This updated table identifies 15 new statutes and 3 new regulations and also includes state laws pertaining to the sale of competitive food in schools. In addition, the table includes several laws that were not identified in our previous report. Requires school committee to establish a travel policy that addresses expectations for fundraising by students . This appendix lists proposals addressing commercial activities in schools that have been introduced by some state legislatures between January 2003 and February 2004. The data are taken from the Web sites maintained by state legislatures. Many of these sites are revised only periodically, and information on some is limited to the current legislative session. Therefore this information should be viewed as a rough snapshot, rather than a comprehensive analysis. Would establish nutrition standards for beverages sold to students in public schools Would require food and drink items in public school vending machines to comply with board of education standards standards for vending machine food and drink items vending machines that are not within the cafeteria to be used exclusively for physical education and nutrition education and candy from being dispensed to students by school vending machines. In addition to those names above, the following people made significant contributions to this report: Susan Bernstein, Carolyn Blocker, Richard Burkard, Jim Fields, Behn Kelly, James Rebbe, and Jay Smale.
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Congress has continuing interest in commercial activities in U.S. public schools. These include product sales, advertising, market research, and the commercial use of personal data about students (such as names, addresses, and telephone numbers) by schools. To update information about commercial activities in schools, Congress asked us to answer the following questions: (1) Since 2000, what statutes and regulations have states enacted and proposed to govern commercial activities in schools? (2) To what extent have districts developed policies implementing amended provisions of the Protection of Pupil Rights Amendment (PPRA) in the No Child Left Behind Act on the use of student data for commercial purposes? (3) What guidance has the Department of Education (Education) disseminated? To answer these questions, we researched state laws, surveyed a national sample of school districts, analyzed policies provided by districts, interviewed officials at Education, and examined its guidance. In addition, we updated findings from the districts we visited in 2000. Since we reported on commercial activities in 2000, 13 states have established laws addressing commercial activities in public schools, and at least 25 states are considering such legislation. Of the states establishing new laws, 6 established laws affecting market research by addressing the use of student data for commercial activities. Almost all of the proposed bills target the sale of food and beverages. Prior to 2000, 28 states established laws addressing commercial activities, particularly product sales and advertising. At that time, only 1 state passed a provision affecting market research. PPRA provisions required districts to implement policies on the collection, disclosure, or use of student data for marketing and selling purposes, and we estimate that about two-thirds of the districts in the nation believe they are developing or have developed such policies. However, of the 61 districts that sent us policies, only 19 policies addressed these issues. No district reported having collected student data for commercial purposes. Only a few reported disclosing student information for these purposes, and all had done so for school-related purposes such as graduation pictures. Education has undertaken several activities, such as sending guidance to state education agencies and school district superintendents and posting information on its Web page, to inform districts about the student information provisions of PPRA, but many districts appear not to understand the new requirements. Some districts told us that they relied on their state school boards association to develop policies for them because state school boards associations address federal and state laws. School districts in one state sent us policies that addressed commercial activities that had been developed by their state school boards association. Education was not required to disseminate guidance to associations of local school boards in each state and has not done so.
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Under the Medicare inpatient PPS, hospitals receive a fixed, predetermined payment for each hospital stay. The payment is based on standardized amounts that are calculated separately for hospitals in large metropolitan areas (with populations of 1 million or more) and for hospitals in smaller metropolitan and nonmetropolitan areas. The standardized amounts are the average cost of hospital stays for Medicare beneficiaries based on historical data and are updated annually for inflation. For 2001, the standardized amount for hospitals in large metropolitan areas was $4,028 and for hospitals in other areas it was $3,965. To determine a hospital's payment for a Medicare beneficiary's stay, the standardized amount is adjusted to account for variation in the cost of providing care to specific patients in specific locations. The labor cost adjustment accounts for geographic variation in hospitals' labor costs, because the wages hospitals must pay employees vary significantly by area. The portion of the standardized amount (71 percent) that reflects labor-related expenses is multiplied by the area wage index. The remaining portion of the standardized amount (29 percent) is not adjusted. This part of the payment--which covers drugs, medical supplies, utilities, and other nonlabor-related expenses--is uniform nationwide because prices for these items are not perceived as varying significantly from area to area. The case-mix adjustment accounts for differences in resource requirements across types of patients. It is based on the expected care needs of the patient as measured by the diagnosis-related group (DRG) patient classification system. Additional payments are made under PPS to compensate hospitals for costs they incur in performing certain missions beyond caring for individual patients. Teaching hospitals receive additional payments from Medicare to account for costs associated with training medical residents. Hospitals that serve a disproportionate share of low-income Medicare and Medicaid patients also receive additional Medicare payments. The combination of all these adjustments and additional payments may result in widely varying per-stay payments across different types of hospitals or geographic areas. The Medicare labor cost adjustment is based on a wage index that is computed for each of 324 metropolitan and 49 statewide nonmetropolitan areas using data that hospitals submit to Medicare. The wage index for an area is the ratio of the average hourly hospital wage in the area compared to the national average hourly hospital wage. The average hourly wage is calculated for each area by aggregating Medicare-allowable wages for all the hospitals in the area and then dividing that sum by the corresponding staff hours. The area's average hourly wage is then divided by the national average hourly wage to produce the area's wage index. For example, if the average hourly wage for all hospitals in a large metropolitan area was $22.59, the wage index for that large metropolitan area would be $22.59 divided by the national average hourly wage of $21.77, for a wage index of 1.04. The wage indexes ranged from roughly 0.74 to 1.5 in 2001. As currently calculated, the wage indexes vary because of geographic differences in wages paid and also because of variation in the mix of higher- and lower- skilled workers employed in an area, termed occupational mix. An area's average hourly wage can be higher than the national average if hospitals in an area employ more highly skilled (and thus more highly paid) workers and lower if an area's hospitals employ more lower- skilled workers than the national average. When one area's hospitals have a larger proportion of more skilled, higher wage staff than another area, the former's wage index will be higher, even if wage rates in both areas for staff with the same skills, such as registered nurses, are identical. While geographic differences in wages paid affect a hospital's labor costs but are largely beyond an individual hospital's ability to control, the mix of occupations employed in a hospital reflects managerial decisions. The Congress, in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), required the Secretary of Health and Human Services to collect data on hospitals' mix of employees and their corresponding wages and calculate wage indexes beginning October 1, 2004, that are adjusted for occupational mix. (For a more detailed discussion of the impact of occupational mix variation on the wage index, see app. II.) The Medicare program uses OMB's "metropolitan/nonmetropolitan" classification system to define its geographic areas for the labor cost adjustment. Each metropolitan statistical area (MSA) is defined as a metropolitan labor market and the residual area in each state is defined as a single, nonmetropolitan labor market. The current geographic areas will most likely change when MSA boundaries are updated in 2003 with population data from the most recent decennial census and revised standards for selecting counties for inclusion in an MSA. The Omnibus Budget Reconciliation Act of 1989 established an administrative process for geographic reclassification, in which hospitals meeting certain criteria can apply to be paid for Medicare inpatient hospital services as if they were located in another geographic area. Once reclassified, hospitals receive the higher labor cost adjustment and, where applicable, the large urban standardized amount. To reclassify, a hospital must submit an application to the MGCRB, which determines if the hospital meets the reclassification criteria (see fig. 1). The two standard criteria that individual hospitals must meet to reclassify for a higher wage index are intended to identify hospitals that have higher average wages than other hospitals in their area because they are competing for labor with hospitals in a different nearby area. The first criterion concerns the hospital's proximity to the higher wage "target" area. The proximity requirement is satisfied if the hospital is within a specified number of miles of the target area or if at least half of the hospital's employees reside in the target area. The second criterion pertains to the hospital's wages relative to the average wages in the target area. The wage criterion is satisfied if the hospital's wages are a specified amount higher than the average in its assigned area and its wages are comparable to the average wages in the target area. Wage index reclassifications are effective for 3 years. All hospitals in an urban county can reclassify as a group if together the hospitals meet certain criteria, as described in figure 2. Rural referral centers (RRC) and sole community hospitals (SCH) can reclassify by meeting less stringent criteria. These hospitals receive special treatment from Medicare because of their role in preserving access to care for beneficiaries in specified areas. RRCs are relatively large rural hospitals providing an array of services and treating patients from a wide geographic area. SCHs are small hospitals isolated from other hospitals by location, weather, or travel conditions. RRCs and SCHs do not have to meet the proximity criteria to reclassify. RRCs are also exempt from the requirement that their wages be higher than the average wages in their original area. Hospitals that have lost their RRC designation can continue to reclassify under these less stringent criteria. In 1992, the first year of reclassifications, 930 hospitals were reclassified under less restrictive criteria than those currently used. More than 75 percent of these hospitals were in nonmetropolitan areas. In the following year, almost 1,200 hospitals were reclassified (of which 69 percent were in nonmetropolitan areas). For 1994, HCFA established more restrictive criteria and the number of reclassified hospitals subsequently dropped by approximately 44 percent, to 667 (see fig. 3). From 1995 to 2002, wage index reclassifications became more predominant, increasing by an average of 6 percent annually, while standardized amount reclassifications fell by almost one-quarter. For 2002, 511 nonmetropolitan hospitals and 117 metropolitan hospitals were reclassified for Medicare payment purposes. Individual hospitals have also been reclassified through legislation. Recently, the BBRA reclassified all hospitals in 7 counties (this totaled 26 hospitals) for purposes of the wage index and the standardized amount. The geographic areas that Medicare uses for the labor cost adjustment include hospitals that pay wages that may be quite different from the average wage in the entire geographic area. Hospital wages within some Medicare geographic areas--either MSAs or states' nonmetropolitan areas--vary systematically across certain parts of the area or across types of communities. While wages paid by individual hospitals within a labor market may vary, the observed systematic variation suggests that some Medicare geographic areas include multiple labor markets. For example, the average wages of the hospitals in outlying counties of metropolitan areas usually are lower than the average wages for the entire metropolitan area's hospitals. As a result, the labor cost adjustment for hospitals in outlying counties of metropolitan areas is based on an average wage that is often higher than the wages paid by these hospitals. In contrast, the average wages paid by hospitals in large towns (nonmetropolitan communities with between 10,000 and 49,999 people) tend to be significantly higher than the average wage of all hospitals in nonmetropolitan areas in the state. Some MSAs are very large, encompassing a diverse mix of counties. Given the broad expanse of many large MSAs, the hospitals in the different parts of an MSA may not be directly competing with each other for the same pool of employees, and the wages they pay can vary greatly. The most populous MSAs typically cover a region of several thousand square miles (see table 1). Distances between points within an MSA can exceed 100 miles. For example, the Chicago MSA includes 8 counties and 5,065 square miles, and the distance from its northernmost to southernmost point is roughly 110 miles. Hospitals in central counties of an MSA typically paid higher wages than hospitals in outlying counties. In the most populous MSAs, average central county hospital wages ranged from 7 percent higher than outlying county wages in Houston to 38 percent higher in New York in 1997. In most of these MSAs, the average wage difference between central and outlying counties ranged from 11 to 18 percent. The Washington, D.C. MSA illustrates how hospital wages in a large MSA can vary across different counties (see fig. 4). It includes hospitals located in the central city of the District of Columbia, as well as 18 counties in Maryland, Virginia, and West Virginia. Hospital wages averaged more than $23 per hour in 1997 in the District of Columbia and in most of the adjacent suburban Maryland and Virginia counties, but averaged below $20 per hour in several outlying counties. One reason MSAs are so large is because they are composed of counties, which can also be quite expansive. As with MSAs, an individual county may subsume multiple labor markets within its boundaries. As an example, San Bernardino County, California extends over 150 miles--from the city limits of San Bernardino through the Mojave Desert to the Nevada border. While most of the population is concentrated in the southwest corner of the county, which includes the city of San Bernardino, even the sparsely populated desert and mountainous portions of the county are part of the MSA. As a result, a hospital in the desert community of Joshua Tree, California, receives the same labor cost adjustment as hospitals in the city of San Bernardino 70 miles away, even though hospital wages averaged $20.84 per hour in 1997 in Joshua Tree, 13 percent less than average wages paid in San Bernardino. The Medicare program groups hospitals in nonmetropolitan areas of each state into a single geographic area for the purposes of the labor cost adjustment. Given their vast size, each statewide nonmetropolitan area is not perceived to be a single labor market, but the same labor cost adjustment is applied to hospitals in these areas. However, there are significant differences in average wages across parts of these areas. For example, for all hospitals in the nonmetropolitan area of Washington state, Medicare payments for 2001 were adjusted based on an average wage of $22.71 per hour. Yet, nonmetropolitan hospitals in the western part of the state had average wages of $24.23 per hour. Wages for nonmetropolitan hospitals in the central and eastern parts of the state, however, averaged $21.15 per hour, or 13 percent lower than hospitals in the western part of the state. Other variation in average wages across the statewide nonmetropolitan areas is associated with the type of community. In three-quarters of all states, the average wages paid by hospitals in large towns are higher than those paid by hospitals in small towns or rural areas. As a result, the Medicare labor cost adjustment may be based on average wages that are below those paid by large town hospitals and above those paid by hospitals in small towns and rural areas. For example, the 2001 labor cost adjustment for hospitals in nonmetropolitan Nebraska was based on an average hourly wage of $17.65; yet, Nebraska hospitals in large towns paid an average wage of $19.54. At the same time, small town Nebraska hospitals paid an average of $16.83 and hospitals in rural areas paid an average of $14.87, or 5 and 16 percent lower, respectively, than the area average (see table 2). In 2001, 38 percent of hospitals in large towns paid wages that were at least 5 percent higher than the average wage in their area; 16 percent paid wages that were at least 10 percent higher than the area average. While reclassification results in more appropriate labor cost adjustments for some higher wage hospitals, the reclassification criteria prevent some of them from reclassifying and exceptions to the criteria allow some lower wage hospitals to do so. In 2001, 419 hospitals, less than 10 percent of all hospitals, reclassified to receive a larger labor cost adjustment. Most of these hospitals had average wages that were above their area's average by enough to meet the standard reclassification wage criterion. Higher wage hospitals in large towns are likelier to reclassify than higher wage hospitals in other community types because many of them are RRCs, which are exempt from the reclassification proximity criterion. Other higher wage hospitals in large towns and many higher wage hospitals in metropolitan areas, small towns, and rural areas cannot reclassify. About one-quarter of hospitals that reclassified had wages that were not high enough to satisfy the standard reclassification wage criterion. These were primarily RRCs. Generally, hospitals that reclassify but do not satisfy the standard wage criterion receive a post-reclassification labor cost adjustment that reflects average wage levels much higher than the wages they actually pay. For hospitals that meet the standard wage criterion, however, reclassification results in an adjustment that better matches their actual labor costs than did their original one. Of the 756 hospitals that paid wages sufficiently higher than their area average wage to meet the reclassification wage criteria, 310 (41 percent) were reclassified in 2001 (see table 3). Hospitals that met the wage criteria, but did not satisfy the proximity criterion, did not reclassify. Just over one- quarter of the higher wage hospitals were in large towns, yet large town hospitals made up almost half of the higher wage hospitals that reclassified. Metropolitan hospitals made up 42 percent of the higher wage hospitals, but comprised only 12 percent of the higher wage reclassified hospitals. Higher wage hospitals in large towns are likelier to reclassify than other higher wage hospitals because many are RRCs, and so are exempt from the proximity criterion. Close to half of the higher wage hospitals in small towns and rural areas reclassify. Almost 39 percent of the reclassified higher wage small town and rural hospitals were exempt from the proximity criterion because they were RRCs or SCHs. Some nonreclassified, higher wage small town or rural hospitals that were SCHs may have opted out of the PPS to receive cost-based payments from Medicare, making reclassification irrelevant. In 2001, only 38 of the 317 metropolitan hospitals with wages that were at least 8 percent higher than the average for their area, thus satisfying the standard wage criteria, reclassified to receive a higher labor cost adjustment. Nearly two-thirds of all reclassified metropolitan hospitals were in two areas--California and the northeast. Metropolitan areas in these two regions are contiguous, so higher wage hospitals may be more likely than hospitals in other areas to satisfy the proximity criterion. In 2001, 109 (about 25 percent) of all hospitals that reclassified for the Medicare labor cost adjustment paid wages that were too low to meet the standard wage criterion for reclassification. Of these, 89 were RRCs. Roughly 42 percent of these RRCs that reclassified had wage costs below the average in their area. Some of the hospitals that were reclassified in 2001 but that did not satisfy the standard wage criterion were part of countywide reclassifications. Others had been reclassified via legislation. The relationship between a hospital's wages and the average in its geographic area, before and after reclassification, depends on whether it was in a metropolitan or nonmetropolitan area and whether it satisfied the standard reclassification wage criterion (see table 4). Reclassification resulted in higher wage hospitals receiving a labor cost adjustment that more closely reflects the wages they actually paid. For example, prior to their reclassification, the higher wage metropolitan hospitals received a labor cost adjustment based on wages in their original area that averaged 10 percent lower than their own wages. After reclassification, the average wages paid by these hospitals did not differ from the average wages paid by the other hospitals in their area. Higher wage nonmetropolitan hospitals that reclassified joined areas with average wages about 4 percent higher than their own average wages. Before reclassification, the higher wage nonmetropolitan hospitals would have received a labor cost adjustment based on average wages that were much lower than what they actually paid. In contrast, reclassification resulted in hospitals that did not satisfy the standard wage criterion joining areas that, on average, had much higher average wages. Prior to reclassification, nonmetropolitan hospitals that did not satisfy the standard wage criterion paid wages near the average of their area. After reclassification, they received a labor cost adjustment based on wages that averaged 8 percent above their own average wages. While geographic reclassification increases the labor cost adjustment, and thus Medicare payments, to hospitals that reclassify, it does not raise total Medicare outlays because any payment increases must be offset by an across-the-board reduction to Medicare payments for all hospitals. In 2002, this budget neutrality adjustment reduced Medicare payments to nonreclassified metropolitan hospitals by about 1 percent and to nonreclassified nonmetropolitan hospitals by about 0.6 percent. If the budget neutrality adjustment were calculated and applied on a state- specific basis, the payment reductions would be different in each state. A state-specific budget neutrality adjustment would reduce payments more in some states and less in other states than the national adjustment. In states in which overall Medicare hospital payments increase more than the national average increase due to reclassification, a state-specific option would result in a bigger payment reduction. A state-specific adjustment would reduce payments less in states in which hospitals do not benefit as much from geographic reclassification as the average. Hospital payments would not be reduced in states that have no reclassified hospitals under a state-specific budget neutrality option. To meet the budget neutrality requirement, CMS annually calculates the increase in Medicare payments to reclassified hospitals. This increase is due to the use of a higher wage index or standardized amount, or both. CMS then calculates how much the standardized amount--the fixed, predetermined hospital payment--needs to be reduced so that total Medicare outlays for hospital services do not change because of reclassification. In 2002, Medicare payments to nonreclassified metropolitan hospitals were about 1 percent lower due to the budget neutrality provision than they would have been in the absence of any geographic reclassifications (see table 5). Payments to nonreclassified nonmetropolitan hospitals were about 0.6 percent lower. The effect of the budget neutrality adjustment on hospital payments varies annually depending on how much Medicare payments are increased due to hospitals being reclassified, compared to total Medicare payments to all hospitals. The budget neutrality adjustment will be higher in those years where reclassified hospitals account for a greater share of Medicare payments. A state-specific adjustment would reduce payments less than a national adjustment in states where reclassified hospitals account for a smaller share of the state's Medicare inpatient hospital spending than the national average. For example, in Colorado, where 3 of 64 hospitals were reclassified in 2000, a state-specific budget neutrality adjustment would have reduced hospital payments by only 0.07 percent, compared to a 0.6 percent reduction under the national budget neutrality calculation. For the states that have no hospitals reclassifying, such as Nevada, there would be no budget neutrality adjustment under a state-specific approach. Conversely, a state-specific adjustment would reduce Medicare payments more than a national one in states where reclassified hospitals account for a larger share of Medicare inpatient hospital spending than the national average. In New Hampshire, for example, where a large share of the state's hospitals was reclassified (4 of 26 hospitals) a state-specific adjustment would have reduced payments to nonreclassified hospitals by nearly 3 percent, compared to a 0.6 percent reduction under the national adjustment. Medicare's PPS for inpatient services provides incentives to hospitals to deliver care efficiently by allowing them to keep any difference between their Medicare payments and their costs, and by making them responsible for their costs that exceed Medicare payments. To ensure that the PPS rewards efficiency rather than hospitals' circumstances, payment adjustments are intended to account for cost differences across hospitals that are beyond the control of individual facilities. If these cost differences are not adequately accounted for by the payment adjustments, hospitals are inappropriately rewarded or put under fiscal pressure. The adjustment used to account for geographic differences in wages--the labor cost adjustment--does not adequately account for these cost differences because the geographic areas used to define labor markets are too large in many instances. As a result, refinements are needed to address systematic problems in defining hospital labor markets. Such changes could improve payment accuracy and reduce the need for geographic reclassification by grouping hospitals into areas with average wages that better match their own wages. RRCs and certain other specially designated hospitals have easier access to a higher labor cost adjustment because they are allowed to reclassify under less stringent criteria than other hospitals. These hospitals may face higher costs than other hospitals, but they do not necessarily have labor costs that are higher than the average in their geographic area. Reclassification potentially offers some financial relief to a share of these facilities, but it does not address the problem underlying their financial circumstances or assist all such facilities. Identifying the underlying cause of their higher costs is important to develop mechanisms to address their financial circumstances. To improve the adequacy of Medicare's labor cost adjustments, we recommend that the Administrator of CMS refine the geographic areas used to more accurately reflect the labor markets in which hospitals compete for employees and the geographic variation in hospitals' labor costs. This could include separating large towns in a state into their own labor market area and removing certain outlying counties in MSAs from the metropolitan geographic area if they exhibit wage costs that are significantly different from the rest of the metropolitan area. In its written comments on a draft of this report (see app. VI), CMS stated that it agreed with the problems we identified with the current labor market areas. CMS stated that it had conducted its own analyses of alternative approaches to defining geographic areas and consulted with hospital representatives and concluded that there is no consensus on an alternative to Medicare's current geographic areas. CMS stated that it will consider whether changes in MSA definitions based on new census figures should be used for refining the geographic areas. CMS noted that a state- specific budget neutrality approach, which we were required to assess, would require statutory change and could make reclassifications within states highly contentious. We believe that Medicare's current geographic areas could be refined to better reflect variation in area labor costs. While forthcoming changes to MSA definitions are important to consider in refining Medicare's geographic areas, these changes are unlikely to improve the labor cost adjustment in most large towns. We recognize that consensus on any changes to the geographic areas would be difficult to achieve because any change would redistribute Medicare payments across hospitals so that hospital payments would increase in some areas and decrease in others. Yet, because the refinements would result in Medicare payments that better match the costs that hospitals face, they would strengthen the incentives of the PPS that encourage hospital efficiency and improve Medicare's payment method. CMS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Administrator of CMS and interested congressional committees. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any other questions about this report, please call me at (202) 512-7119. Jean Chung, James Mathews, Michael Rose, and Kara Sokol made key contributions to this report. To conduct this work, we recreated the 2001 labor cost adjustment for each hospital in the country prior to any reclassifications, using aggregated wage and hour data reported on 1997 Medicare hospital cost reports. We used data on reclassifications and hospital characteristics from the PPS Payment Impact Files created each year by CMS. Information on metropolitan areas, such as central and outlying counties and the criteria by which counties are included in an MSA, was obtained from the U.S. Census Bureau Web site as well as interviews with Census Bureau staff. We used RUCA codes, developed at the Washington, Wyoming, Alaska, Montana, & Idaho (WWAMI) Rural Health Research Center at the University of Washington, to examine segments of nonmetropolitan areas. We assigned 1 of 30 possible RUCA codes to each hospital based on its census tract. These 30 codes were then collapsed into 4 categories: urban, large town, small town, and rural. We calculated dollar-weighted average hourly hospital wages for each of the nonmetropolitan categories, nationally and by state, by dividing aggregate wages for all hospitals within a category by aggregate hours. We then compared the average hourly hospital wage for each nonmetropolitan subgroup within a state to the statewide nonmetropolitan average hourly wage. To evaluate the potential payment impact of applying a geographic reclassification budget-neutrality factor on a state-specific basis, we used the 2000 PPS Payment Impact File to calculate the Medicare payments to all hospitals within each state, before and after any geographic reclassifications. We then used the difference between pre- and post- reclassification payments to calculate a budget neutrality factor for each state. These budget neutrality factors were then used to estimate how payments to reclassified and nonreclassified hospitals in each state would differ under a state-specific budget neutrality adjustment, compared to the current national adjustment. In BIPA, the Congress required the Secretary of Health and Human Services to collect data on hospitals' mix of occupations and their corresponding wages by September 30, 2003, and calculate wage indexes beginning October 1, 2004, that are adjusted to remove the effects of occupational mix on average wages. Occupational mix data for each acute care hospital will be collected and updated every 3 years. The methodology for adjusting the wage index for occupational mix will be determined after the data have been collected. Average hospital wages vary because of differences in wages paid across hospitals, but also because hospitals employ different mixes of occupations. As a result, average hospital wages are higher than the national average if the hospitals in an area employ more workers in highly skilled occupations and lower if the hospitals employ fewer workers in more highly skilled occupations. The current calculation of the Medicare wage index does not distinguish between wage differences due to geographic labor cost variation and wage differences due to geographic variation in the mix of more highly and less highly skilled occupations. Thus, Medicare's wage indexes are too high in areas with a more highly skilled mix of hospital workers and too low in areas with a less skilled mix of hospital workers. While geographic differences in wages paid affect hospitals' labor costs, but are beyond an individual hospital's ability to control, occupational mix generally is within the control of a hospital. Changing the calculation of the wage index to eliminate the effect of occupational mix differences will raise the wage index for some types of hospitals and lower it for others. Wage indexes will be reduced for hospitals, such as metropolitan or teaching hospitals, that tend to hire more employees in highly skilled occupations with higher wages. Wage indexes for rural hospitals, which tend to employ a less skilled mix of employees, are likely to go up. While national data on the occupational mix of hospital employees are not available, data from California demonstrate the potential effects of changing the wage index calculation to eliminate the effects of occupational mix differences. Without adjusting for differences in occupational mix, the average hourly wage for hospitals in the Oakland MSA is 57 percent higher than the average hourly wage for nonmetropolitan California hospitals. Hospitals in the Oakland area generally employ a greater proportion of more skilled, and therefore more expensive, staff (see table 6). For example, in Oakland area hospitals, RNs account for approximately 25 percent more of the total hours worked by hospital employees than they do in nonmetropolitan California. Recalculating the wage indexes so that they reflect the same mix of workers in all areas reduces the difference between the Oakland area wages and those paid in nonmetropolitan areas to 50 percent. An occupational mix-adjusted wage index in nonmetropolitan California would be almost 4 percent higher than the current wage index calculation (see table 7). Across metropolitan areas, the change to the wage index would vary. Change in Medicare hospital payments (current law) Change in Medicare hospital payments (current law)
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The Medicare program's prospective payment system (PPS) for inpatient hospital services provides incentives for hospitals to operate efficiently by paying them a predetermined, fixed amount for each inpatient hospital stay regardless of the actual costs incurred in providing the care. Although the fixed amount is based on national average costs, actual per stay payments vary widely across hospitals, primarily because of two payment adjustments in the PPS. One adjustment accounts for cost differences across patients due to their care needs and the other accounts for the substantial variation in labor costs across the country. The Medicare program's labor cost adjustment may not adequately account for geographic differences in hospital wages because of problems with the definition of labor markets. The geographic areas used by Medicare to approximate hospital labor markets often encompass large areas in which hospitals in different parts of an area or different types of communities pay widely varying wages. Geographic reclassification does not systematically address inadequacies in the way the Medicare program defines geographic areas, although it allows some, but not all, hospitals that may be in distinct labor market and pay wages above the average in their area to receive a higher labor cost adjustment. Geographic reclassification reduces payments to hospitals that do not reclassify because of the budget neutrality requirement, and the amount of this reduction would vary across hospitals under a state-specific budget neutrality approach depending on their location. In 2002, payments to metropolitan hospitals that were not reclassified were 1 percent lower and payments to nonmetropolitan hospitals that were not reclassified were 0.6 percent lower because of geographic reclassification. If the budget neutrality provision were calculated and applied within individual states instead of nationally, the adjustment would be smaller in those states in which hospitals did not benefit much from reclassification and higher in states where a higher proportion of hospitals reclassified.
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Foreign schools can offer unique educational opportunities for U.S. residents, such as improved language proficiency and knowledge of other cultures, and help ensure that U.S. residents have a wide range of options in pursuing postsecondary education. The number of loans certified for U.S. residents attending foreign schools has risen from just under 4,600 in the 1993-94 academic year to over 13,000 in the 2000-01 academic year. Over 500 schools in 44 foreign countries are currently eligible to participate. About 9,000 of these students attend foreign medical schools and account for about three-quarters of the total loan volume. By country, the highest volume of FFELP loans--over $35 million--are for students attending school in Dominica; its sole eligible institution is a private, for- profit medical school. England, ranked fourth in loan volume, and Canada, seventh, have the largest number of institutions eligible to participate in the FFELP--182 and 108, respectively. Those countries participating in the FFELP and the top 10 foreign schools in loan volume for the 2000-01 academic year are indicated in figure 1. While a few foreign schools enroll large numbers of U.S. residents who receive FFELP funds, the majority of foreign schools enroll only a small number. For example, Queen's College at the University of Oxford had just 3 students receiving FFELP funds in 2001. For more information on the ranges for numbers of U.S. residents receiving FFELP funds for attendance at schools in different countries, see appendix I. In order to participate in FFELP, foreign schools must submit a variety of documents, such as an application and a copy of the most recent course catalog. Once Education initially certifies the school for participation, the school enters into a Program Participation Agreement (PPA) with Education that requires it to comply with the laws, regulations, and policies governing FFELP. PPAs vary, but some may be valid for up to 6 years. To maintain its ability to participate, the foreign school must demonstrate that it is administratively capable of providing the education promised and of properly managing the program, and that it is financially responsible. Schools must submit program compliance audits and audited financial statement reports to Education on an annual basis. Program compliance audit reports are intended to demonstrate schools' ability to administer FFELP in compliance with HEA and related Education regulations, while audited financial statements serve as evidence of schools' financial responsibility. Schools must submit recertification materials to Education for continued participation in FFELP before the expiration of their current PPA. Education evaluates the application and accompanying documentation to determine whether a school is eligible to participate. Education's Foreign Schools Team, consisting of eight staff members and one director, is responsible for assisting and overseeing foreign schools. Some of the ways in which the team oversees foreign schools, which are similar to the way Education oversees domestic schools, are presented in table 1. Education also has responsibility for maintaining information systems involved in the loan process, which is discussed more fully below. While Education and the foreign schools each have specific responsibilities, other parties are involved in the student loan process, including students, lenders, and guaranty agencies. Students are responsible for filing certain loan application materials, while lenders make loans, and guaranty agencies repay lenders the loan funds if the borrower defaults. Regardless of whether a student plans to attend a foreign or domestic school, a student applying for a FFELP loan is required to first submit a Free Application for Federal Student Aid (FAFSA). The student must also sign the Master Promissory Note (MPN), which outlines the students' responsibilities for repaying the loan. The information provided by the student on the FAFSA is checked by Education against various information systems, including Social Security Administration databases and the National Student Loan Database System (NSLDS), to test the accuracy of information and to assess the student's loan history. The administrators of the school the student plans to attend must certify the student's eligibility for loans and the loan amount based on the output from the FAFSA. This output will indicate whether there are any issues with the student's eligibility based on the information provided by the student and the edit checks against the various databases. For example, the output would indicate if the check against SSA's databases revealed that the social security number provided did not match the name provided by the student, or if the check against Education's NSLDS revealed that the student was in default on previous loans. In addition, the output includes the Expected Family Contribution, which is the amount the student and his family are expected to contribute to educational expenses. The administrators determine the student's financial need based on this information, the cost of attendance, and the amount of financial aid other than FFELP funds that the student is expected to receive. Once the school has certified the student's eligibility and loan amount and the student has signed the MPN, the lender can disburse the loan. Although lenders disburse loans for students attending domestic schools to the school, a chief difference for students attending foreign schools is that lenders may disburse loans either directly to students or to the foreign school the student is attending. The guaranty agency then sends to the student's school a student status confirmation report (SSCR), which lists all students for whom loans were guaranteed for attendance at the school. School officials must indicate the enrollment status of these students and return the form to the guaranty agency. FFELP is vulnerable to fraud, waste, and abuse in several ways. Some school officials who do not have electronic access to Education's information systems are improperly documenting and determining student eligibility for loans and are unaware of the proper procedures to do so, which could result in ineligible students receiving federal funds. In addition, Education has not conducted any on-site reviews to assess schools' ability to administer FFELP since November 2000. Moreover, exposure to fraud, waste, and abuse is increased because students attending foreign schools, unlike students attending domestic schools, can choose to receive loans directly and in one lump sum for the entire academic year. Further, foreign schools do not submit required audited financial statements and program compliance audit reports, which compromises Education's ability to monitor for and detect significant fraud or other illegal acts. Also, an investigation by our Office of Special Investigations revealed vulnerability in Education's process for determining the eligibility of foreign schools to participate in FFELP. Interviews with foreign school officials and our review of school files revealed that some officials are not properly determining and documenting students' eligibility for FFELP loans. As a result, FFELP funds may be provided to students who should not be receiving them. In particular, we found that several schools were using incorrect versions of documents Education generated to alert school officials to information that might indicate a student is ineligible for FFELP loans. We identified this problem among those schools that did not have electronic access to Education's information systems that contain data needed to determine students' eligibility for loans. Of the over 500 foreign schools participating in FFELP, only 32 can electronically access these information systems. However, these 32 schools certified about 70 percent of the total foreign school FFELP loan volume for fiscal year 2001. Electronic access to Education's information systems can help ensure that schools use the correct information to determine whether students should be receiving FFELP loans. In accessing Education's information systems, schools can obtain Institutional Student Information Reports (ISIR), which Education generates to help schools determine whether students are eligible for loans. ISIRs contain summary information provided on students' FAFSAs as well as the results of various computer matches that Education conducts. ISIRs indicate, among other things, whether an applicant's social security number reported on the FAFSA is valid, whether a loan applicant has ever defaulted on a student loan, and how much an applicant has previously borrowed. Electronic access to Education's information systems under its existing procedures will not be granted unless a foreign school has among its staff a person who possesses a U.S. social security number. Few foreign schools meet this requirement. In the absence of obtaining ISIRs, foreign school officials must rely on and obtain from students a special eight-page version of the Student Aid Report (SAR), which is also generated by Education and contains information similar to that found in the ISIR. Education typically provides students with only an abbreviated two-page SAR, which summarizes information students submit on the FAFSA, but does not contain all of the information foreign school officials need to determine whether a student is eligible for a loan. Students must specifically request the special eight-page version from Education. Rather than documenting and determining student eligibility based on the eight-page SAR, we found that certain foreign school officials were improperly basing their student eligibility determinations on the two-page SAR. In reviewing files to determine if schools were properly determining and documenting students' eligibility for FFELP loans, we found that the 2 schools with electronic access to Education's information systems had copies of ISIRs for every student file we reviewed. Each of these schools had certified in excess of $30 million in FFELP loans and together certified about 30 percent of the total FFELP loan volume for fiscal year 2001. However, 5 of the 6 schools without access to Education's information systems, which collectively certified over $3 million in FFELP loans for fiscal year 2001, did not have copies of ISIRs or eight-page SARs on file indicating that schools may have approved loans without obtaining the information necessary for determining student eligibility. Some school officials, in fact, told us that they verified students' eligibility for loans based of the two-page SAR and were unaware that without the eight-page SAR or ISIR, students' eligibility for loans could not be properly verified and documented. The inability of foreign school officials to electronically access Education's information systems also creates the potential for delays in schools confirming and reporting student enrollment. Schools must confirm the enrollment of students who have borrowed FFELP funds through the use of a SSCR. Without timely and accurate reporting of student enrollment, detecting an individual who receives an FFELP loan but never enrolls in a foreign school is made more difficult. Schools that have electronic access to Education's information systems can enter these data directly into Education's information systems. Guaranty agencies can then retrieve data through these information systems and monitor whether students whose loans the agency has guaranteed are in fact enrolled in the foreign school. Schools that do not have electronic access to Education's information systems, however, rely on guaranty agencies to send them SSCRs, which they then must return to guaranty agencies via postal mail. Several school officials told us that the inefficiency and lack of dependability of postal mail interfered with their timely submission of SSCRs. Education has not conducted an on-site program review--which is intended to assess, promote, and improve schools' compliance with laws and regulations and help ensure program integrity--at a foreign school since November 2000. Program reviews can supplement the information provided to Education through the required annual audit reports and also help Education to monitor for fraud. Between March 1999 and November 2000, Education conducted six such program reviews at foreign schools (or the U.S. administrative office of the foreign school). As a result of these reviews, Education identified problems with how schools were administering FFELP. For example, the reviews revealed that some foreign school administrators had certified FFELP loans for students in excess of allowable loan limits and certified loans without verifying students' eligibility for FFELP loans. However, a senior FSA official stated that because of budget constraints, on-site visits at foreign schools may not be a feasible use of Education's funds at this time. Exposure to potential loss through instances of fraud, waste, and abuse is exacerbated by the fact that students attending foreign schools, unlike those attending domestic schools, may choose to receive loans directly from the lender rather than through their schools and may receive all loan proceeds in one lump sum for the entire academic year rather than receive the proceeds in multiple disbursements during the academic year. For example, Education's OIG investigated a case in which a single individual submitted about 50 fraudulent loan applications for over $900,000 by falsely claiming enrollment at foreign medical schools. About 26 of the loans, totaling about $400,000 in FFELP funds, were disbursed to the individual before the fraud was detected. Such cases of fraud underscore the importance of foreign schools confirming and reporting student enrollment information to guaranty agencies. Over the past decade, Education's OIG has investigated 90 cases of suspected FFELP fraud, many of which involved individuals requesting to receive loan proceeds directly and posing as foreign school students. During this same time period, according to an Inspector General official, the OIG recouped about $2.75 million in restitution from the successful prosecution of cases and prevented an additional $1.2 million from being disbursed. Many foreign schools have not submitted required annual audited financial statement and program compliance audit reports, which enable Education to monitor whether schools are using correct procedures to award, disburse, and account for the use of federal funds as well as help Education monitor for and detect significant fraud or other illegal acts. According to Education's OIG Foreign School Audit Guide, the annual audit reports are the primary tools used by Education program managers to meet their stewardship responsibilities in overseeing FFELP. For fiscal year 2001, about 57 percent of foreign schools failed to submit audited financial statements. Collectively, these schools certified about $38 million in FFELP loans, about 17 percent of the total foreign school loan volume during the period. Further, Education regulations require foreign schools that certify $500,000 or more in FFELP loans during a fiscal year to have audited financial statements presented in U.S. Generally Accepted Accounting Principles (GAAP). For fiscal year 2001, nearly one- third of the foreign schools that certified $500,000 or more in FFELP loans failed to submit audited financial statements. Moreover, of those schools that certified $500,000 or more in FFELP loans and submitted audited financial statements for the period, over half did not submit statements presented into U.S. GAAP as required. (See table 2.) In addition to submitting audited financial statements, all foreign schools are required to submit program compliance audit reports on an annual basis. These reports address schools' compliance with the laws and regulations that are applicable to FFELP. In fiscal year 2001, however, only 7 percent of all foreign schools submitted such reports. Of schools that certified $500,000 or more in FFELP loans, over 40 percent failed to submit program compliance audit reports. The vast majority of those schools that certified less than $500,000 in FFELP loans also failed to submit such reports. While those schools that submitted program compliance audit reports collectively certified about 75 percent of the total FFELP loan volume for fiscal year 2001, the remaining schools certified about $59 million in FFELP loans. (See table 3.) Interviews with foreign school officials and our review of school files revealed that some foreign schools do not provide loan counseling. Despite that default rates for foreign schools as a whole are relatively low, loan counseling is important because new students often have little or no experience with repaying and managing debt. Such counseling can help borrowers avoid defaulting on their loans, which can, in turn, help prevent waste from occurring in FFELP. Two of the schools we visited, which are also the schools with electronic access to Education's information systems, had staff available to provide loan counseling and school officials reported doing so both prior to students' arrival on campus and after students' registration on campus. Other school officials, who had certified loan volumes ranging from $100,000 to about $1 million, stated that loan counseling was not provided as required by regulations. Education's current eligibility certification process does not include conducting on-site visits to verify the existence of foreign schools. As we reported in November 2002, due in part to this weakness, Education granted approval to a fictitious foreign school that our undercover investigators created and which enabled our investigators to obtain approval for FFELP loans for fictitious students. To obtain approval to participate in FFELP, our investigators created various false documents required to be submitted with its PPA, including a course catalog, audited financial statements, and a letter purporting to be from United Kingdom government authorities acknowledging the school as a nonprofit, degree- granting institution. Education did not verify the existence of the school with foreign government officials or other parties or sources before certifying the school as eligible to participate in FFELP. After receiving approval of their fictitious school, our investigators also requested and obtained information necessary for the school to certify student eligibility for loans. Our investigators then sought FFELP loans by filing FAFSAs using three different fictitious student identities and applying for loans from three different lenders. Our investigators created false school certifications of these students' eligibility for loans and also created false student enrollment reports. Two of the three lenders to whom our investigators submitted applications approved loans totaling, in the aggregate, $55,000, at which point we completed the investigation. Based on the results of our investigation, we recommended that Education implement a process, including conducting on-site visits, to ensure that a foreign school applying to participate in FFELP actually exists. Education has taken limited steps--since the beginning of 2002 and throughout the course of our audit work--to reduce the vulnerability of FFELP to fraud, waste, and abuse; however, its actions in some cases have been limited or have achieved limited results. In an effort to share more information with foreign school officials to help them comply with HEA and Education requirements, Education has increased the technical assistance it provides to foreign schools by publishing a reference guide and holding a series of training sessions. In addition, to assist foreign schools in complying with audit requirements, Education's OIG issued a Foreign School Audit Guide in September 2002. However, interviews with foreign school officials and review of school files revealed that these efforts may not be sufficient to ensure that FFELP is being properly administered by the schools. Our review also found that the on-line training tutorial made available to foreign school officials on Education's Web site does not contain information specific to foreign schools and even has information contrary to how foreign schools are to administer FFELP. Moreover, while Education requested that all foreign schools with overdue audited financial statements and certain schools with overdue program compliance audit reports submit them, it has not decided on the consequences for schools that do not comply with the request. Finally, in response to our fraud investigation, Education established new procedures for staff to use in certifying schools' eligibility to participate in FFELP and provided its staff training on the new procedures yet no new foreign schools have been approved for participation in FFELP since the summer of 2002. Education has provided a reference handbook and training to foreign school officials; however, our interviews with several school officials and our review of schools' files revealed that they remain unaware of how to properly administer FFELP, which may increase the risk of fraud, waste, and abuse occurring. In January 2002, Education issued the Student Financial Aid Handbook for Foreign Schools: 2001-2002. The Handbook was designed to help participating foreign schools achieve manageable, student-friendly administration of FFELP and to ensure that schools are aware of the legal requirements of participating in FFELP. According to FSA, the Handbook was mailed to all foreign schools participating in FFELP and it is currently posted to Education's Web site. Education also held a series of training sessions for foreign school officials during 2002 in several locations, including Canada, Australia, England, Scotland, and Puerto Rico. Also, in September 2002, Education's OIG issued a Foreign School Audit Guide, which assists foreign school officials in complying with the audited financial statement and program compliance audit requirements. To supplement this information, Education offers an on-line training tutorial, FSA COACH, for school officials' use, although it was not specifically designed for foreign school officials. However, Education's efforts to improve FFELP administration through training may have fallen short because knowledge of the training materials available was not widespread among the school officials we spoke to during our review. For instance, two foreign school administrators indicated that they had not received the Handbook from Education. In addition, as previously discussed, some foreign school officials were unaware of how to properly document and determine student eligibility for FFELP loans. Furthermore, although HEA regulations require training for officials at schools newly certified to participate in FFELP, Education officials did not provide information about training requirements or opportunities to our undercover investigators when we created the fictitious foreign school. An FSA official said that Education does not require foreign school officials to travel to the United States to attend available training before certifying a schools' eligibility to participate in FFELP because of concerns about the financial burden on foreign schools. Instead, FSA provides training materials, along with information about how to use FSA COACH, to school officials. However, some administrators remain unaware of any on-line information, and when we interviewed foreign school officials at schools that have been participating in FFELP for a number of years, several indicated that they had not received training prior to administering FFELP. Even when training materials did reach FFELP administrators, these materials may have been insufficient to assist school officials. While some officials told us that they found the information and training useful, other officials told us that they did not. For example, several foreign school officials we spoke with indicated that the training sessions were very useful and indicated that holding such trainings more frequently would be valuable. One school official, however, commented that his peers found the regulatory and legislative information contained in the Handbook beyond their grasp, and that some of the information was confusing, especially for those school officials in countries where student financial aid is administered in an entirely different fashion than in the United States. Many other school officials commented on the need for better on- line information. Some found Education's Web page difficult to navigate and some reported being unable to find needed information. Finally, while reviewing COACH, we found that much of the information contained within it was not applicable to foreign schools and, in some instances, it presents information that is contrary to how foreign schools operate. (See table 4.) While COACH was not designed specifically for foreign schools, Education directs foreign school officials to COACH for training materials upon certification, and the COACH tutorial states that it is a comprehensive introductory course on school requirements for administering FFELP and other student financial aid programs. In December 2002, during the course of our review, Education sent letters to all foreign schools requesting that they submit overdue audited financial statement reports. They also requested schools that certify $500,000 or more in FFELP loans to submit program compliance audit reports for the 4 most recent fiscal years. Education told the schools that failure to submit the requested documents within 45 days would result in consequences. Education is now considering revoking or denying schools' certification to participate in FFELP if it did not receive overdue audited financial statement and program compliance audit reports. According to Education officials, FSA revised internal procedures for verifying schools' legitimacy, and its foreign schools' team was retrained. The retraining covered school eligibility requirements with an emphasis on the importance of validating with the appropriate foreign education office that a school is legitimate. To help staff verify that a school is legitimate, Education modified an internal checklist to include space for documenting the source and date of validation in the school's file. Since learning of our investigation, Education verified the existence of all schools that are participating in FFELP, by either checking that the school is approved on an official Web site, or by corresponding or speaking with country education offices and ministries. Additionally, with respect to new applications from schools that have not previously participated in FFELP, Education no longer accepts a post office box address as the official location of a school or a third party servicer that administers FFELP for the school. Education has not yet implemented some planned changes in its procedures for determining FFELP eligibility of new foreign school applicants. Consequently, no new foreign schools have been certified to participate in FFELP since Education became aware of the school we created in May 2002, even though applications have been received from 19 schools. Education is currently considering implementing a process similar to that used when a domestic school applies for participation. This process would entail circulating the name of the school and its owners among a number of officials in FSA and other Education offices to determine whether staff have any information or knowledge that would affect a decision to certify the school's eligibility to participate in FFELP. Education's International Affairs staff, who coordinate the agency's various international programs, would be among those to whom such information would circulate. If any staff were to raise concerns about the school or its owners, Education would consider conducting an on-site program review. Education could take additional action to address the goal of reducing the vulnerability of FFELP to fraud, waste, and abuse, such as more strictly enforcing school audit requirements or providing electronic access to information systems to help school officials more easily determine students' eligibility for FFELP loans. However, any steps that Education takes will likely involve trade-offs that may affect access, accountability, and burden for various participants in FFELP. For example, Education could aggressively enforce foreign schools' audit reporting requirements, but this may lead to unintended consequences, including limiting students' access to such institutions if foreign schools withdraw from FFELP as a result. Other potential steps include changing disbursement procedures to help limit the federal government's exposure to loss, but doing so may increase burdens for schools and students. In addition, providing foreign school officials with electronic access to information may help them properly determine student eligibility for FFELP loans, but may increase security risks. Additionally, we have developed tools that could help Education determine how to balance the objectives of providing U.S. residents with access to foreign schools while protecting the taxpayers' investment that is intended to help provide that access. Education could more strictly enforce school audit report requirements, but doing so may limit U.S. residents' access to foreign schools. FSA officials have stated that while Education is committed to maintaining the integrity of the FFELP program, it is also committed to providing access to international education opportunities for U.S. resident students and does not want to create barriers to those opportunities. As previously discussed, a large number of foreign schools have failed to submit required audited financial statement and compliance audit reports to Education in a timely manner. FSA officials told us that balancing enforcement of these statutory and regulatory provisions with providing students access to foreign schools is challenging. In their opinion, the current compliance audit requirements may place an undue burden and result in excessive costs for foreign schools that enroll few U.S. residents. Several foreign school officials we spoke to also told us that they found such audits to be costly, considering that students receiving FFELP loans constituted very small proportions of their student bodies. According to these officials, these audit requirements provide a disincentive to participate in FFELP in order to avoid what they perceive as an administrative and financial burden. Education officials are now considering whether to issue letters to foreign schools that certify less than $500,000 annually in FFELP loans requesting program compliance audit reports and whether an alternative approach to overseeing these schools should be taken. In addition to requiring foreign schools to submit audited financial statements and compliance reports, another potential step Education is considering relates to the requirement that certain schools submit audited financial statements under U.S. GAAP. Several school administrators and government officials in the United Kingdom told us that they found the requirement for schools to submit audited financial statements presented in U.S. GAAP to be burdensome, in light of the audit requirements of their home country. They stated that they believed that the United Kingdom's accounting standards are sufficiently comparable to U.S. GAAP that Education should accept their statements for purposes of meeting FFELP statutory and regulatory requirements. Doing so, according to these officials, would reduce the administrative and financial burden associated with the requirement. Further, because Education's regulation requiring that audited financial statements be presented under U.S. GAAP applies only to foreign schools that certify $500,000 or more in FFELP loans, these officials told us that foreign schools have an incentive to limit enrollment of students receiving FFELP loans so that they do not exceed this threshold. Education is currently considering whether to allow exemptions for foreign schools located in Canada and the United Kingdom--which collectively accounted for 314, or about 62 percent of the total foreign schools participating in the FFELP during academic year 2000-01--to its regulations requiring audited financial statements be presented into U.S. GAAP. According to an FSA official, the justification for such an exemption is based on the results of a comparison of several foreign countries' auditing standards contained in Education's policies and procedures manual, developed in consultation with a private accounting firm. While the purpose of the manual is to provide a methodology for FSA staff to use in assessing the financial health of foreign schools certifying less than $500,000 in FFELP loans, the manual does contain a limited analysis comparing the selected foreign countries' accounting standards with U.S. GAAP and the potential effects of Education relying on foreign standards on the results of its analyses. Education could seek statutory, and consider regulatory, changes to loan disbursement procedures to address the potential for fraud, waste, and abuse; however, such changes could have a significant impact on schools and students. In our discussions with FFELP lenders and school officials, we found that disbursement methods and preferences vary among both lenders and schools. For example, representatives of one large FFELP lender told us that it is their standard operating procedure to disburse student loan proceeds directly to student borrowers by sending them checks. In contrast, a representative of another large FFELP lender, which specializes in making FFELP loans to students attending foreign medical schools, told us that it only (1) issues checks that are payable to both the student borrower and the foreign school and (2) sends these checks, or electronically transfers loan proceeds, to foreign schools, requiring student borrowers to obtain their funds through the schools. Some foreign school officials encourage students to receive their loan proceeds in this manner, as it helps the school maintain control of the funds. According to a guaranty agency official, a school official, and an FSA official some schools do not have financial aid offices or routinely carry out such functions at their institutions and therefore do not have the resources to be an intermediary between lenders and students. Other school officials told us that they are prohibited by local regulations from taking out student fees from loan checks and remitting the difference to students. In addition to receiving loan proceeds directly from lenders, students attending foreign schools may also receive loan proceeds in one lump sum rather than in multiple disbursements. According to many of the lenders and foreign school officials we spoke to, students frequently elect to receive their loan proceeds in this way, particularly students who are enrolled in 1-year graduate programs. Yet, several school officials told us that they prefer multiple disbursements for their students as the school is on a semester or trimester calendar and multiple disbursements provide them more assurance that expenses will be paid. One lending official, however, told us of an instance in which a student had trouble entering a country because she did not have sufficient proof that she had enough funds for the academic year. Thus, allowing students to receive loan proceeds in one lump sum might help students in such situations. Education is considering taking additional steps with respect to current disbursement procedures. As previously discussed and as documented by prior OIG investigations, the disbursement procedures used to provide loan proceeds to U.S. residents attending foreign schools exposes the federal government to increased risk for potential losses. Education is considering encouraging or requiring lenders to take steps prior to disbursing loan funds to students attending foreign schools. These steps could include (1) confirming that schools are eligible to participate in FFELP, (2) verifying that students are accepted for enrollment at foreign schools prior to disbursing funds, and (3) continuing to notify foreign schools when loan disbursements are made to student borrowers. Providing electronic access to Education's information systems needed to determine student eligibility may help improve schools' administrative capacity but may also increase information security risk. The lack of electronic access decreases schools' administrative capacity, as foreign school officials have difficulty obtaining the documentation necessary to determine student eligibility and impedes the exchange of SSCRs with guaranty agencies. Education is currently working to address these issues and is considering providing foreign school officials with an alternative to requiring that someone on their staff possess a U.S. social security number to access its information systems. However, poor information security is a high-risk area across the federal government with potentially devastating consequences. Threats to the security of any data system may include attempts to access private information by unauthorized users, user error, as well as pranks and malicious acts. Potential damage arising from such threats could include, among other things, the disclosure of sensitive information, disruption of critical services, the interruption of services and benefits, and the corruption of federal data and reports. Therefore, Education needs to carefully weigh the benefits and risks of providing such access to foreign school administrators. We have found that conducting a risk assessment is one of several critical steps that agencies need to undertake to identify and address major performance challenges and areas that are at risk for fraud, waste, and abuse. We have also developed tools to assist agencies in undertaking such assessments. These tools provide a framework for identifying areas at greatest risk as well as various reports which can assist agencies in evaluating internal controls and addressing improper payments resulting from fraud, waste, and abuse. These tools could be useful to Education in weighing the advantages and disadvantages of various ways of overseeing and assisting foreign schools. Among other things, these tools highlight the importance of conducting risk assessments--comprehensive reviews and analyses of program operations to determine the nature and extent of program risks--and identifying cost-effective control activities to address identified risks. Foreign schools' ability to participate in FFELP supports wide-ranging educational opportunities for U.S. residents and ensures that these students have a variety of options in pursuing postsecondary education. In light of recent events highlighting the vulnerability of FFELP with respect to U.S. residents attending foreign schools, Education has taken some important steps, and could take additional steps, both immediate and longer term, to decrease the vulnerability of the program. Ensuring that foreign school officials know how to properly administer the program, especially what steps they need to take to ensure that students are eligible to receive federal funds, is critical to reducing the program's vulnerability to fraud, waste, and abuse. Education has taken steps to provide school officials with additional information concerning their responsibilities yet as we have shown, foreign school officials may need more information. Training that is convenient and specifically designed for foreign school officials could help bridge this information gap. Education is also considering what regulatory flexibilities it might extend to some foreign schools while also considering stricter enforcement of current statutory and regulatory provisions. The use of a risk assessment could help ensure that Education appropriately identifies the risks involved in the program and how best to balance the objectives of providing U.S. residents with access to foreign schools while protecting the taxpayers' investment intended to help provide that access. In taking such actions, Education might identify alternative regulatory and oversight methods that would strike such a balance. To help ensure that foreign school officials have the knowledge necessary to properly administer FFELP, we recommend that the Secretary of Education develop on-line training resources specifically designed for foreign school officials. To better ensure that Education is adequately overseeing foreign schools participating in FFELP, we recommend that the Secretary of Education undertake a risk assessment to determine how best to ensure accountability while considering costs, burden to schools and students, and the desire to maintain student access to a variety of postsecondary educational opportunities. Further, after completing the risk assessment, if Education determines that legislative and/or regulatory changes are justified, we recommend that the Secretary seek any necessary legislative authority and/or implement any necessary regulatory changes. In written comments on our draft report, Education agreed with our reported findings and recommendations and, among other things, said that it has begun to reengineer its process for determining the eligibility of foreign schools to participate in FFELP. Education also provided technical clarification, which we incorporated where appropriate. Education's written comments appear in appendix II. We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. In addition, the report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about his report, please contact me on (202) 512-8403 or Jeff Appel on (202) 512-9915. Gillian Martin and Cara Jackson made significant contributions to this report.
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Recent events have increased concerns about the potential for fraud in Education's student loan programs related to loans for U.S. residents attending foreign schools. In 2002, GAO's Office of Special Investigations created a fictitious foreign school that Education subsequently certified as eligible to participate in the student loan program. GAO investigators subsequently successfully obtained approval for student loans totaling $55,000 on behalf of three fictitious students. Over the past decade, Education's Inspector General has investigated many instances of suspected student loan fraud involving individuals applying for loans for purported attendance at foreign schools. The conference report accompanying the 2001 Labor, Health and Human Services, and Education Appropriations Act mandated that GAO examine and report on fraud, waste, and abuse with respect to student loans for Americans attending foreign schools. Foreign schools offer unique educational opportunities for Americans and help ensure that U.S. students have a wide range of options in pursuing postsecondary education. Almost 70 percent of all U.S. residents receiving Federal Family Education Loan Program (FFELP) funds to attend foreign schools are in medical school and they account for three-quarters of the total loan volume. While some foreign schools participating in the FFELP enroll large numbers of U.S. residents, others enroll only a few, as seen in the table below, which also indicates the countries wherein FFELP loan volume is highest. We found that FFELP is vulnerable to fraud, waste, and abuse in several ways. For instance, many foreign schools do not submit required audited financial statements and program compliance audit reports, which would allow Education to monitor for and detect significant fraud or other illegal acts. For fiscal year 2001, about 57 percent of foreign schools failed to submit audited financial statements, while the vast majority of foreign schools failed to submit program compliance audit reports. Education has taken limited steps to address instances of vulnerabilities to fraud, waste, and abuse. For example, Education has issued a reference guide and conducted training for foreign school officials. However, a number of foreign school officials reported that they had not received training prior to administering FFELP funds. In addition, we found that some foreign school officials are not properly determining and documenting student eligibility for loans; as a result FFELP funds may be provided to students who should not be receiving them. We also found that the on-line training to which Education refers foreign school officials presents information in some cases that is contrary to how foreign schools are to administer FFELP. Education could take additional action to reduce the potential for fraud, waste, and abuse, but will have to address the trade-offs that arise from its actions that may affect student access and burden for various program participants. A comprehensive risk assessment is one method that Education could employ to determine how to balance an appropriate level of oversight with the desire to provide American students access to foreign educational opportunities.
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According to the Intergovernmental Panel on Climate Change--a United Nations organization that assesses scientific, technical, and economic information on the effects of climate change--global atmospheric concentrations of greenhouse gases have increased markedly as a result of human activities over the past 200 years. These gases trap heat that would otherwise escape the earth's atmosphere, contributing to climate change. Climate change is a long-term and global issue because greenhouse gases disperse widely in the atmosphere once emitted and can remain there for an extended period of time. Among other potential impacts, climate change could threaten coastal areas with rising sea levels, alter agricultural productivity, and increase the intensity and frequency of floods and tropical storms. Carbon dioxide is emitted in by far the largest volume of any greenhouse gas, and most emissions are caused by fossil fuel combustion. According to the EPA, carbon dioxide emissions from fossil fuel combustion accounted for approximately 80 percent of all greenhouse gas emissions in 2007. Placing a price on emissions is likely to raise the cost of production of many goods and services. The size of the impact will depend on the price of allowances, as well as the ability of producers to substitute less emission-intensive processes and inputs. While some studies suggest that the overall impact would be modest, a cap-and-trade program could have a disproportionate effect on covered entities that rely heavily on fossil fuels, such as electricity generators. According to the Energy Information Administration (EIA), electricity generators derived about 49 percent of their electrical power from coal in 2007. The combustion of coal generates about twice as much carbon dioxide per unit of energy as the combustion of natural gas, the next most common fuel source for U.S. electricity generation, according to EIA. Due to changes in the regulation of electricity markets, certain companies may be limited in their ability to pass on emissions reduction costs to their customers. Historically, electricity was generated, transmitted, and distributed by local monopolies. These companies were overseen by regulators who restricted the entry of new companies, approved investments and retail prices, and determined profits. Since the 1970s, efforts have been made to "restructure" electricity markets by introducing more competitive conditions. At the wholesale level, federal regulators have introduced market-based pricing, although these markets can take a variety of forms. About half the states have made efforts since the 1990s to restructure how retail prices are set, generally seeking to increase competition in electricity sales. According to EIA, 14 of these states-- located in New England and the upper Midwest, plus Texas--currently operate retail markets in which customers may choose among competing power suppliers. The other states where restructuring was introduced have either suspended or repealed these efforts. In the remaining states, regulators still approve utility costs and prices. In addition to covered utilities, which are mostly investor-owned, most states also have utilities that are owned either by the public (such as through a municipality) or cooperatively by customers themselves. Such utilities--which currently account for about one-quarter of electricity sales--generally set prices at cost instead of maximizing profits. In markets where regulation and international competition are not major factors, it is likely that consumers will ultimately bear most of the costs associated with pricing emissions. These costs are expected to disproportionately affect low-income consumers, who tend to spend a higher proportion of their incomes on energy products like electricity, heating, and gasoline. EPA has estimated that the cap-and-trade program in the American Clean Energy and Security Act would cost the average household $80 to $111 per year. A similar study by CBO estimated average household costs to be $175 per year, with some lower-income households receiving a net benefit. On the other hand, research suggests that policy makers could mitigate or eliminate these effects by selling allowances to covered entities through auctions and returning the revenue back to consumers in the form of lump-sum rebates or tax adjustments. If the government were to 'recycle' revenue through tax reductions, it could also realize benefits to the overall economy in the form of "economic efficiency." Many economists view certain taxes as inefficient or "distortionary," because they shift resources away from their most highly valued use. For example, efficiency costs may arise because taxes on labor income may affect job choices or hours worked. Most economists agree that minimizing the efficiency cost of the revenue raised to fund government services is an important objective of tax policy, among other objectives such as distributing the burden of taxation equitably. The effects of emissions pricing on consumers and industry will also vary by region. While some recent studies suggest that this variation would be minimal, it may be more substantial for low-income households. Areas that get most of their electricity from coal, the most emissions-intensive source, may see a greater electricity cost increase than areas that rely heavily on natural gas, nuclear energy, or hydropower. One study has estimated that the cost burden as a percentage of household income would range from about 1.9 percent in the East South Central region to about 1.5 percent in the West North Central region. A cap-and-trade program would also affect federal, state, and local governments, which purchase energy intensive goods and would be responsible for the program's implementation. According to one study, governments produce approximately 13 percent of U.S. carbon dioxide emissions, and the allowance consumption associated with these emissions could cost governments an additional $16.6 billion. Furthermore, price increases could increase government payments--such as Social Security benefits and federal pensions, which are indexed to prices--and reduce personal income tax collections. Finally, depending on the details of the program, a cap-and-trade program could increase the administrative burden on the government relative to a business-as-usual situation. For example, markets for emissions allowances would require oversight, and the distribution of auction revenues could require additional personnel or a new entity to administer payments. The design of a cap-and-trade program's allowance allocation plan--the ways in which tradable allowances are allotted to covered entities at the outset of the program--will help determine how costs and benefits are distributed across the economy, according to available literature. The method of allowance allocation will generally not affect the level of emissions reductions achieved by the program, because allocation is independent of the overall cap. Therefore, the principal consideration in designing an allowance allocation plan is how to distribute the allowances in a way that helps to achieve certain goals: for example, to offset the program's economic impact on disproportionately affected industries or to generate revenue that could be redistributed to consumers or used for other purposes. To accomplish these goals, three basic design choices are available: allowances may be sold through an auction or other means, distributed for free, or dispensed using a combination of these methods. Selling allowances to regulated entities could provide several benefits. First, it would generate a source of revenue that the government could use to defray the economic costs associated with emissions reductions or direct toward other purposes. These revenues could be substantial: in June 2009, CBO reported that the American Clean Energy and Security Act would generate annual revenues of $45 billion by the year 2019 by auctioning of a percentage of the allowances. Earlier CBO estimates indicated that annual allowance revenues could range between $30 billion and $300 billion by roughly the same time period if all allowances were auctioned, although this proposal is not part of the bill. Some existing cap-and-trade programs have already sold allowances through auctions or commodity exchanges. For example, several member states participating in the European Union's Emissions Trading Scheme (ETS)--including Ireland, Hungary, Lithuania, the United Kingdom, and Germany--have generated revenues from allowance sales; in Germany, these totaled approximately $1.2 billion in 2008. The level of auctioning is expected to increase as the program moves toward its third phase, which is to begin in 2013. In the United States, the Regional Greenhouse Gas Initiative--a regional cap-and-trade program involving 10 northeastern states--has conducted four auctions since it began auctioning allowances in 2008. These auctions, held quarterly, have each raised between $38 million and $118 million for programs to promote energy efficiency and assist low-income households with energy costs, among other things. Given the revenue generation potential of auctions, many experts we consulted as part of a prior study suggested that a cap-and-trade program should maximize the level of auctioning. Auctioning may confer other additional benefits, according to available literature and researchers we spoke with. For example, many economists favor auctioning because of its transparency and because it discourages behaviors motivated by a desire to gain free allowances, such as "baseline inflation." This occurs when a firm attempts to boost the number of allowances it receives by increasing its emissions prior to the outset of a cap-and-trade program. Auctioning can also help ensure that new entrants to an industry face the same emissions reduction costs as existing firms. Finally, auctioning could decrease the possibility that covered entities earn windfall profits as a result of the cap-and-trade program, particularly in restructured regions where prices are determined largely by market factors. Covered entities could earn windfall profits if they pass along the "opportunity costs" of free allowances--that is, the revenue foregone by not selling them--in the form of increased electricity prices. For example, in the first phase of the European Union's ETS, electric utilities that received free allowances reaped substantial profits by charging ratepayers for the opportunity cost of those allowances. On the other hand, auctioning does not offer compensation to covered entities, particularly those that face disproportionate costs due to a cap- and-trade program. The government will also incur certain administrative costs associated with designing and administering the auctions, although these activities could be funded using part of the auction revenues. Moreover, the effectiveness of allowance auctions will depend partly on their design. Free allocation could help establish political support at the outset of a cap- and-trade program and compensate covered entities for any decrease in profits they might experience as a result the program, but it could also have some disadvantages. Two principal options are available when allocating allowances for free: "grandfathering" or "output-based updating allocation." Grandfathering involves allocating allowances based on historic (pre-regulation) emissions measures, while output-based updating allocation involves adjusting the number of allowances provided to an entity based on its recent production levels. Available literature indicates that since past emissions measures do not change, grandfathering may be less susceptible to manipulation than output-based updating allocation. However, research suggests that grandfathering is unlikely to prevent the "leakage" of economic activity--including production, jobs, and emissions--to countries where greenhouse gases are not regulated. As we have previously reported, leakage may be of particular concern to firms in certain energy-intensive industries that face international competition--such as primary metals, paper, and chemicals--as these firms could find it more difficult than other covered entities to pass on costs to consumers by raising prices. Grandfathering could also provide an advantage to existing facilities, which are more likely to have outdated, inefficient technologies in place. Output-based updating allocation could also present trade-offs. As we have previously reported, output-based updating allocation could provide incentives for covered entities to maintain or increase production, potentially reducing the likelihood that these entities would move production to countries that are not subject to emissions regulations. However, output-based updating allocation could also decrease incentives for covered entities to engage in conservation and reduce their energy intensity, depending on how the program is designed. Moreover, some research indicates that an output-based approach would subsidize entities in certain industries, forcing entities in other sectors to make deeper cuts in their emissions in order to meet the overall cap. Since these cuts may be more expensive than the reductions that would have otherwise taken place, the overall cost of the cap-and-trade program would increase. In addition, some research suggests that maintaining output may not always be a worthwhile goal: for example, the contraction of output from a high- emissions sector may be one of the most cost-effective means by which to reach the overall emissions target. Furthermore, attempts to keep energy prices low could increase the cost of the program to the economy. Rising prices for energy and energy- intensive goods are critical to the success of the program, because these "price signals" create incentives for both covered entities and consumers to conserve energy, and thereby reduce emissions of greenhouse gases. To the extent that price signals are not preserved, fewer households and businesses will change their behavior in response to these signals. This could reduce the economic efficiency of a cap-and-trade program, since some of the less costly emissions reduction opportunities would be forgone. The structure of the U.S. electricity generation sector--which represents roughly 40 percent of domestic carbon dioxide emissions--could affect whether price signals reach energy users. Since the price of electricity is regulated in certain regions, generators that receive free allowances in these regions may not be able to pass along the costs associated with an emissions price to residential and commercial electricity users. If costs are not passed through, incentives for conservation decrease. A diminished price signal could also have indirect effects--for example, if the price of energy intensive goods does not rise in relation to other goods, consumers have less of an incentive to purchase fewer of these goods. Considering the limitations of free allocation, some analyses have advocated limiting the use of free allowances to specific subsets of carbon intensive industries. Several studies suggest that freely allocating between 6 and 21 percent of all allowances would be enough to compensate these industries--which include coal-fired power plants, fossil fuel suppliers, and energy intensive manufacturers--for profit losses related to emissions regulation. In 2007, CBO reported that less than 15 percent of allowances would be sufficient to offset net losses in stock value as a result of the program. The establishment of a cap-and-trade program creates opportunities for the government to direct the value of allowances in a variety of ways. For the purposes of this testimony, we assessed five options that are frequently discussed in the economic literature, although numerous other options exist. First, the government could reduce the overall cost of the program by reducing taxes on capital or income that currently make the economy less efficient. Second, the government could distribute lump-sum rebates to consumers, who would likely pay the bulk of the economic costs associated with a cap-and-trade program. Third, revenues could be used to expand the Earned Income Tax Credit to assist low-income working families. Fourth, policymakers could compensate covered entities for their increased costs through free allocation--an approach equivalent to selling allowances on the market and transferring all the revenue to covered entities. Finally, revenues could help fund climate-related programs or activities, including research and development, energy- efficiency programs, or international aid to developing countries that face challenges in mitigating and adapting to climate change. Using program revenues to reduce marginal tax rates--whether from individual income or payroll or taxes, corporate income taxes, or taxes on capital gains or investments--can reduce economic distortions in the tax code and lower the overall cost of the program. The benefits of tax reduction depend on the extent to which these taxes currently distort economic activity, according to literature and economists we spoke with. For example, existing taxes on labor or capital can discourage individuals from participating in the labor force or investing money. The structure of the tax code can also create distortions by directing spending toward certain areas where the buyer has a tax advantage, such as homeownership or employer-provided medical insurance. A cap-and-trade program could further exacerbate these tax distortions, according to economic literature. This so-called "tax interaction effect" could occur because a cap-and-trade program may have some of the same effects as a tax. Specifically, covered entities that face additional costs due to an emissions price will generally pass on their increased costs to consumers in the form of higher prices, thereby reducing the amount of goods that consumers can purchase. Because a loss of purchasing power effectively represents a decrease in real wages, incentives to work may also decrease. These effects could ultimately raise the cost of the program to the economy, according to economic literature we reviewed. However, 'recycling' auction revenues through the tax code could partially or wholly offset costs that result from inefficiencies in the tax code, as well as potential costs imposed by the cap-and-trade program, according to a review of economic literature and interviews conducted with economists. For example, because an emissions cap could cause prices to rise--and real wages to fall--a reduction in labor, income, or capital taxes could provide efficiency gains and help reduce the overall cost of the program. These efficiency gains may present trade-offs. Economic analyses suggest that reducing tax rates would do little to compensate low-income individuals that may be disproportionately affected by the cap-and-trade program. According to these analyses, most benefits from reduced taxes would accrue to higher income households, regardless of the tax targeted for reduction. Moreover, in the absence of supplemental policies, the benefits of reducing labor taxes will not reach individuals who do not file tax returns. To close this gap in coverage, the government could supplement a tax reduction with payments issued through existing systems, such as the Electronic Benefit Transfer system or state-based food stamp programs. However, using a combination of systems could increase the administrative burden and complexity of the program, and may require additional governmental coordination. In addition, adjusting the payroll tax rate may be complicated since these taxes represent social security and Medicare financing contributions. Another way to distribute revenues to consumers would be to distribute lump-sum rebates to consumers. Such a program could take many forms, but the underlying goal would be to compensate consumers or households through rebates of a specific amount. The amount of the rebate could be based on a simple per-capita formula with checks of equal size--also known as "cap-and-dividend"--or could account for household size, region, or other factors. An important advantage of lump-sum rebates, according to many economists, is that they help offset the costs of a cap-and-trade program on consumers, particularly on low-income households. Depending on the design of the program, certain consumers may even experience a net benefit. However, research indicates that distributing lump-sum rebates would forgo the efficiency gains that could be achieved through tax reductions, making the program comparatively more expensive to the economy overall. The ultimate cost of lump-sum rebates and the resulting effects on consumers would depend in part on the program's administration. The funds could be distributed, for example, using existing government programs, such as the income tax system or other benefit transfer programs. For example, one economist has proposed that the government could provide rebates for taxes paid on the first $3,660 of each worker's earnings, leading to a maximum rebate of $560 per worker. Alternatively, the government could develop a new distribution mechanism, although this approach would carry additional administrative costs. While using a single existing mechanism for rebate delivery would be the simplest and most transparent option, it would exclude individuals that did not participate in that program--for example, rebates that use the tax system would exclude individuals that do not file tax returns. The government could encourage these individuals to file through outreach campaigns, a strategy used when stimulus checks were distributed under the Economic Stimulus Act of 2008. Evidence suggests that such efforts could encourage more individuals to file--for example, of the 150 million individual income tax returns processed for tax year 2008, approximately 9 million claimed only the economic stimulus payment. However, any outreach effort would entail additional costs and administrative requirements. Policymakers could also design a rebating system that uses a combination of mechanisms to maximize coverage, although this strategy would increase the program's complexity, given the need for program coordination, as well as the risk of fraud or duplicate rebates. Several proposals for distributing revenue involve expanding the Earned Income Tax Credit (EITC) program. The EITC was enacted in 1975 and was originally intended to offset the burden of Social Security taxes and provide a work incentive for low-income taxpayers. It is a refundable federal income tax credit, meaning that qualifying working taxpayers may receive a refund greater than the amount of income tax they paid for the year. According to one study, approximately half of all households would benefit from this approach, with lowest-income households with children reaping the highest gains. However, this study suggests this option would affect low-income households differently depending on their location. Low-income households in the Northeast, for example, could see about a 2 percent gain in income, compared to a 7.4 percent gain in Texas. Some research also indicates that the EITC may encourage labor activity for low- income workers. Using the EITC to distribute revenue, however, may involve trade-offs. For example, as the Treasury Inspector General for Tax Administration has reported, the EITC has been vulnerable to taxpayer error in the past, due in part to changes in eligibility and the tax code. Prior reviews by the IRS and GAO also suggest that errors are common--for example, an IRS study has reported that the EITC program has an erroneous payment rate estimated to be between 23 and 28 percent. Allocating free allowances to covered entities can help establish political support at the outset of a cap-and-trade program and compensate covered entities for any increased costs they incur as a result. However, as noted earlier, free allocation can raise the cost of the program if such allocation decreases incentives to conserve energy and reduce emissions in one sector and forces other sectors to make less efficient reductions. In addition, economic literature suggests that a grandfathering approach to free allocation would do little to discourage the leakage of economic activity, jobs, and emissions, since covered entities' variable costs of production would remain unchanged. An output-based approach to free allocation, on the other hand, could reduce the likelihood that covered entities would relocate or decrease production, although it could also reduce their incentives to decrease emissions. Most of the benefits of freely allocated allowances will accrue to the shareholders of entities that receive them by compensating shareholders for any declines in stock value they might experience as a result of the cap. However, consumers are unlikely to see these benefits in the form of lower prices, since most covered entities will pass on costs associated with a cap-and-trade program, even when they receive allowances for free. Free allocation is therefore likely to benefit those with higher incomes more than those with lower incomes. The administrative burden associated with free allocation of allowances depends primarily on how policymakers determine the relative allocations to each industry. A grandfathering approach, for example, would require the government to select a set of years with which to determine a baseline. An output-based approach would require the government to define a baseline, which could prove challenging. As one economist we interviewed pointed out, "output" could be subject to numerous interpretations, each with its own implications for equity. The government could also direct the recipients of free allowances to use these allowances for the benefit of consumers. For example, HR 2454, as passed by the House on June 26, allocates some allowances to electric and natural gas local distribution companies (LDC) for the benefit of retail ratepayers. Distributing free allowances through LDCs may go some way toward mitigating regional differences in cost impacts, according to some researchers. However, the overall effects of this approach would depend largely on the extent to which it creates incentives to reduce energy use, according to economists we spoke with. Importantly, if benefits to electricity customers were conferred in the form of decreased energy rates, the incentives for energy conservation may diminish and the overall cost of the program could increase. This may be particularly true for residential customers, according to economists we interviewed, since industrial customer may have other reasons to pursue efficient practices. To help preserve incentives, LDCs could allow electricity rates to rise and rebate consumers through the fixed portion of their utility bills--that is, the portion not based on energy use. However, this approach assumes that electricity customers will differentiate between the fixed and variable portions of their utility bill when assessing their costs, as opposed to simply looking at the bottom line amount, which could remain largely unchanged. Several economists and researchers we spoke with expressed skepticism that customers would react to the price signal if their total energy costs did not change, although some said that distributing rebate checks separately from the utility bill could address this concern. The effect of this approach on consumers will depend on other factors. If both residential and business customers receive benefits, for example, the benefits conveyed to businesses may not get passed along to their customers. According to a CBO analysis of H.R. 2454, most of the allowance value given to local distribution companies would benefit business customers. The analysis also estimates that 63 of percent allowance values conferred to businesses would ultimately benefit the highest earning 20 percent of households, since these households are more likely to be shareholders. In addition, the way in which benefits are conveyed to customers--for example, through lower prices, investments in energy efficiency, or other means--will depend on the state public utility commissions that regulate the LDCs. While some organizations have expressed concern that past regulation has been uneven, several economists and state officials we spoke with expressed confidence that the existing regulatory structure could effectively ensure that customers received the benefits. Revenues generated through allowance auctions could also be directed toward climate-related programs or activities, including the research and development of low-carbon technologies, programs to promote energy- efficiency, or mitigation and adaptation activities abroad. Beyond their environmental benefits, such programs could also convey efficiency gains, if they lowered the cost of emissions reductions. The development of renewable energy sources, for example, could ultimately lower covered entities' total expenditures on emissions allowances. Funding for efficiency programs could also offset costs for households through reduced energy demand. Some research organizations have also suggested that funding in these areas could create job opportunities, and in the long run could help ensure greater economic stability due to energy security. Economic research suggests that an emissions price, on its own, will go some way toward promoting low-carbon technologies and the efficient use of energy. However, economists we spoke to said that there are certain instances--known as "market failures"--where opportunities for reduction may not be captured. For example, builders and owners of rental properties may not have incentives to consider energy efficiency in the construction and renovation of these properties, since they may not be responsible for paying electricity and heating costs. In these cases, subsidies for efficient construction or renovation may be appropriate. In addition, certain technologies--such as carbon capture and storage--may face cost barriers that could be mitigated through grants or subsidies. Other technologies may need nationwide infrastructure that could require additional funding at the federal level--for example, an enhanced transmission grid to transmit renewable energy. While many economists we spoke with said funding such activities could be beneficial, several also cautioned that selecting, implementing and evaluating these programs could pose challenges. from a power plant's emissions, transporting it to an underground storage location, and then injecting it into a geologic formation for long-term storage. result, several economists we spoke with recommended allocating part of the allowance revenues for research and development to help overcome these cost barriers. However, several also noted that it is difficult to determine how to allocate such funds effectively. For example, selecting which technologies receive funding places the government in the position of attempting to choose the best technologies rather than allowing the market to make that determination. Overall, research suggests that funding technologies in the early stages of development may be more cost- effective than using revenues to commercialize existing technologies. Investments in energy efficiency have the potential to alleviate some of the effects of the cap-and-trade program on households. For example, using auction revenue to support weatherization improvements for homes or the purchase of energy-efficient appliances could lower these households' energy consumption and expenditures. Some research suggests that tax credits, for example, can have a significant impact on efficiency investments by homeowners and businesses. However, several researchers have noted that the implementation of such programs has been unpredictable in the past, in part because it is difficult to determine whether these activities would have occurred anyway. Allowance revenues could also be used as aid to developing countries, either in the form of grants, loans, or other means of assistance. Such aid could target activities that reduce greenhouse gas emissions in these countries--for example, programs that aim to deploy low-carbon technologies in areas where they would not normally be financially feasible. Revenue could also support adaptation activities that could help these countries prepare for and adjust to the project effects of climate change. Several economists and researchers we spoke with supported directing some portion of auction revenue for international aid efforts. Some highlighted an obligation on the part of developed countries, which represent the bulk of greenhouse gas emissions to date, to help less developed nations deal with potential problems associated with climate change, such as food shortages, water quality problems, and the increased risk of malnutrition or disease. In addition, research indicates that the developing world presents low-cost opportunities for emissions reduction--for example, avoiding landfill waste through composting--as well as opportunities to prevent future emissions in those countries that are rapidly developing their energy, industrial, and transportation infrastructures. Furthermore, some researchers noted that the provision of mitigation or adaptation aid to developing countries may essentially be a prerequisite to these countries' participation in an international agreement to limit emissions. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Committee might have. For further information about this statement, please contact John Stephenson, Director, at (202) 512-3841 or [email protected]. Individuals who made key contributions to this testimony include Michael Hix, Assistant Director; Cindy Gilbert; Robert Grace; Richard Johnson; Jessica Lemke; Ben Shouse; Jeanette Soares; Ardith A. Spence; and Vasiliki Theodoropoulos. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Congress is considering proposals to establish a price on greenhouse gas emissions through a cap-and-trade program that would limit overall emissions and require covered entities to hold tradable emissions permits, or allowances, for their emissions. The purpose of such a program is to raise the cost of activities that produce emissions and thereby provide an economic incentive to decrease emissions. Carbon dioxide, which results from burning fossil fuels, is the primary greenhouse gas and accounts for about 80 percent of U.S. emissions. A cap-and-trade program would increase the cost of burning fossil fuels and other activities that generate emissions and potentially raise costs for consumers. A key decision is the extent to which the government offsets these costs. For example, the government could sell the allowances and then return the revenues to covered entities or households. The government could also give away some or all of the allowances. According to the Congressional Budget Office, the value of the allowances could total $300 billion annually by 2020. Today's testimony provides preliminary results of ongoing work assessing the potential effects of (1) allowance allocation methods, and (2) options for distributing program revenues or the economic value of allowances. GAO reviewed economic literature and interviewed experts in climate policy, including those involved in existing cap-and-trade programs. The method for allocating allowances in a cap-and-trade program can have significant economic implications for the government, regulated entities, and households. Most importantly, a cap-and-trade system would create a market for a valuable new commodity: emissions allowances. The government could allocate these allowances to regulated entities in three main ways. First, it could auction all of the allowances and collect a significant amount of revenue that it could use, for example, to compensate households affected by the cap-and-trade program. Second, it could give away the allowances to entities affected by the program and thereby transfer the value of the allowances to those entities. This could enhance the program's appeal to covered entities but could also increase the program's overall cost to the economy if it reduced incentives for those entities to decrease their emissions. Third, the government could give away some allowances and auction the rest. For example, studies have suggested that freely allocating 6 to 21 percent of the allowances created by a cap-and-trade program would be sufficient to compensate entities in energy-intensive industries for any profit losses incurred as a result of the cap-and-trade program. According to the economic literature and economists we interviewed, regardless of the mechanism for distributing allowances, consumers will bear most of the costs of a cap-and-trade system because most regulated entities will pass along their increased costs in the form of increased prices; however, these costs could be largely offset depending on how revenues are used. Available literature and economists we interviewed point to five main options for distributing a program's allowance revenues, although numerous other options exist. First, the government could lower the overall cost of the cap-and-trade program to the economy through accompanying reductions in taxes on income, labor, or investment. Second, auction revenues could be distributed to households through lump-sum payments, which could offset the higher consumer prices resulting from a cap-and-trade program and mitigate any disproportionate impacts on low-income households. Third, the government could expand the scope of the Earned Income Tax Credit to further benefit low-income working families. Fourth, the government could compensate regulated entities and their shareholders for lost profits by allocating them free allowances. Finally, revenues might be used to fund climate-related programs, such as research on low-carbon technologies, or used to support climate change mitigation activities in developing nations. Each potential use of revenues has trade-offs. For example, decreasing tax rates could lower the overall economic cost of the program; however, this approach may do little to compensate low-income consumers, who would receive greater benefit from a direct rebate. In addition, using revenues to dampen increases in energy prices may benefit ratepayers but reduce their incentives to conserve energy, potentially increasing the program's overall cost.
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IRS expects individual taxpayers to pay the full amount of tax owed when they file their tax return. However, Section 6159 of the Internal Revenue Code provides for taxpayers to pay their taxes in installments when full payment is not possible. Taxpayers who cannot pay their taxes are subject to IRS' collection process. IRS' routine collection process can involve three stages, and taxpayers may enter into an installment agreement during any stage. In the first stage, IRS is to send a series of notices to taxpayers requesting payment. Cases unresolved by these notices may be referred to the second stage--ACS telephone call sites. IRS employees at these sites are to contact taxpayers to secure payments and contact banks and employers to identify levy sources. The employees are to also answer calls from taxpayers who have been subjected to collection actions, such as levies and liens. If ACS call site employees cannot resolve a case, it may be referred to an IRS district office--the third stage in the collection process--for further collection action. IRS made changes to its installment agreement program in April 1992 making it easier for taxpayers to obtain agreements. IRS made the following changes under the revised program. Staff in all offices with taxpayer contact were delegated authority to approve installment agreements of up to $100,000. The thresholds for which IRS can approve an installment agreement without filing a lien increased from $2,000 to $10,000 and without requiring taxpayers to provide financial information demonstrating the need for an agreement increased from $5,000 to $10,000. IRS refers to these agreements as streamlined agreements. IRS allowed taxpayers to request installment agreements when they file by attaching a Form 9465, Installment Agreement Request, or note to their tax returns (see app. I). These agreements, called pre-assessed agreements, do not go through IRS' routine collection process. IRS made these changes to the installment agreement program to (1) improve voluntary compliance by emphasizing to taxpayers that installment payments are an option available to them to pay their tax debts if full payments cannot be made on time; (2) expedite the IRS collection process by bringing more delinquent accounts into a current status sooner, thereby increasing collections on such accounts in the form of installment payments; and (3) enhance its "one-stop service" concept by allowing staff in all functions with taxpayer contact to approve agreements. In addition, IRS recently developed procedures to implement another change in the program--charging user fees for installment agreements. The Treasury, Postal Service, and General Government Appropriations Act of 1995 (P.L. 103-329) authorized the Secretary of the Treasury to supplement IRS' appropriations through the imposition of user fees for services performed by IRS. As a result, in March 1995, IRS began charging a $43 user fee for a new installment agreement and a $24 user fee for amending or reinstating an existing agreement. Our objectives were to review (1) the increase in installment agreements following changes IRS made in April 1992; (2) the effects these changes had on IRS' collection activity; (3) concerns raised by IRS' internal auditors regarding these changes; and (4) administrative aspects of the program, such as the information IRS provides taxpayers regarding installment agreements, and opportunities for improvement. We also collected descriptive information on taxpayers who elected to pay past due taxes through installment agreements. To address the four objectives, we did the following: We met with officials in IRS' National Office of the Assistant Commissioner for Collections to discuss IRS' objectives for the installment program and gather information about the program's administration and progress. We met with IRS officials in the Cincinnati Service Center (Collections Branch) and the Cincinnati District Office (including the Taxpayer Service, Collection, and Examination divisions) to obtain information on the experiences of these IRS personnel with the revised procedures. We selected the Cincinnati Service Center because we had available experienced staff in that area. We discussed the installment agreement program changes with members of the American Institute of Certified Public Accountants, the Federation of State Tax Administrators, the National Consumer Law Center, the Consumer Federation of America, and a Cincinnati-based commercial bank. We reviewed IRS internal audit and management reports concerning the installment agreement program. To accomplish our objective of collecting descriptive information on taxpayers, we analyzed the 722 useable cases from our random sample of 900 installment agreements from IRS' Service Centers in Atlanta, GA; Cincinnati, OH; and Fresno, CA. The sample was taken from the inventory of 628,285 agreements at the 3 service centers as of April 23, 1994. In reviewing the sample, we obtained information about the agreements, such as (1) the tax periods covered by the agreements; (2) the original amount and current balance of the agreements; (3) the agreement payment history; and (4) certain taxpayer financial characteristics, such as adjusted gross income and source of income. The sample results were indicative of the installment agreement inventory at the three IRS service centers as of April 23, 1994. However, the results are not projectable to IRS' total universe of installment agreements and may not be indicative of the inventory at any other point in time. Appendix II describes our sampling methodology in more detail. We did our audit work from January 1994 through November 1994 in accordance with generally accepted government auditing standards. On March 27, 1995, we met with IRS National Office officials to obtain their comments on a draft of this report. IRS representatives at that meeting included the Acting Assistant Commissioner, Collection. Their comments are summarized on page 16 and incorporated in this report where appropriate. As stated earlier, the installment agreement program grew rapidly during fiscal years 1991 through 1994. As shown in table 1, significant growth took place between fiscal years 1992 and 1993. While part of this growth may be attributable to the April 1992 program changes, IRS officials said that changes to federal tax withholding tables in 1992 caused many taxpayers who would normally have received refunds to owe taxes when they filed their returns in 1993. IRS estimated that installment agreement requests would increase by about 39 percent because of the changes to the withholding tables. Since 1992, installment agreements have played an increasing role in IRS' collection process. Table 2 shows that installment agreements have made up an increasing percentage of IRS' accounts receivable inventory for individual taxpayers since 1992. Table 3 shows that installment agreements have accounted for an increasing percentage of IRS' total collections. IRS National Office collection officials said that the increase in total collections between fiscal years 1993 and 1994 was a positive result of the changes made to the installment agreement program. In raising service center and taxpayer service authority to grant installment agreements from $5,000 to $10,000, IRS wanted to shift some of the collection work from ACS call sites to service center collection and district taxpayer service offices. Some shift in workload has occurred. Taxpayer service and service center staffs originated about 82 percent of all agreements in fiscal year 1994, up from 43 percent in fiscal year 1991. Most of the increase was due to these two staffs granting streamlined agreements. ACS call sites granted fewer agreements in fiscal year 1994 (about 381,000 or 15 percent of agreements) than in fiscal year 1991 (about 579,000 or 53 percent of agreements). In shifting the installment agreement workload to service center and taxpayer service staff, IRS hoped to increase ACS collections by freeing up ACS staff to work on higher dollar cases. However, the expectation of increased collections had not materialized since ACS collections per staff year dropped between fiscal years 1992 and 1994 from $1.71 million to $1.44 million in current year dollars. Overall, the amount collected at ACS sites decreased from $4.88 billion to $3.30 billion during the same period. IRS collection officials said that the lower ACS collections are due, in part, to their decision during this same period to increase the deferral level--the amount under which delinquent accounts are not pursued beyond the notice stage, except to offset refunds. According to IRS officials, this increase reduced ACS workloads more than expected and contributed to reduced ACS collections. IRS subsequently lowered its deferral level in April 1994, a move IRS officials expect will increase ACS workloads and the resulting collections. Another indication of the greater impact the installment agreement program is having on collections was the increased number of balance due accounts that are being resolved earlier in the collection process. IRS data show that more balance due accounts are being favorably resolved by taxpayers paying or arranging to pay the amounts owed without IRS resorting to collection notices and subsequent collection actions. Between fiscal years 1991 and 1994, accounts favorably resolved before a collection notice rose from 41 percent to 52 percent, with installment agreements accounting for a growing share of the favorable early resolutions. In fiscal year 1994, installment agreements accounted for 41 percent of the favorable early resolutions, up from 14 percent in fiscal year 1991. IRS' internal audit raised several questions regarding the installment agreement program since IRS implemented the April 1992 changes. In September 1994, IRS' internal auditors raised concerns about whether (1) the new procedures for granting installment agreements were encouraging taxpayers to choose installments when they could be paying their taxes in full and (2) the program was leading some taxpayers to accumulate debt they may not be able to pay. The installment agreement program was established to provide taxpayers who cannot pay their taxes in full, when they are due, an opportunity to pay in installments. Before the program was revised in April 1992, taxpayers whose agreements were for tax debts above $5,000 were required to provide financial data to substantiate their inability to pay in full and on time. Under its streamlined procedures, IRS relies on taxpayers to determine for themselves whether they can pay in full or want to pay in installments, as long as the amount owed does not exceed $10,000 and the payment period meets IRS requirements. IRS recognizes that this may result in some taxpayers opting for installment agreements even though they could have paid in full and on time. IRS collection officials told us they did not know the extent to which this occurs, but they believed the benefits from streamlining outweigh any unintended negative effects of making installment agreements available to taxpayers who can pay in full. This issue was raised by IRS' internal auditors in their September 1994 report on using and processing installment agreement requests received with tax returns. The auditors reviewed a sample of 2,824 pre-assessed installment agreements--those agreements requested by taxpayers when they filed their tax returns--granted in 1993 and found that 22 percent of the taxpayers had paid in full with their return the previous year, while another 10 percent had fully paid later during the collection notice process. The auditors reasoned that on the basis of the taxpayer's payment history, some of these taxpayers could have paid their taxes in full in the year they entered into an agreement. In addition, to obtain more conclusive information on whether some taxpayers who entered into installment agreements could have paid their taxes on time, the auditors contacted 87 taxpayers who received pre-assessed agreements. The auditors were told by 41 percent of these taxpayers that they could have fully paid their accounts by withdrawing savings, liquidating assets, or borrowing. In response to IRS' internal audit findings, IRS has begun taking steps to discourage taxpayers who can pay in full from using installment agreements. For example, IRS revised Form 9465 to advise taxpayers to consider other alternatives, such as bank loans, before requesting an installment agreement when filing a tax return. IRS' streamlined procedures allow for new tax debt to be added to an existing installment agreement without a review of a taxpayer's financial condition or of possible remedies to incurring future debt, provided the new aggregate balance does not exceed $10,000 and the payment period meets IRS requirements. IRS data show that about 16 percent of the agreements granted in fiscal year 1994 were added to existing installment debt. In their September 1994 report, IRS internal auditors expressed concern that IRS procedures allowed taxpayers to incur tax debts beyond what they could reasonably be expected to pay. The auditors stated that allowing taxpayers to add tax debt beyond what could be paid within a reasonable time would increase IRS' accounts receivable balance and its costs to collect taxes. According to an IRS official, one explanation for why the practice of accumulating debt was allowed is that IRS accommodated taxpayers who had balance due accounts because of 1992 changes in the withholding tables. During that period, IRS assumed that many taxpayers would owe taxes unexpectedly and allowed taxpayers to pay those taxes by adding debt to existing agreements under streamlined procedures. That policy continued through 1994 when, as a result of concerns from IRS' internal auditors, IRS took several steps to address the issue for the 1995 tax filing season. For example, the monthly installment agreement reminder notices for December 1994 included a special reminder to taxpayers. The reminder stated that under the terms of their existing agreements the taxpayers were not eligible for another installment agreement while their existing agreements were in effect and that all federal tax liabilities must be paid in full or they would be in default. Also, Form 9465 was revised to inform taxpayers that they are not to use the form if they were currently making installment payments and that the agreement would be in default if all liabilities were not paid in full. In addition, in January 1995, IRS issued procedures to field personnel working installment agreements to prevent taxpayers from adding new tax debt to existing liabilities. IRS plans to revisit this issue before the 1996 tax filing season. IRS internal auditors also reviewed whether taxpayers with installment agreements acted on their own to avoid the need for future agreements. In doing so, IRS contacted 87 taxpayers who were granted pre-assessed installment agreements and found that 39 percent had not adjusted their withholding or estimated payments to avoid owing money on successive tax returns. Although acceptance letters to taxpayers contain instructions for making such adjustments, no such instructions appear on Form 9465, which is the initial form completed by taxpayers who request pre-assessed agreements. The auditors recommended that IRS include a section on Form 9465 for taxpayers to identify the cause of their tax debts and the steps taken to ensure that the condition does not recur the following year. Additionally, IRS' Research Division is studying a group of taxpayers to determine the cause for their delinquencies and through that study intends to determine how best to solve the problem of underwithholding and underestimated payments. As we discussed earlier, the installment agreement program grew rapidly during fiscal years 1991 through 1994. Because of this growth, we believe the administrative operation and efficiency of the program has become increasingly important. In that regard, we reviewed certain aspects of the program and offer several suggestions that could lead to more efficient administration. Specifically, we are concerned about the (1) lack of information taxpayers receive about the length and costs of installment agreements, (2) extent IRS has taken advantage of opportunities to improve program efficiency, and (3) amount of installment agreement debt by taxpayers with agreements lasting more than 5 years. During the term of an agreement, a taxpayer continues to accrue interest and penalty charges on the unpaid balance of the debt. IRS advises taxpayers in its agreement application forms and acceptance letters that interest and penalties will continue to accrue while they are making installment payments. However, IRS does not tell taxpayers the total estimated cost of the agreement, including interest and penalty accruals, nor does IRS tell taxpayers how long it will take to pay off their debt. The lack of information provided by IRS contrasts with prevailing private sector practices, which are governed by truth-in-lending laws. Penalty and interest accruals add considerably to the cost and payoff period of an agreement. For example, assume a taxpayer agrees to make $100 monthly payments on a $2,800 tax debt (the median amounts from our sample). To pay off interest and penalty accruals, the taxpayer would need to make 6 additional monthly payments (34 payments versus 28 payments) and pay an additional $544 (assuming the 0.5 percent per month penalty rate and monthly compounding of interest at 9 percent). Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis computed from the federal short-term rate based on daily compounding. Representatives of consumer groups told us that providing taxpayers with better cost information could lead some taxpayers to consider and use other options to pay their tax debts before choosing installment agreements or assuming long payoff periods. By providing more information to taxpayers on the cost of agreements, IRS may be able to limit agreement use more closely to taxpayers who are unable to pay their taxes on time in a lump sum. IRS officials agreed that more information would be a factor in deterring some taxpayers with other available resources from using IRS' installment agreement program to pay their taxes. However, IRS officials are reluctant to provide specific cost and payoff period projections to installment agreement applicants. The officials are concerned that the estimates they provide at the beginning of an agreement could be misleading because these estimates could change over the life of the agreement. For example, the estimates could be affected by interest rates that are subject to quarterly adjustment and by missed taxpayer payments. A method to alleviate this concern would be to include revised cost and payoff period projections in the monthly statements that IRS sends taxpayers during the course of an agreement. These notices already include information specific to a taxpayer's agreement, such as the amount of payment due and the current unpaid balance. IRS offers taxpayers the option of making installment payments automatically by directly withdrawing funds from the taxpayer's bank account. According to IRS, the advantages to direct debit agreements are they (1) are cheaper to service than the standard agreement, (2) eliminate the chance that a taxpayer will forget to make a payment or send less than the agreed upon payment amount, (3) eliminate the float time associated with processing paper remittances, and (4) may reduce default rates. Although direct debit agreements offer these advantages to IRS, they made up less than 2 percent of the agreements in IRS' inventory at the end of fiscal year 1994. IRS collection officials explained that one reason for the low rate of direct debits is that staff who set up installment agreements view direct debits as additional work because the processing involves performing more steps and gathering more information from taxpayers. According to IRS data, pre-assessed installment agreements accounted for almost 31 percent of the 2.6 million new agreements in fiscal year 1994. Form 9465, the form used by taxpayers to request pre-assessed agreements, does not mention the direct debit option (see app. I), leaving it up to IRS staff to pursue this option later. As noted, however, IRS collections officials indicated that this reliance on staff has limited the number of direct debits. Because of the advantages of the direct debit payment method, it may be worthwhile for IRS to test a revision of the form to include space for taxpayers to authorize direct debits and supply the information necessary to set them up. When taxpayers default on their installment agreements, service center staff must review the taxpayers' accounts and send them a default notice. That notice is a statement informing the taxpayer that the account is not current and, if not corrected, the taxpayer is subject to levy action. Depending on how taxpayers respond to these notices, IRS staff may reinstate the agreement; take some other collection action, such as a levy or lien filing; or place the account in a deferred status where only passive collection actions, such as refund offsets are taken. One service center has suggested that some of the costs incurred on defaulted agreements may be reduced if IRS could send default notices by regular mail rather than certified mail. This change would replace a $1.29 letter with a 23-cent letter (presorted rate) and also reduce some handling costs. Since defaults are not uncommon, the savings in postage costs could be significant. The service center estimated its own annual savings would be nearly $150,000. Our analysis suggests that the service center suggestion has merit. We realize that some default notices may still need to be sent by certified mail because they are used to give taxpayers notice of impending levy actions against their assets. Section 6331(d) of the Internal Revenue Code requires that IRS inform taxpayers in person or by certified mail 30 days before taking levy actions. Other defaulted installment agreements, however, are placed in deferred status, and no levy action is pending because collection action is limited to periodic notices and offsets against future refunds. Our review of the October 1 through 7, 1994, listing of 1,933 defaulted agreements in the Central Region showed that 62 percent of these agreements were below the deferral level. IRS officials agreed that taxpayers in these instances would not need to be sent default notices by certified mail. The officials added that notices for cases subject to levies could continue to be coded to send by certified mail. According to IRS data, in 1994 the average installment agreement was paid off in about 9.5 months. However, a large portion of IRS' installment debt is for agreements that will run for more than 5 years if payments are made at their current levels. Such agreements are costly to administer, and IRS considers them riskier than shorter term agreements. IRS' manual states that installment agreements lasting more than 5 years are not likely to be paid off. Thus, these protracted agreements are candidates for other options, such as an offer in compromise, which is a program that allows taxpayers to liquidate their tax liability through a lump-sum settlement for less than the amount owed. About 18 percent of the agreements we reviewed from three service centers were protracted agreements. These agreements accounted for approximately 53 percent, or $846 million, of the installment debt owed at the three centers. For these agreements, the median balance owed was $5,780, the median monthly payment was $100, and the projected median payoff period was 7.6 years. Some of the protracted agreements in our sample are unlikely to ever be paid off because current payments were not keeping up with accruing interest. These agreements made up about 16 percent of the protracted agreements we reviewed, with a current unpaid balance totaling $292 million. The median monthly payment on these agreements was $50, and the median unpaid balance was $17,530. At IRS' 9-percent annual interest rate as of December 1994, 1 month's interest on the median unpaid balance amounted to $131. IRS officials acknowledged the existence of these types of agreements in their inventory, adding that sometimes accepting a taxpayer's installment payment may be its best option. The officials explained that these payments often represented amounts that may otherwise not be collected. IRS' procedures require staff to periodically review agreements with terms exceeding 3 years to reevaluate taxpayers' financial conditions. Presumably, if the review indicated a better payment option, IRS would pursue it. Since 1991, taxpayer use of installment agreements has grown considerably, and installment agreements have accounted for a growing portion of IRS' collection activity. The program grew more rapidly after IRS made changes in April 1992. IRS internal auditors, however, reported that some taxpayers are using installment agreements even though they were able to fully pay their taxes. This practice conflicts with IRS' intent to reserve installment agreements for taxpayers who cannot otherwise pay their taxes in full when they are due. The auditors also raised concerns about the ease with which taxpayers could accumulate additional tax debt by adding new income tax liabilities to existing agreements. IRS has acted to address the internal auditors' concerns. Our work surfaced several other concerns about certain administrative aspects of the program. For example, IRS does not tell taxpayers the extent that interest and penalty accruals will add to the costs of installment agreements and the payoff time. Providing this information may influence some installment payers to pay in full or make larger monthly payments. In addition, IRS could reduce some of the administrative costs of servicing agreements by (1) encouraging more taxpayers to make installment payments by direct debit and (2) mailing some default notices by regular mail instead of certified mail. Our sample of installment agreements contained a substantial amount of installment debt associated with agreements having payoff periods longer than 5 years. This length of time makes collection of the debt risky and more expensive to administer, according to IRS. IRS reviews agreements every 3 years to explore payment options. To improve the information provided to taxpayers and the administration of the installment agreement program, we recommend that the Commissioner of Internal Revenue notify taxpayers about projected total costs and payoff periods when setting up agreements with taxpayers and when mailing monthly reminder notices, experiment with Form 9465 to test whether having space for taxpayers to authorize direct debit installment payments increases the frequency with which this option is used, and send agreement default notices to taxpayers by regular mail instead of certified mail unless an account is being referred for levy action. Responsible IRS officials, including the Acting Assistant Commissioner, Collection, reviewed a draft of this report and provided oral comments in a meeting on March 27, 1995. The officials said that the report was a fair and accurate assessment of the installment agreement program and that they generally agreed with our recommendations. In response to the recommendations, the Acting Assistant Commissioner said that: IRS will study the feasibility of notifying taxpayers about the projected costs and payment periods of installment agreements. If notification is not feasible under its existing computer systems, IRS will pursue changes as part of its Tax Systems Modernization. In the interim, IRS plans to modify the monthly reminder notice in 1996 to provide taxpayers with a breakdown of the current balance due and penalty and interest charges. IRS will consider options, including modification of Form 9465, to encourage taxpayers to authorize direct debit payments on their installment agreements. IRS will develop methods to identify defaulted installment agreement accounts it does not intend to take levy action against and send default notices to these taxpayers by regular mail. We believe the actions that IRS proposes, if properly implemented, would be responsive to our recommendations. We are sending copies of this report to other congressional committees; the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others upon request. The major contributors to this report are listed in appendix III. If you or your staff have any questions, you can reach me at (202) 512-5407. To profile characteristics of taxpayers with installment agreements, we used the active inventory of installment agreements as of April 23, 1994, at three IRS service centers--Atlanta, GA; Cincinnati, OH; and Fresno, CA. We selected these centers because of their larger inventories and the availability of our staff to review the sample. We identified active installment agreements by obtaining IRS' Taxpayer Service and Returns Processing Categorization of Accounts Receivable (TRCAT) file for each of the three service centers. We isolated installment agreements from the individual master file and then took a stratified random sample of 900 installment agreements from the TRCAT file--300 from each service center. We were able to analyze 722 of these cases. Table II.1 gives information on the total number of cases we sampled from the three service centers. Since we used a probability sample of installment agreements to develop our estimates, each estimate has a measurable precision or sampling error that may be expressed as an upper and lower limit. A sampling error indicates how closely we can reproduce from a sample the results that we would obtain if we were to take a complete count of the study population using the same measurement methods. The difference between the upper and lower limits is called a confidence interval. Sampling errors and confidence intervals are stated at a certain confidence level--in this case 95 percent. For example, a confidence interval at the 95-percent confidence level means that in 95 out of 100 instances, the sampling procedures we used would produce a confidence interval containing the population value we are estimating. We attempted to gather profile information from IRS' records on all 900 sample cases. Due to a 2-month time lag in processing sample information and obtaining the records from IRS' Integrated Data Retrieval System, we were unable to obtain profile data for certain cases. Therefore, we excluded these cases from our sample analysis. We found the majority of the excluded cases involved installment agreements that had been paid off by the taxpayer during the period we were gathering our data. We also excluded installment agreements cases that had been paid off but a new agreement was created during the 2-month lag in obtaining IRS records because these new cases were technically not part of the April 23, 1994, inventory. We excluded other agreements granted to pay off trust fund recovery penalties because these types of debts are not related to payments of personal income taxes and would have biased our analysis. Finally, we excluded cases that IRS was unable to locate in its records. Table II.2 gives the reasons for excluding sample cases and the estimate for each category of excluded cases. Table II.3 contains profile information we gathered on the sample installment agreements taken from the TRCAT file. This file is a snapshot of the installment agreements IRS was managing on April 23, 1994. The sample results may not be indicative of all installment agreements managed by IRS at the three service centers at any other point in time. Median age of agreements (months) Median payoff period (months) Median number of tax periods in Percent of agreements with added tax Percent of agreements covering: Three or more tax years Percent of agreements that have been in default status at least once Reason agreement was added (percent): Collection status when entering agreement (percent): Agreements granted for tax year 1992 only Median adjusted gross income of Percent with adjusted gross income over (continued) Percent of total agreements made up by Percent of total unpaid balance made up agreements (millions) Median unpaid balance for protracted Median monthly payment for protracted Median payoff period for protracted agreements (years) Percent of protracted agreements made up by agreements with monthly payments insufficient to keep up with accruals Unpaid balance on agreements with insufficient payments (millions) Robert I. Lidman, Regional Assignment Manager Richard C. Edwards, Evaluator-in-Charge Donald L. Allgyer, Evaluator Jennifer C. Jones, Evaluator Mary Jo Lewnard, Technical Advisor Kenneth R. Libbey, 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 reviewed the Internal Revenue Service's (IRS) Installment Agreement Program, focusing on the: (1) increase in installment agreements since IRS streamlined the processing and approval of taxpayers' requests for installment agreements; (2) effects these changes had on IRS collection activities; (3) internal auditors' concerns regarding these changes; (4) information that IRS provides taxpayers on their liabilities under installment agreements; and (5) administrative practices that could improve the installment agreement program. GAO found that: (1) the 2.6 million new installment agreements approved in fiscal year (FY) 1994 represented a 136-percent increase over the number of FY 1991 installment agreements; (2) the amount of taxes paid through new installment agreements increased 135 percent between FY 1991 and 1994 and accounted for 33 percent of the delinquent taxes paid in FY 1994; (3) installment agreement program changes have affected IRS collection activities by reducing Automated Collection System collections and the routine collection process workload; (4) IRS internal auditors have raised concerns about the ease of entering into installment agreements and IRS failure to instruct taxpayers to amend their withholding or estimated taxes to prevent future delinquencies; (5) IRS may be permitting financially capable taxpayers to avoid paying their tax debts in one on-time payment and to accumulate tax debts by adding new tax balances to existing agreements; (6) IRS is taking steps to reduce the problems the auditors identified; and (7) administrative changes to improve the installment agreement program and reduce costs include informing taxpayers of the applicable penalties and interest that will be added to their installment agreements, allowing taxpayers to make electronic direct debit payments, and sending some default notices by regular mail instead of certified mail.
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The procedures under UMRA for the identification and analysis of intergovernmental and private sector mandates are very complex. Moreover, some potential mandates are enacted through procedures that never require them to be reviewed under UMRA. For example, UMRA does not require the automatic review of potential mandates contained in appropriation bills, nor does the act cover rules that were issued as final without having been preceded by a notice of proposed rulemaking. Even if proposed legislation or regulations are reviewed under UMRA, those provisions are subject to various definitions, exclusions, and exceptions before being identified as containing mandates at or above UMRA's cost thresholds. For example, UMRA does not apply to legislative provisions that cover constitutional rights, discrimination, emergency aid, accounting and auditing procedures for grants, national security, treaty ratification, and certain parts of Social Security. As figure 1 illustrates, a provision in legislation must pass through a multiple step process before the Congressional Budget Office prepares required statements identifying and estimating the costs of mandates in legislation that meet certain criteria and determines whether or not those estimated costs meet or exceed UMRA's thresholds. Based on UMRA's requirements, we found that few provisions in statutes or rules are considered mandates as defined by UMRA. As mentioned previously, in 2001 and 2002, the period of our review, only 5 of the 377 statutes enacted and 9 of the 122 major rules issued contained federal mandates at or above UMRA's thresholds. All 5 statutes and 9 rules contained private sector mandates and only one final rule--an Environmental Protection Agency standard on arsenic in drinking water-- contained an intergovernmental mandate. Despite the determinations made under UMRA, nonfederal parties affected by federal actions viewed many more federal actions in statute and regulation as containing unfunded or under funded mandates. When we explored this issue, we found that some of the statutes and rules that had not triggered UMRA's requirements appeared to have potential financial impacts on affected parties similar to those of actions that had been flagged as containing mandates at or above UMRA' s thresholds. Specifically, we identified at least 43 statutes and 65 rules issued in 2001 and 2002 that resulted in new costs or other negative financial impacts on nonfederal parties that the affected parties might perceive as unfunded or under funded mandates even though they did not meet UMRA's definition of a mandate or did not meet or exceed UMRA's thresholds. For these statutes and rules, CBO or federal agencies most often had determined that the estimated direct costs or expenditures, as defined by UMRA, would not meet or exceed the applicable thresholds or that one or more of the other definitions, exclusions, or exclusions applied. These findings raised the question of whether UMRA, given its procedures, definitions, and exclusions, adequately captures and subjects to scrutiny federal statutory and regulatory actions that might impose significant financial or other burdens on affected nonfederal parties. To begin to address this question, you asked us to obtain the views of a diverse group of parties knowledgeable about UMRA and federal mandates. Parties from the various sectors provided a variety of comments but they generally fell into several broad themes. UMRA's coverage was the most frequently cited theme, with comments provided by all the sectors (academic/think tank, business, federal agencies, public interest advocacy groups, and state and local governments). Issues involving enforcement were the second most frequently cited but with far fewer parties providing comments. Other themes that emerged from the comments included the use and usefulness of the information generated under UMRA, UMRA's analytic framework, and consultation under UMRA. Finally, issues involving the design and funding and evaluation of federal mandates also emerged as themes. Given the findings from our May 2004 report, it's not surprising that UMRA's coverage, including its numerous definitions, exclusions, and exceptions, was the most frequently cited issue by parties from all five sectors. Most parties from the state and local governments, federal agency, business, and academic/think tank sectors viewed UMRA's narrow coverage as a major weakness that leaves out many federal actions with potentially significant financial impacts on nonfederal parties. However, a few parties, from public interest advocacy groups and academic/think tank sectors, considered some of the existing exclusions important or identified UMRA's narrow scope as one of the Act's strengths. The comments about weaknesses in UMRA's coverage ranged from general to specific. For example, some parties commented, in general, about the number of exclusions and exemptions. Others provided more specific comments, including points regarding issues with the exclusion of indirect costs and UMRA's cost thresholds for legislative and regulatory mandates, which result in excluding many federal actions that may significantly impact nonfederal entities. Others raised more fundamental concerns about the exclusions for appropriations and other legislation not covered by the Act and for rules issued by independent regulatory agencies, which are also not covered by UMRA but can result in provisions that contain mandates. CBO estimates that in 2004, 5 of the 8 laws containing federal mandates (as defined by UMRA) that it did not review before enactment, were appropriations acts. Finally, parties from the state and local government sector also identified concerns about gaps in UMRA's coverage of federal preemption of state and local authority. Although some preemptions are covered by UMRA such as those that preempt state or local revenue raising authority, they are covered only for legislative actions and not for federal regulations. According to CBO's 2005 report on unfunded mandates, "Over half of the intergovernmental mandates for which CBO provided estimates were preemptions of state and local authority." Despite the widespread view in several sectors that UMRA's narrow coverage leaves out federal actions with potentially significant impacts on nonfederal entities, there was less agreement by parties about how to address this issue. The options ranged from general to specific but those most frequently suggested were: Generally revisit, amend, or modify the definitions, exceptions, and exclusions under UMRA and expand UMRA's coverage. Clarify UMRA's definitions and ensure their consistent implementation across agencies to ensure that all covered provisions are being included. Change the cost thresholds and/or definitions that trigger UMRA by, for example, lowering the threshold for legislative or executive reviews and expanding cost definitions to include indirect costs. Eliminate or amend the definitional exceptions for conditions of federal financial assistance or that arise from participation in voluntary federal programs. Expand UMRA coverage to all preemptions of state and local laws and regulations, including those nonfiscal preemptions of state and local authority. As I mentioned previously, while most parties thought UMRA's narrow coverage was a weakness, a few parties from academic/think tank and public interest advocacy groups sectors view UMRA coverage differently. They viewed UMRA's narrow scope as one of its primary strengths. In fact, rather than expanding UMRA's coverage, these parties said that it should be kept narrow and that the exceptions and exclusions are needed. Between 1996 and 2004, CBO reports that of 5,269 intergovernmental statements, 617 had mandates and of 5,151 private sector statements, 732 had mandates. Of the mandates identified by CBO, about 9 percent of the intergovernmental mandates and almost 24 percent of private sector mandates had costs that would exceed the thresholds. As discussed at our January 26, 2005, symposium on UMRA and federal mandates, some parties also identified a number of suggestions that they could not support, namely any attempt to expand UMRA to cover constitutional or civil rights or excluding private sector mandates. Issues involving UMRA enforcement were the second most frequently cited issue but with far fewer parties from each sector commenting. Parties across and within sectors had differing views on both the enforcement mechanisms provided in the law itself and the level of effort exercised by those responsible for implementing UMRA's provisions. Many of the comments focused on the point of order--one of the primary tools used to enforce UMRA requirements in title I of UMRA. Although the point of order provides members of Congress the opportunity to raise challenges to hinder the passage of legislative provisions containing an unfunded intergovernmental mandate, views were mixed about its effectiveness. Those representing state and local government and federal agency sectors said that the point of order should be retained because it has been successful in reducing the number of unfunded mandates by acting as a deterrent to their enactment, without greatly impeding the process. Conversely, some parties primarily from academic/think tank, business, and federal agency sectors did not believe the point of order has been effective in preventing or deterring the enactment of mandates and suggested otions to strengthen it. Moreover, others commented about its infrequent use. Some parties said the point of order needs to be strengthened by making it more difficult to defeat. One suggested revision was to require a three- fifths vote in Congress, rather than a simple majority, to overturn a point of order. This change was believed to strengthen the "institutional salience of UMRA" and to ensure that no mandate under UMRA could be enacted if it was supported only by a simple majority. As you know, on March 17, 2005, the Senate approved the fiscal year 2006 budget, which included a provision that would increase to 60 the number of votes needed to overturn an UMRA point of order in the Senate. A few parties from the federal agency and academic/think tank sectors commented on another enforcement mechanism for regulatory mandates--UMRA's judicial review provision, which subjects any agency compliance or noncompliance with certain provisions in the Act to judicial review. Most felt that this mechanism does not provide meaningful relief or remedies if federal agencies have not complied with the requirements of UMRA because of its limited focus. Specifically, judicial review is limited to requirements that pertain to preparing UMRA statements and developing federal plans for mandates that may significantly impact small government agencies. Furthermore, if a court finds that an agency has not prepared a written statement or developed a plan for one of its rules, the court can order the agency to do the analysis and include it in the regulatory docket for that rule; but the court may not block or invalidate the rule. The few parties commenting about judicial review suggested expanding it to provide more opportunities for judicial challenges and more effective remedies when noncompliance of the Act's requirements occur. A few parties primarily from the academic/think tank and public interest advocacy groups sectors said that efforts to limit or stop implementation of mandates through legal action might be unwarranted, because UMRA was not intended to preclude the enactment of federal mandates. They were primarily concerned about litigation being used to slow down the regulatory process. Commenting parties from business, federal agency, and state and local governments sectors questioned some federal agencies' compliance with UMRA requirements and the effectiveness of enforcement mechanisms to address this perceived noncompliance. They mentioned the failure of some agencies to consult with state, local and tribal governments when developing regulations that may have a significant impact on nonfederal entities. Likewise, at least one party of each of the three sectors expressed concerns about the lack of accurate and complete information provided by federal agencies, which are responsible for determining whether a rule includes a mandate and whether it exceeds UMRA's thresholds. The perceived lack of compliance with certain UMRA requirements generated several suggested changes to UMRA. However, the only suggestion that had support across parties from multiple sectors was to replicate CBO's role for legislative mandates by creating a new office within OMB that would be responsible for calculating the cost estimates for federal mandates in regulations. Parties from all sectors also raised a number of other issues about the use and usefulness of UMRA information (in decreasing the number of unfunded mandates), UMRA's analytic framework, and federal agency consultations with state, local, and tribal governments, but there was no consensus in their views about how these issues should be addressed. The parties provided mixed but generally positive views about the use and usefulness of UMRA information. Some parties commented that the Act does increase awareness of unfunded mandates but thought more could be done to increase its usefulness. However, the only option that attracted multiple supporters was a suggestion for a more centralized approach for generating information within the executive branch similar to the suggestions mentioned about improving enforcement. Parties also provided a number of comments about the provisions of UMRA that establish the analytic framework for cost estimates, which generated a few suggested options aimed at improving the quality of information generated such as including indirect costs for threshold purposes and clarifying certain definitions (e.g. "federal mandates" and "enforceable duty"). UMRA's consultation also emerged as a recurring theme within and across certain sectors. The comments generally were about a perceived lack of consistency across agencies when consulting with state and local governments. Parties from all sectors also raised a number of broader issues about federal mandates--namely, the design and funding and evaluation of federal mandates--and suggested a variety of options. While most of the comments were about the evaluation of federal mandates, some parties also raised concerns about the design and funding of mandates, which varied across sectors. Issues raised include: (1) costs for mandates may vary across different affected nonfederal entities, (2) mismatches between the funding needs of parties compared to federal formulas, and (3) effects of the timing of federal actions and program changes on nonfederal parties. Most often, the comments focused on a perceived mismatch between the costs of federal mandates and the amount of federal funding provided to help carry them out. Others raised issues about the need to address the incentives for the federal government to "over leverage" federal funds by attaching (and often revising) additional conditions for receiving the funding. Parties, primarily from the academic/think tank sector, suggested a wide variety of options to address their concerns, but there was no broad support for any option. For example, while some parties across four sectors suggested providing waivers or offsets to reduce the costs of the mandates on affected parties or "off ramps" to release them of some responsibilities to fulfill the mandates in a given year if the federal government does not provide sufficient funding. Others said that compliance with federal mandates should not be made contingent on full federal funding and off ramps and waivers can introduce other issues. The option of building into the design of federal mandates "look back" or sunset provisions that would require retrospective analyses of the mandates' effectiveness and results was also suggested. About half the parties, representing most sectors commented on the evaluation of federal mandates and offered suggestions to improve mandates, whether covered by the Act or not. Not surprisingly parties in the academic/think tank sector, who felt that the evaluation of federal mandates was especially important because there is a lack of information about the effects of federal mandates on affected parties, provided most of the comments. The issues raised included concerns about the lack of focus on evaluating the effectiveness (results) of the mandates; the questionable accuracy and completeness of cost estimates, particularly ones prepared by federal agencies, and the lack of evaluation of the impact of mandates. All of these issues are related and the concerns expressed touched upon the need to adequately evaluate mandates in the context of costs, benefits, impacts, and effectiveness of the mandated actions to achieve desired goals. Parties across the sectors suggested that various forms of retrospective analysis are needed for evaluating federal mandates after they are implemented. Some suggestions for retrospective analysis focused on costs and effectiveness of mandates, including comparing them to the estimates and expected outcomes. Others from the state and local governments sector also suggested focusing on the cumulative costs and effects of mandates--the impact of various related federal actions, which when viewed collectively, may have a substantial impact although any one may not exceed UMRA's thresholds. Finally, parties primarily from the academic/think tank sector suggested examining local and regional impacts of mandates and analyzing the benefits of federal mandates, when appropriate, not just costs. As Congress reevaluates UMRA on its 10-year anniversary, the information we provided over the past year provides some useful insights. First, although parties from various sectors generally focused on the areas of UMRA and federal mandates that they would like to see fixed, they also recognized positive aspects and benefits of UMRA. In particular, they commented about the attention UMRA brings to potential consequences of federal mandates and how it serves to keep the debate in the spotlight. I also found it notable that no one suggested repealing UMRA. Second, when considering changes to UMRA itself, UMRA's narrow coverage stands out as the primary issue for most sectors because it excludes so many actions from coverage under UMRA and contributes to complaints about unfunded or under funded mandates as discussed in both of our reports. Even with an issue such as coverage on which there was some general agreement across most sectors, the variety of suggested options indicates that finding workable solutions will require including all affected parties in the debate. Third, one of the challenges for Congress and other federal policy makers is to determine which issues and concerns about federal mandates are best addressed in the context of UMRA and which are best considered as part of more expansive policy debates on federal mandates and federalism. On broader policy issues concerning federal mandates, various parties recognized that UMRA is only part of the solution and the issue raises broader public policy questions about structuring and funding mandates in general. These parties made it clear that retrospective analysis is needed to ensure that mandates are achieving their desired goals, which could help provide additional accountability for federal mandates and provide information that could lead to better decisions regarding the design and funding of mandate programs. Finally, as we move forward in an environment of constrained fiscal resources, the issue of unfunded mandates raises broader questions about the assignment of fiscal responsibilities within our federal system. Reconsideration of such responsibilities begins with the observation that most major domestic programs, costs, and administrative responsibilities are shared and widely distributed throughout our system. Part of this public policy debate includes a reexamination of the federal government's role in our system and a need to sort out how responsibilities for these kinds of programs should be financed in the future. If left unchecked, unfunded mandates can weaken accountability and remove constraints on decisions by separating the enactment of benefit programs from the responsibility for paying for these programs. Likewise, 100 percent federal financing of intergovernmental programs can pervert fiscal incentives necessary to ensure proper stewardship at the state and local level for shared programs. Mr. Chairman, once again I appreciate the opportunity to testify on these important issues and I would be pleased to address any questions you or other members of the committee might have. If additional information is needed regarding this testimony, UMRA or federal mandates, please contact Orice M. Williams at (202) 512-5837 or [email protected] or Tim Bober at (202) 512-4432 or [email protected]. Other key contributors to the work which was associated with this testimony were Tom Beall, Kate Gonzalez, and Boris Kachura.
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The Unfunded Mandates Reform Act of 1995 (UMRA) was enacted to address concerns about federal statutes and regulations that require nonfederal parties to expend resources to achieve legislative goals without being provided funding to cover the costs. UMRA generates information about the nature and size of potential federal mandates but does not preclude the implementation of such mandates. At various times in UMRA's 10-year history, Congress has considered legislation to amend aspects of the act to address ongoing questions about its effectiveness. This testimony is based on GAO's reports, Unfunded Mandates: Analysis of Reform Act Coverage ( GAO-04-637 , May 12, 2004) and Unfunded Mandates: Views Vary About Reform Act's Strengths, Weaknesses, and Options for Improvement ( GAO-05-454 , March 31, 2005). Specifically, this testimony addresses (1) UMRA's procedures for the identification of federal mandates and GAO's analysis of the implementation of those procedures for statutes enacted and major rules issued in 2001 and 2002, and (2) the views of a diverse group of parties familiar with UMRA on the significant strengths and weaknesses of the act as the framework for addressing mandate issues and potential options for reinforcing the strengths or addressing the weaknesses. The identification and analysis of intergovernmental and private sector mandates is a complex process under UMRA. Proposed legislation and regulations are subject to various definitions, exceptions, and exclusions before being identified as containing mandates at or above UMRA's cost thresholds. Also, some legislation and rules may be enacted or issued via procedures that do not trigger UMRA reviews. In 2001 and 2002, 5 of 377 statutes enacted and 9 of 122 major or economically significant final rules issued were identified as containing federal mandates at or above UMRA's thresholds. Despite the determinations under UMRA, at least 43 other statutes and 65 rules resulted in new costs or negative financial consequences that affected nonfederal parties might perceive as unfunded or underfunded federal mandates. GAO obtained information from 52 knowledgeable parties, who provided a significant number of comments about UMRA, specifically, and federal mandates, generally. Their views often varied across and within the five sectors we identified (academic/think tank, public interest advocacy groups, business, federal agencies, and state and local governments). Overall, the numerous strengths, weaknesses, and options for improvement identified during the review fell into several broad themes, including, among others, UMRA-specific issues such as the act's coverage and enforcement, and more general issues about the design, funding, and evaluation of federal mandates. UMRA's coverage was, by far, the most frequently cited issue by parties from the various sectors. Parties across most sectors said that UMRA's numerous definitions, exclusions, and exceptions leave out many federal actions that might significantly impact nonfederal entities and suggested that they should be revisited. However, a few parties, primarily from the public interest advocacy sector, viewed UMRA's narrow coverage as a strength that should be maintained. Another issue on which the parties had particularly strong views was the perceived need for better evaluation and research of federal mandates and more complete estimates of both the direct and indirect costs of mandates on nonfederal entities. The most frequently suggested option to address these evaluation issues was more post-implementation evaluation of existing mandates or "look backs" at their effectiveness. Going forward, the issue of unfunded mandates raises broader questions about assigning fiscal responsibilities within our federal system. The long-term fiscal challenges facing the federal and state and local governments and the continued relevance of existing programs and priorities warrant a national debate to review what the government does, how it does business, and how it finances its priorities. Such a reexamination includes considering how responsibilities for financing public services are allocated and shared across the many nonfederal entities in the U.S. system.
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There is no single definition for financial literacy, but it has previously been described as the ability to make informed judgments and to take effective actions regarding current and future use and management of money. Financial literacy encompasses both financial education and consumers' behavior as it relates to their ability to make informed judgments. Financial education refers to the processes whereby individuals improve their knowledge and understanding of financial products, services, and concepts. However, being financially literate refers to more than simply being knowledgeable about financial matters--it also entails utilizing that knowledge to make informed decisions, avoid pitfalls, and take other actions to improve one's present and long-term financial well-being. Evidence indicates that many U.S. consumers could benefit from improved financial literacy efforts. In a 2010 survey of U.S. consumers prepared for the National Foundation for Credit Counseling, a majority of consumers reported they did not have a budget and about one-third were not saving for retirement. In a 2009 survey of U.S. consumers by the FINRA Investor Education Foundation, a majority believed themselves to be good at dealing with day-to-day financial matters, but the survey also revealed that many had difficulty with basic financial concepts. Further, about 25 percent of U.S. households either have no checking or savings account or rely on alternative financial products or services that are likely to have less favorable terms or conditions, such as nonbank money orders, nonbank check-cashing services, or payday loans. As a result of this situation, many Americans may not be planning their finances in the most effective manner for maintaining or improving their financial well-being. In addition, individuals today have more responsibility for their own retirement savings because traditional defined-benefit pension plans have declined substantially over the past two decades. As a result, financial skills are increasingly important for those individuals in or planning for retirement to help ensure that retirees can enjoy a comfortable standard of living. Federal financial literacy programs and resources are spread widely among many different federal agencies, raising concerns about fragmentation and potential duplication of effort. As we noted in our recent report on overlap, duplication, and fragmentation, in 2009, more than 20 different agencies had more than 50 financial literacy initiatives under way that covered a number of topics, used a variety of delivery mechanisms, and targeted a range of audiences. This distribution of federal financial literacy efforts across multiple agencies can have certain advantages. For example, different agencies can focus their efforts on particular subject matter or target specific audiences for which they have expertise. However, this fragmentation also increases the risk of inefficiency and redundancy and highlights the need for strong coordination of these efforts. Further, fragmentation of programs across many federal agencies can make it difficult to develop a coherent overall approach for meeting needs, identifying gaps, and rationally allocating overall resources. Because of the fragmentation of federal financial literacy efforts, coordination among agencies is essential to avoid inefficient, uncoordinated, or redundant use of resources. Identifying potential inefficiencies can be challenging because federal financial literacy efforts have numerous different funding streams and there are little good data on the amount of federal funds devoted to financial literacy. Financial literacy efforts are not necessarily organized as separate budget line items or cost centers within federal agencies and there is no estimate of overall federal spending for financial literacy and education, according to the Department of the Treasury. In part to encourage a more coordinated response to financial literacy, in 2003 Congress created the multiagency Financial Literacy and Education Commission and mandated that the Commission develop a national strategy. We conducted a review of the Commission in 2006 and made recommendations related to enhancing public-private partnerships, conducting independent reviews of duplication and effectiveness, and conducting usability testing of the Commission's MyMoney.gov Web site. We subsequently reported that the Commission had made progress in cultivating sustainable partnerships with states, localities, nonprofits, and private entities, and had acted on our recommendation to measure customer satisfaction with its Web site. The Commission and the Department of the Treasury also initiated two independent reviews, as we had recommended, addressing overlap in federal activities and the availability and impact of federal financial literacy materials. As we have noted in the past, the Commission faces significant challenges in its role as a centralized focal point: it is composed of many agencies, but it has no independent budget and no legal authority to compel member agencies to take any action. Our 2006 review also found that while the Commission's initial national strategy was a useful first step in focusing attention on financial literacy, it was largely descriptive rather than strategic. In particular, the national strategy was comprehensive to the extent of discussing major issues and challenges in improving financial literacy and describing initiatives in government, nonprofit, and private sectors. However, it did not include a plan for implementation and only partially addressed some of the characteristics we had previously identified as desirable for any effective national strategy. For example, although it provided a clear purpose, scope, and methodology, it did not go far enough to provide a detailed discussion of problems and risks; establish specific goals, performance measures, and milestones; discuss the resources that would be needed to implement the strategy; or discuss, assign, or recommend roles and responsibilities for achieving its mission. However, in December 2010, the Commission released a new national strategy that identifies five action areas--policy, education, practice, research, and coordination--and clearly lays out a series of goals and related objectives intended to help guide financial literacy efforts over the next several years. To supplement this national strategy, the Commission has said it will be releasing an implementation plan for the strategy by the end of this fiscal year. While the new national strategy clearly identifies action areas and related goals and objectives, it still needs to incorporate specific provisions for performance measures, resource needs, and roles and responsibilities, which we believe to be essential for an effective strategy. The new strategy will benefit if the forthcoming implementation plan incorporates these elements, as well as addresses the fragmentation of federal financial literacy efforts. More recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the establishment of an Office of Financial Education within the new Bureau of Consumer Financial Protection, further underscoring the need for coordination among federal agencies on this topic. The Dodd-Frank Act charges the new office within the bureau with developing and implementing a strategy to improve financial literacy through activities including opportunities for consumers to access, among other things, financial counseling; information to assist consumers with understanding credit products, histories, and scores; information about saving and borrowing tools; and assistance in developing long-term savings strategies. This new office presents an opportunity to further promote awareness, coordinate efforts, and fill gaps related to financial literacy. At the same time, the duties this office is charged with fulfilling are in some ways similar to those of the separate Office of Financial Education and Financial Access within the Department of the Treasury. As noted above, the Dodd-Frank Act charges the Bureau of Consumer Financial Protection with developing and implementing a strategy on improving the financial literacy of consumers--one that is consistent with, but separate from, the strategy required of the Commission. Thus, these entities will need to coordinate their roles and activities closely to avoid unnecessary overlap and make the most productive use of resources. Coordination and partnership among federal, state, nonprofit, and private sectors are also essential in addressing financial literacy, and there have been positive developments in these areas in recent years. For example, a recent partnership between the National Credit Union Administration, the Department of Education, and the Federal Deposit Insurance Corporation aims to improve the financial education of millions of students. These three agencies are coordinating to facilitate partnerships among schools, financial institutions, federal grantees, and other stakeholders to provide effective financial education. Additionally, the National Financial Education Network, the President's Advisory Council on Financial Capability, and the Community Financial Access Pilot all represent examples of progress in fostering partnerships among participants in financial education. For example, our review in 2009 found that the establishment of the National Financial Education Network was a useful initial action to facilitate and advance financial education at the state and local levels. Similarly, the President's Advisory Council on Financial Capability facilitates strategic alliances among federal, private, and nonprofit enterprises. Although numerous financial literacy initiatives are conducted by federal, state, local, nonprofit, and private entities throughout the country, there is little definitive evidence available on what specific programs and approaches are most effective. As part of ongoing work we are performing in response to a mandated study in the Dodd-Frank Act, we are conducting a review of studies that have evaluated the effectiveness of financial literacy efforts. More than 100 articles, papers, and studies have been published on the general topic of financial literacy since 2000, but our preliminary findings have identified only about 20 papers that constitute empirically based evaluations on the effectiveness of specific financial education programs. In addition, only about 10 of these studies actually measured the impact of a program on participants' behavior rather than simply identifying a change in the consumer's knowledge, understanding, or intent. This distinction is important because a change in behavior is typically the ultimate goal of any financial literacy program, and changes in behavior do not necessarily follow from changes in knowledge or understanding. We are currently in the process of analyzing the results of these studies and look forward to reporting more fully on our findings this summer. But in general, the consensus among a wide variety of stakeholders in the field of financial literacy is that relatively little is known about what financial literacy approaches are most effective in meaningfully changing consumers' financial behavior. The limited number of rigorous, outcome-based evaluations of financial literacy programs is likely the result of several factors. Because the field of financial literacy is relatively new, many programs have not been in place long enough to allow for a long-term study of their effectiveness; many of the key federal financial literacy initiatives were created only within the past 10 years. In addition, experts in financial literacy and program evaluation have cited many significant challenges to conducting rigorous and definitive evaluations of financial literacy programs. For example, measuring a change in participant behavior is much more difficult than measuring a gain in knowledge, which can often be captured through a simple post-course survey. Similarly, financial literacy programs often seek to effect change over the long term, which means that effective evaluation can require ongoing follow up with participants--a complex and expensive process. In addition, discerning the impact of the financial literacy program as distinct from other influences, such as changes in the overall economy, can often be difficult. Nonetheless, given that federal agencies have limited resources, focusing federal financial literacy resources on initiatives that work is important. Some federal financial literacy programs, such as the Federal Deposit Insurance Corporation's Money Smart, have included a strong evaluation component, while others have not. The Financial Literacy and Education Commission and many federal agencies have recognized the need for a greater understanding of which programs are most effective in improving financial literacy. The Commission's original national strategy in 2006 noted, for example, that more research and program evaluation are needed so that organizations are able to validate or improve their efforts and measure the impact of their work. In response, in October 2008, the Department of the Treasury and the Department of Agriculture convened, on behalf of the Commission, the National Research Symposium on Financial Literacy and Education, which discussed academic research priorities related to financial literacy. Moreover, we are pleased to see that the Commission's new 2011 national strategy sets as one of its four goals to "identify, enhance, and share effective practices." The new strategy sets objectives for reaching this goal that include, among other things, (1) encouraging research on financial literacy strategies that affect consumer behavior, (2) establishing a clearinghouse for evidence-based research and evaluation studies, (3) developing and disseminating tools and strategies to encourage and support program evaluation, and (4) forming a network for sharing research and best practices. These measures are positive steps in helping ensure that, in the long term, scarce resources are focused efficiently and effectively. At the same time, as we have noted in the past, an effective national strategy goes beyond simply setting objectives; it also must describe the specific actions needed to accomplish goals, identify the resources required, and discuss appropriate roles and responsibilities for the players involved. We encourage the Commission and its participating agencies to incorporate these elements into the national strategy's implementation plan, which is slated to be released later this year. In addition, it is important to note that financial education is not the only approach--or necessarily always the best approach--for improving consumers' financial behavior. Alternative strategies or mechanisms, sometimes in conjunction with financial education, have also been successful in improving financial behavior. In particular, insights from behavioral economics that recognize the realities of human psychology have been used effectively to design strategies to assist consumers in reaching financial goals without compromising their ability to choose among different products or approaches. For example, one strategy has been to use what are referred to as commitment mechanisms, such as having individuals commit well in advance to allocating a portion of their future salary increases toward a savings plan. Another strategy for encouraging consumers to increase their savings has been to use incentives with tangible benefits, such as matching funds. In addition, changing the default option for enrollment in retirement plans--that is, automatically enrolling new employees while giving them the opportunity to opt out--has led to significant increases in plan participation rates among some organizations. The most effective approach to improving consumers' financial decision making and behavior may be to use a variety of these types of strategies in conjunction with financial education. As I noted during my confirmation hearing, financial literacy is an area of priority for me as Comptroller General, and during my tenure, I hope to draw additional attention to this important issue. Improving financial literacy involves many stakeholders and must be a partnership between the federal government, state and local governments, the private and nonprofit sectors, and academia. My hope is that GAO can play a role in facilitating knowledge transfer among these different entities, as well as working with other organizations in the accountability community, such as the American Institute of Certified Public Accountants. Almost 7 years ago we hosted a forum on the role of the federal government in improving financial literacy. At that forum, public and private sector experts highlighted, among other things, the need for the federal government to serve as a leader in this area, but they also stressed the importance of public-private partnerships. We will host another forum on financial literacy later this year to bring together experts in financial literacy and education from federal and state agencies, nonprofit organizations representing consumers, educational and academic institutions, and private sector employers. This forum will address the gaps that exist in financial literacy efforts, challenges that federal agencies may face in addressing these gaps, and opportunities for improving the federal government's approach to financial literacy. In addition, as part of our audit and oversight function, we will continue to conduct evaluations of the efficiency and effectiveness of federal financial literacy efforts. Financial literacy plays a role in a wide variety of areas that GAO regularly reviews--including student loans, retirement savings, banking and investment products, and homebuyer assistance programs, to name a few. For example, in work we have done on retirement savings, we have made recommendations intended to facilitate consumers' understanding of retirement plans, disclosures, and any associated fees. Additionally, our reviews of financial products will continue to focus on consumer understanding of these products, as well as strategies for encouraging consumers to make sound decisions about them. Moreover, we will continue our body of work evaluating various consumer protections, which in conjunction with financial education are a key component in helping consumers avoid abusive or misleading financial products, services, or practices. Financial education has its limitations, of course, but it does represent an important tool that can benefit both individuals and our economy as a whole. On an individual level, better money management and financial decisions can play an important role in improving families' standard of living and helping them achieve long-term financial goals. While personal financial decisions are made by individuals and their families, the federal government can play a role in helping ensure that its citizens have easy access to financial information and the tools they need to make sound decisions. Moreover, improving consumer financial literacy can be beneficial to our national economy as a whole. Financial markets function best when consumers understand how financial service providers and products work and know how to choose among them. Our income tax system requires citizens to have an adequate understanding of both the tax system itself and financial matters in general. Educated citizens are also important to well-functioning retirement systems--for example, workers should understand the benefit of saving for their retirement to supplement any benefits received from Social Security. Finally, our nation faces a challenging long-term fiscal outlook, and it is important that our citizens understand and are attentive to the fact that the federal government faces hard choices that will affect their own, and our nation's, economic future. Chairman Akaka, Ranking Member Johnson, 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 about this testimony, please contact Alicia Puente Cackley at (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 Alicia Puente Cackley (Director), Jason Bromberg (Assistant Director), Tania Calhoun, Beth Ann Faraguna, Jennifer Schwartz, and Andrew Stavisky. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Consumer Finance: Factors Affecting the Financial Literacy of Individuals with Limited English Proficiency. GAO-10-518. Washington, D.C.: May 21, 2010. Financial Literacy and Education Commission: Progress Made in Fostering Partnerships, but National Strategy Remains Largely Descriptive Rather Than Strategic. GAO-09-638T. Washington, D.C.: April 29, 2009. Financial Literacy and Education Commission: Further Progress Needed to Ensure an Effective National Strategy. GAO-07-100. Washington, D.C.: December 4, 2006. Highlights of a GAO Forum: The Federal Government's Role in Improving Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004. 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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Financial literacy plays an important role in helping ensure the financial health and stability of individuals, families, and our broader national economy. Economic changes in recent years have highlighted the need to empower Americans to make informed financial decisions, yet evidence indicates that many U.S. consumers could benefit from a better understanding of financial matters. For example, recent surveys indicate that many consumers have difficulty with basic financial concepts and do not budget. This testimony discusses (1) the state of the federal government's approach to financial literacy, (2) observations on overall strategies for addressing financial literacy, and (3) the role GAO can play in addressing and raising awareness on this issue. This testimony is based largely on prior and ongoing work, for which GAO conducted a literature review; interviewed representatives of organizations that address financial literacy within the federal, state, private, nonprofit, and academic sectors; and reviewed materials of the Financial Literacy and Education Commission. While this statement includes no new recommendations, in the past GAO has made a number of recommendations aimed at improving financial literacy efforts.. Federal financial literacy efforts are spread among more than 20 different agencies and more than 50 different programs and initiatives, raising concerns about fragmentation and potential duplication of effort. The multiagency Financial Literacy and Education Commission, which coordinates federal efforts, has acted on recommendations GAO made in 2006 related to public-private partnerships, studies of duplication and effectiveness, and the Commission's MyMoney.gov Web site. While GAO's 2006 review of the Commission's initial national strategy for financial literacy found that it was a useful first step in focusing attention on financial literacy, it was largely descriptive rather than strategic. The Commission recently released a new strategy for 2011, which laid out clear goals and objectives, but it still needs to incorporate specific provisions for performance measures, resource needs, and roles and responsibilities, all of which GAO believes to be essential for an effective strategy. However, the Commission will be issuing an implementation plan to accompany the strategy later this year and the strategy will benefit if the plan incorporates these elements. The new Bureau of Consumer Financial Protection will also have a role in financial literacy, further underscoring the need for coordination among federal entities. Coordination and partnership among federal, state, nonprofit, and private sectors is also essential in addressing financial literacy, and there have been some positive developments in fostering such partnerships in recent years. There is little definitive evidence available on what specific programs and approaches are most effective in improving financial literacy, and relatively few rigorous studies have measured the impact of specific financial literacy programs on consumer behavior. Given that federal agencies have limited resources for financial literacy, it is important that these resources be focused on initiatives that are effective. To this end, the Commission's new national strategy on financial education sets as one of its four goals identifying, enhancing, and sharing effective practices. However, financial education is not the only approach for improving consumers' financial behavior. Several other mechanisms and strategies have also been shown to be effective, including financial incentives or changes in the default option, such as automatic enrollment in employer retirement plans. The most effective approach may involve a mix of financial education and these other strategies. GAO will continue to play a role in supporting and facilitating knowledge transfer on financial literacy. GAO will host a forum on financial literacy later this year to bring together experts from federal and state agencies and nonprofit, educational, and private sector organizations. The forum will address gaps, challenges, and opportunities related to federal financial literacy efforts. In addition, as part of GAO's audit and oversight function, GAO will continue to evaluate the effectiveness of federal financial literacy programs, as well as identify opportunities to improve the efficient and cost-effective use of these resources.
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Regulation B imposes a general prohibition on collecting data on personal characteristics for nonmortgage loan applicants. But in 2003, FRB expanded its exceptions to this prohibition to include permitting lenders to collect data on race, gender, and other personal characteristics in connection with a self-test for the purpose of determining the effectiveness of the lender's compliance with ECOA and Regulation B. A self-test is any program, practice, or study that is designed and used by creditors to determine the effectiveness of the creditor's compliance with ECOA and Regulation B. The results of a self-test are privileged--that is, they cannot be obtained by any government agency in an examination or investigation in any lawsuit alleging a violation of ECOA. Although Regulation B prohibits creditors, except in limited circumstances such as conducting a self-test, from collecting data on personal characteristics for nonmortgage loan applicants, creditors are required to collect such data for mortgage loan applicants. Specifically, HMDA, as amended in 1989, requires certain financial institutions to collect and publicly report information on the racial characteristics, gender, and income level of mortgage loan applicants. In 2002, FRB, pursuant to its regulatory authority under HMDA, required financial institutions to report certain mortgage loan pricing data in response to concerns that minority and other targeted groups were being charged excessively high interest rates for mortgage loans. Authority for enforcing compliance with ECOA with respect to depository institutions, such as Federal Reserve System member banks, national banks, state-chartered banks, saving associations, and credit unions, lies with the five federal regulators--FRB, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA). To carry out their responsibilities, the agencies may conduct periodic compliance examinations of depository institutions. These compliance exams generally assess depository institutions' loan underwriting guidelines and credit decisions to detect possible discrimination in both mortgage and nonmortgage lending. FRB's Survey of Small Business Finances (SSBF) is one of the principal sources of information available on the factors that affect the availability of credit for small businesses. FRB has conducted the SSBF about every 5 years from 1987 through 2003 from a nationwide sample of small businesses of varying sizes, locations, and ownership characteristics. In 2007, FRB decided to discontinue the SSBF due to its cost and other considerations. However, according to FRB officials, FRB plans to include elements of the SSBF in another survey, the Survey of Consumer Finances (SCF), starting in 2010. The limited number of studies on nonmortgage lending that met our criteria for selection in our June report focused primarily on the small business sector, and suggested that certain minority-owned businesses may be denied loans more often or be offered higher interest rates than similar white-owned businesses. However, the key data source for most of these studies, FRB's SSBF, has certain limitations compared with HMDA data, and this may limit the data's usefulness as an analytical tool. The few studies we identified that addressed possible discrimination in automobile and credit card lending relied on SCF data, which has certain limitations similar to those of the SSBF data. Further, our report found that data limitations may also impede the relative efficiency of the bank regulators' fair lending examination process for the nonmortgage sector as compared with the mortgage sector. Primarily using data obtained from FRB's SSBF, all eight studies we identified on minority business lending generally found that lenders denied loans to minority-owned businesses (seven of the eight specifically refer to African-American-owned businesses) or required them to pay higher interest rates for loans significantly more often than white-owned small businesses. This finding generally remained consistent after considering a variety of risk factors, such as borrower creditworthiness, industry sector, and other firm characteristics (e.g., business location, assets, and profits). In addition, studies have found that Hispanic-owned businesses were denied credit or charged higher interest rates more often when compared with white-owned businesses with similar risk characteristics. On the other hand, some studies we reviewed did not identify evidence that women-owned businesses face credit denials or higher rates significantly more often than male, white-owned businesses. While studies using SSBF data have provided important insights into possible discrimination in small business lending, researchers and FRB officials also pointed out a number of limitations: SSBF data are collected from individual small business borrowers rather than lenders, which limit their analytical value. For example, SSBF data do not allow researchers to assess the overall small business lending underwriting standards or lenders' performance by type of institution, by size, or by geographic or metropolitan region. SSBF survey data are self-reported and are not verified by FRB. For example, FRB relies upon survey respondents to accurately report their race, gender, and other characteristics, as well as requested information on their business and their financing. Since the survey may be conducted long after the survey respondent applied for credit, the timing of the SSBF increases the risk that respondents may not accurately recall and report information from the time when the credit decision was made. FRB conducts the SSBF about every 5 years rather than annually and, therefore, the survey results may not be timely. To illustrate, most of the studies that we reviewed were based on data that are about 10 years old from surveys conducted in 1993 and 1998. Researchers and FRB officials that we spoke with said it may also take FRB a significant period of time to review and process the SSBF data prior to releasing it to the public. In contrast, HMDA data offer certain advantages over SSBF data as a research tool to assess possible discrimination in mortgage lending. In particular, HMDA data are collected directly from a large and identified population of mortgage lenders on a consistent and annual basis. Researchers have used HMDA data to conduct analyses of possible discrimination by type of lending institution, size of the institution, and geographic or metropolitan area. FRB also requires that lenders help verify the HMDA data they report, such as applicant data on personal characteristics and the interest rates charged on certain types of mortgages. Despite these advantages, we noted that analyses of HMDA data as a basis for conducting research on possible discrimination in mortgage lending have been criticized for not including key loan underwriting variables, such as the borrowers' credit scores or mortgages' loan-to-value ratios. Some argue that such underwriting variables may account for many apparent discrepancies between minority and white mortgage borrowers. To compensate for the lack of underwriting variables in the HMDA data, several researchers have collected such data from proprietary sources and matched it with HMDA data. According to a study on auto lending, racial discrimination could play a role in differences between the treatment of minority and white borrowers. The study relied on data from FRB's SCF, which asks a nationwide sample of about 4,500 U.S. consumers to provide detailed information on the finances of their families and on their relationships with financial institutions. Because SCF data is also collected from borrowers rather than lenders, like SSBF data, it cannot be used as a basis for assessing individual lenders' lending practices or lending practices industrywide (i.e., by type of institution, size of institution, or geographic or metropolitan area). The two studies we identified that also relied on SCF data had mixed results with respect to possible discrimination in credit card lending. One study found that minorities were likely to pay higher interest rates on credit card debt than white credit cardholders even after considering the payment history and financial wealth of each group. Another study did not find that minority credit cardholders paid higher interest rates as compared with white credit cardholders after controlling for creditworthiness factors. These studies showed the strength of the SCF as a data source (e.g., the ability to consider data on personal characteristics and loan underwriting factors), as well as its limitations (e.g., the data are collected from borrowers rather than lenders). Representatives from the four federal bank regulatory agencies we contacted (FRB, OCC, FDIC, and OTS) said that the availability of HMDA data has facilitated the fair lending law examination process. In particular, agency staff said that the analysis of HMDA data provided insights into lenders that might be at high risk of engaging in potentially discriminatory practices in mortgage lending. While agency staff said that HMDA data were only a first start in the investigative process (because they must evaluate a range of underwriting criteria and practices that may help explain disparities in a lender's mortgage lending patterns), HMDA data allowed them to prioritize their examination resources. We found that in the absence of similar race, gender, and other data on personal characteristics for nonmortgage loan applicants, examiners may rely on time-consuming and possibly unreliable techniques to assess lenders' compliance with fair lending laws. Under the Interagency Fair Lending Examination Procedures, examiners can use established "surrogates" to make educated guesses as to the personal characteristics, such as race or gender, of nonmortgage loan applicants to help determine whether the lenders they regulate are complying with established laws and regulations in extending credit to minority and other individuals targeted for loan applicants. For example, examination guidance allows examiners, after consulting with their agency's supervisory staff, to assume that an applicant is Hispanic based on the last name, female based on the first name, or likely to be an African-American based on the census tract of the address. While these techniques may help identify the racial or gender characteristics of loan applicants, they have potential for error (e.g., certain first names are gender neutral, and not all residents of a particular census tract may actually be African-American). As a result of the limitations of the data on personal characteristics for nonmortgage loan applicants, as well as regulatory guidance directing examiners to consider using surrogates, federal oversight of lenders' fair lending law compliance in this area may be less efficient than it is for mortgage lending. According to a comment letter submitted by a Federal Reserve Bank to FRB as it considered amending Regulation B in 1999, its examiners were unable to conduct thorough fair lending examinations or review consumer complaints alleging discrimination for nonmortgage products due to the lack of available data. Moreover, our reviews of agency fair lending examination guidance and discussions with some agency staff (OCC, FDIC, and OTS) suggest that, due in part to HMDA data availability, agencies focus most of their resources on possible discrimination in mortgage lending rather than nonmortgage lending. We plan to further explore the issue of fair lending enforcement in future work, including the impact of potential data limitations on regulatory agencies' oversight and enforcement of the fair lending laws for mortgage and nonmortgage lending. While some individuals we contacted generally agreed with FRB's 2003 conclusion that permitting lenders to voluntarily collect data on personal characteristics for nonmortgage loan applicants could create some risk of discrimination, many other individuals we contacted expressed skepticism about this argument. Even so, a range of researchers, regulatory staff, and representatives from both consumer and banking groups we contacted generally concurred with FRB that voluntarily collected data might not be useful or reliable and that very few banks would choose to collect it. Consequently, the benefits of permitting lenders to voluntarily collect data on personal characteristics as a means for researchers, regulators, and others to better understand possible discrimination in nonmortgage lending would likely be limited. Some researchers, staff from a bank regulatory agency, and representatives from banking and business trade groups we contacted generally agreed with FRB that permitting voluntary data collection on personal characteristics could create a risk that the information would be used for discriminatory purposes. These officials told us that the best way to protect borrowers against discrimination is to minimize the availability of information to lenders about their personal characteristics. However, many other researchers, staff from some regulatory agencies, and officials from consumer groups expressed skepticism on this conclusion. First, a staff member from a regulatory agency, several researchers, and representatives from consumer groups said that, in certain cases, lenders were already aware of the race and gender or other information on personal characteristics of nonmortgage loan applicants. Therefore, simply collecting data on personal characteristics on applicants in such cases would not necessarily create a risk of discrimination. Other researchers and officials from banking institutions disagreed. They noted that, in some cases, lending decisions may be made by officials who do not interact directly with loan applicants. Second, lenders' voluntary collection and use of data on personal characteristics for nonmortgage loan applicants, outside of the ECOA self- test privilege, would also be subject to varying degrees of regulatory scrutiny, which could serve to deter lenders from using such data for discriminatory purposes. Similarly, all lenders that chose to collect and use such data for discriminatory purposes would face the risk of public disclosure of such practices through litigation. Further, according to a variety of researchers and officials we contacted, as well as FRB documents we reviewed, there is no evidence that lenders have used HMDA data for discriminatory purposes. These officials generally attributed the transparency of the HMDA program, through regulatory reviews and public reporting requirements, as serving to help deter lenders from using the data to discriminate in mortgage lending. Finally, FRB could potentially have mitigated some of its concerns that voluntarily collected data could be used for discriminatory purposes by including, as part of its 1999 proposal, minimum procedures for the collection and use of such data. FRB established such procedures for federally regulated lenders that choose to conduct a self-test. These procedures include developing written policies describing the methodology for data collection and keeping data on personal characteristics separate from loan underwriting data that are used to make credit decisions. Imposing such minimum procedures and requirements for a voluntary program could serve to enhance regulators' oversight of lenders' data collection, processes, practices, and uses of the data, and further deter possibly discriminatory practices. Even so, many researchers, regulatory staff, and representatives from consumer groups and banking trade groups agreed with FRB's conclusion that the reliability of voluntarily collected data may be limited in identifying possible discrimination in nonmortgage lending. In particular, they agreed with FRB that, due to potentially inconsistent data collection standards, it would be difficult to use voluntarily collected data to compare fair lending performance across different lenders. Additionally, there may be data inconsistency problems for any given lender that chooses to collect data on personal characteristics for nonmortgage loan applicants. For example, a lender could "cherry pick," or collect racial, gender, and other data on personal characteristics on applicants only for certain loan products that they felt would reflect favorably on their fair lending practices and not collect data for other products. Just as FRB could potentially have mitigated some of its concerns about the possibility that lenders would use voluntarily collected data for discriminatory purposes by adopting minimum procedures, as mentioned previously, it could also potentially have considered adopting data collection standards. Such standards could have served to better ensure the consistency of the data and enabled regulators and others to use the data to assess individual lender performance and compare lending practices across different financial institutions. However, according to a senior FRB official, a researcher, and a bank industry trade association official, the imposition of such standards would have undermined the voluntary nature of the data collection proposal. For example, FRB could be required to conduct examinations to help ensure that federally regulated lenders were collecting the data in a manner consistent with any such standards. Moreover, the establishment of such data collection standards might also have further diminished lender interest in a voluntary program, which researchers, FRB officials, and others said was already limited due to the potential for increased regulatory and public scrutiny of their lending practices. According to bank regulators and banking trade groups, very few, if any, lenders choose to conduct self-tests out of concern that the results of such tests would be subject to regulatory review even though they are privileged. Finally, while some officials we contacted and documents we reviewed said that any data that was collected and potentially reported by lenders would provide important insights into nonmortgage lending practices that are not currently available, other researchers and researchers suggested that such data would be prone to substantial selection bias. That is, the data would likely be skewed by the possibility that only lenders with good fair lending compliance records would choose to collect such data. Consequently, although voluntarily collected data on personal characteristics could provide some benefits, it would not likely materially assist the capacity of researchers, regulators, and others to better understand possible discrimination in nonmortgage lending. In concept, a requirement that lenders collect and publicly report data on the personal characteristics of nonmortgage loan applicants, similar to HMDA requirements, could help address some of the existing data limitations that complicate efforts by researchers, federal bank regulators, and others to identify possible discrimination. However, mandatory data collection and reporting would impose some additional costs on the lending industry, although opinions differed on how burdensome these costs might be. While options exist to potentially mitigate some of these costs, such as limiting data collection and reporting to specific types of lending, these options also involve additional complexities and costs that must be considered. Required data collection and reporting for nonmortgage loan applicants, similar to HMDA's requirements, could help address some of the existing limitations of available data and facilitate the efficiency of the fair lending examination process for nonmortgage lending. Such data would be more timely than SSBF data, and the implementation of data collection standards could help ensure its reliability. For example, researchers and financial regulators would be able to analyze the practices of specific lenders and compare practices across lenders, assessing lending practices by type, size, and location of the institutions, similar to analyses done currently with HMDA data. While such analyses would represent only the first step in determining whether or not particular lenders were engaging in discriminatory practices, they could potentially help regulators prioritize their examinations and better utilize existing staff and other resources. While it is not possible to quantify the potential costs associated with a reporting requirement, in part because the requirements could vary, banking organizations and banks that we contacted identified a variety of additional costs that lenders might face. These officials also said that they were concerned about such costs and that the additional expenses associated with data collection and reporting would, in part, be passed on to borrowers. According to the officials, most of the costs associated with a reporting requirement would involve developing the information technology necessary to capture and report the data, including system integration, software development, and employee training. Moreover, the officials said that, as with HMDA data, verifying, any reported data would also entail costs, including expenses associated with conducting internal audits. The regulatory agency responsible for assembling, verifying, and reporting the data to the public would also accrue costs for these activities. Some researchers and representatives from consumer groups we contacted said that they did not think that the costs associated with required collection and reporting of data on personal characteristics of nonmortgage loan applicants would be significant because many lenders already collect and report data on personal characteristics under HMDA. But representatives from banks and banking organizations, along with one researcher, said that lending information systems and personnel were not integrated in many mortgage and nonmortgage organizations. For this reason, they reiterated that a data collection and reporting requirement would involve additional system integration and employee training costs, among others. One potential option to mitigate the costs associated with a requirement that regulated lenders collect and report data on the personal characteristics of those seeking nonmortgage loans would be to limit the requirement to certain types of loans, such as small business and/or automobile loans. Similar to mortgage loan applications, small business and automobile loan applications are often made on a face-to-face basis, which could enhance the ability of lenders to help verify the race, gender, or other personal characteristics of the applicants. In contrast, lenders' capacity to record data on personal characteristics for other types of nonmortgage applicants, such as applicants for credit card loans, may be limited by the fact that credit card loan applications and credit decisions are typically done by mail or over the Internet. However, researchers, federal bank regulatory staff responsible for fair lending oversight, banking officials, and representatives from some consumer groups we contacted cautioned that there were still significant complexities and potential costs associated with a data collection and reporting requirement that was limited to small business lending. Unlike mortgage and automobile lending, which have relatively uniform underwriting criteria, these officials said that small business loan underwriting is heterogeneous and more complex. For example, the types of financing that small businesses typically seek can vary widely, ranging from revolving lines of credit to term loans, and the risk of the collateral pledged against these loans may also vary widely (i.e., from relatively secure real estate to inventory). As discussed previously, studies of possible discrimination in small business lending that use SSBF data consider a variety of other indicators of creditworthiness, such as applicants' credit scores, personal wealth, and history of bankruptcy. Without information on key underwriting variables, the officials said, research based on the reported data could be subject to significant controversy and potential misinterpretation, much like research based on HMDA data, which lacks information on these variables. At the same time, costs for the necessary technology, employee training, and data verification would likely increase as the range of data that lenders were required to collect and report increases. One option to potentially enhance federal oversight of the fair lending laws, while mitigating lender cost concerns, would be to require lenders to collect data on personal characteristics for small business loan applicants, and perhaps other types of nonmortgage lending like automobile lending, and make the data available to regulators but not require public reporting of such data or any other information. This approach could facilitate federal bank regulators' ability to prioritize fair lending examinations for regulated lenders because the agencies currently do not have ready access to data on personal characteristics for nonmortgage loan applicants. It could also limit lender costs because they would not have to collect, publicly report, and verify data on a range of underwriting variables because regulators already have access to this information. However, due to the lack of a public data reporting requirement, such an option would not enhance the capacity of researchers, Congress, and the public to better understand the possibility of discrimination in nonmortgage lending. In closing, assessing the potential for discrimination in nonmortgage lending is an important and complex issue. While current data sources, primarily FRB's SSBF and SCF provide important insights into possible discrimination in certain types of lending, they both have limitations that may impede the ability of researchers, regulators, Congress, and the public to further assess lender compliance with the fair lending laws. It is also not yet clear how FRB's decision to discontinue the SSBF and incorporate elements of the survey into an expanded SCF beginning in 2010 will impact the already limited amount of information about possible discrimination in nonmortgage lending. Therefore, from a public policy perspective, now may be the time to consider whether the benefits of additional data for research and regulatory purposes outweigh the costs of collecting the data, as well as the trade-offs of various options to enhance available data, from a purely voluntary program to a data collection and reporting requirement, and decide whether such a requirement is warranted. 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; Benjamin Bolitzer; Emily Chalmers; Kimberly Cutright; John Forrester; Simin Ho; Omyra Ramsingh; Robert Pollard; Carl Ramirez; and Ethan Wozniak. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Federal Reserve Board's (FRB) Regulation B, which implements the Equal Credit Opportunity Act of 1974 (ECOA), generally prohibits lenders from collecting certain data from loan applicants, such as their race or gender, for nonmortgage loans (e.g., small business loans). FRB has stated that this provision of Regulation B minimizes the chances that lenders would use such data in an unlawful and discriminatory manner. However, others argue that the prohibition limits the capacity of researchers and regulators to identify possible discrimination in nonmortgage lending. This testimony is based on the GAO report, Fair Lending: Race and Gender Data Are Limited for Nonmortgage Lending ( GAO-08-698 , June 27, 2008). Specifically, GAO analyzes (1) studies on possible discrimination in nonmortgage lending and the data used in them, (2) FRB's 2003 decision to retain the prohibition of voluntary data collection, and (3) the benefits and costs of a data collection and reporting requirement. For this work, GAO conducted a literature review; reviewed FRB documents; analyzed issues involving the Home Mortgage Disclosure Act (HMDA), which requires lenders to collect and publicly report data on personal characteristics for mortgage loan applicants; and interviewed FRB and others. FRB did not take a position on this report's analysis. In addition to restating its rationale for retaining the prohibition of voluntary data collection, FRB summarized GAO's findings, including the potential benefits and costs of additional data for fair lending enforcement. GAO's June 2008 report found that most research suggests that discrimination may play a role in certain types of nonmortgage lending, but data limitations complicate efforts by researchers and regulators to better understand this issue. For example, available studies indicate that African-American owned small businesses are denied loans more often or pay higher interest rates than white-owned businesses with similar risk characteristics. While the primary data source for these studies, a periodic FRB small business survey, provides important insights into possible discrimination, it also has limits compared to HMDA data. For example, the FRB survey data are collected from borrowers rather than lenders, which limit their usefulness as a means to assess lending practices. In addition, federal bank regulators that enforce ECOA said that HMDA data facilitates the identification of lenders that may be engaging in discriminatory mortgage lending. In the absence of such data for nonmortgage loans, regulators may rely on time-consuming and less reliable approaches to identify possible discrimination, such as assuming a loan applicant is Hispanic based on his or her last name. While testimony from researchers and other information GAO collected did not fully agree with all aspects of FRB's 2003 rationale for retaining the prohibition of voluntary data collection, there was general agreement that such voluntary data would have limited benefits. FRB did not adopt a proposal that would have allowed lenders to collect data, without any standards, because it said the proposal would have (1) created an opportunity for lenders to use the data for discriminatory purposes and (2) such data would not be useful since lenders may use different collection approaches. While some researchers and others agreed with FRB's first rationale, others said that data collection alone would not necessarily create the risk for discrimination because, in some cases (e.g., small business lending), lenders may already be aware of applicants' personal characteristics as such lending is often done on a face-to-face basis. Even so, a range of researchers, regulatory staff, and others agreed that voluntarily collected data would not likely materially benefit efforts to better understand possible discrimination because the data would be collected on an inconsistent basis or few lenders would participate out of concern for additional regulatory scrutiny of their nonmortgage lending practices and the potential for litigation. Requiring lenders to collect and publicly report data on personal characteristics for nonmortgage loan applicants could help address current data limitations that complicate efforts to better assess possible discrimination. However, such a requirement would impose additional costs on lenders that could be partially passed on to borrowers. These potential costs include those associated with information system integration, software development, data storage and verification, and employee training. Limiting a requirement to certain types of loans could help mitigate such costs but may also involve complexities that would need to be carefully considered. For example, to the extent that small business lending is more complicated than other types of lending, lenders may need to collect and report additional information on a range of underwriting standards in addition to data on personal characteristics so that informed judgments can be made about their lending practices.
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Over the past decade, VA's system of health care for veterans has undergone a dramatic transformation, shifting from predominantly hospital-based care to primary reliance on outpatient care. As VA increased its emphasis on outpatient care rather than inpatient care, it was left with an increasingly obsolete infrastructure, including many hospitals built or acquired more than 50 years ago in locations that are sometimes far from where veterans live. To address its obsolete infrastructure, VA initiated its CARES process-- the first comprehensive, long-range assessment of its health care system's capital asset requirements since 1981. CARES was designed to assess the appropriate function, size, and location of VA facilities in light of expected demand for VA inpatient and outpatient health care services through fiscal year 2022. Through CARES, VA sought to enhance outpatient and inpatient care, as well as special programs, such as spinal cord injury, through the appropriate sizing, upgrading, and locating of VA facilities. Table 2 lists key milestones of the CARES process. We have previously reported that a range of capital asset alignment alternatives were considered throughout the CARES process, which adheres to capital planning best practices. Moreover, there was relatively consistent agreement among the DNCP prepared by VA, the CARES Commission appointed by the VA Secretary to make alignment recommendations, and the Secretary as to which were the best alternatives to pursue. Although the Secretary tended to agree with the CARES Commission's recommendations, the extent to which he agreed varied by alignment alternative. In particular, the Secretary always agreed with the commission's recommendations to build new facilities, enter into enhanced use leases, and collaborate with the Department of Defense and universities, but was less likely to agree with the CARES Commission's recommendations to contract out or close facilities. The decisions that emerged from the CARES process will result in an overall expansion of VA's capital assets. According to VA officials, rather than show that VA should downsize its capital asset portfolio, the CARES process revealed service gaps and needed infrastructure improvements. We also reported that a number of factors shaped and in some cases limited the range of alternatives VA considered during the CARES process. These factors included competing stakeholder interests; facility condition and location; veterans' access to facilities; established relationships between VA and health care partners, such as DOD and university medical affiliates; and legal restrictions. The challenge of misaligned infrastructure is not unique to VA. We identified federal real property management as a high-risk area in January 2003 because of the nationwide importance of this issue for all federal agencies. We did this to highlight the need for broad-based transformation in this area, which, if well implemented, will better position federal agencies to achieve mission effectiveness and reduce operating costs. But VA and other agencies face common challenges, such as competing stakeholder interests in real property decisions. In VA's case, this involves achieving consensus among such stakeholders as veterans service organizations, affiliated medical schools, employee unions, and communities. We have previously reported that competing interests from local, state, and political stakeholders have often impeded federal agencies' ability to make real property management decisions. As a result of competing stakeholder interests, decisions about real property often do not reflect the most cost-effective or efficient alternative that is in the interest of the agency or the government as a whole but instead reflect other priorities. In particular, this situation often arises when the federal government attempts to consolidate facilities or otherwise dispose of unneeded assets. Through the CARES process, VA gained the tools and information needed to plan capital investments. As part of the CARES process, VA modified an actuarial model that it used to project VA budgetary needs. According to VA, the modifications enabled the model to produce 20-year forecasts of the demand for services and provided for more accurate assessments of veterans' reliance on VA services, capacity gaps, and market penetration rates. The information provided by the model allowed VA to identify service needs and infrastructure gaps, in part by comparing the expected location of veterans and demand for services in years 2012 through 2022 with the current location and capacity of VA health care services within each network. In addition to modifying the model, VA conducted facility condition assessments on all of its real property holdings as part of the CARES process. These assessments provided VA information about the condition of its facilities, including their infrastructure needs. VA continues to use the tools developed through CARES as part of its capital planning process. For example, VA conducts facility condition assessments for each real property holding every 3 years on a rotating basis. In addition, VA uses the modified actuarial model to update its workload projections each year, which are used to inform the annual capital budget process. The CARES process serves as the foundation for VHA's capital planning efforts. The first step in VHA's capital budget process is for networks to submit conceptual papers that identify capital projects that will address service or infrastructure gaps identified in the CARES process. The Capital Investment Panel, which consists of representatives from each VA administration and staff offices, reviews, scores, and ranks these papers. The Capital Investment Panel also identifies the proposals that will be sent forward for additional analysis and review, and may ultimately be included as part of VA's budget request. According to VA officials, all capital projects must be based on the CARES planning model to advance through VHA's capital planning process. On the basis of CARES-identified infrastructure needs and service gaps, VA identified more than 100 major capital projects in 37 states, the District of Columbia, and Puerto Rico. In addition to these projects, the CARES planning model identified service needs and infrastructure gaps at other locations throughout the VA system. The model is updated annually to reflect new information. VHA's 5-year Capital Plan outlines CARES implementation and identifies priority projects that will improve the environment of care at VA medical facilities and ensure more effective operations by redirecting resources from the maintenance of vacant and underutilized buildings to investments in veterans' health care. In VA's fiscal year 2010 budget submission, VA requested about $1.1 billion to fund 12 VHA major construction projects and about $507 million for VHA minor construction projects. VA has begun implementing some CARES decisions. Specifically, VA is currently in varying stages (e.g., planning or construction) of implementing 34 of the major capital projects that were identified in the CARES process. Eight major capital CARES projects are complete. Although VA is moving forward with the implementation of some CARES decisions, we previously reported that a number of VA officials and stakeholders, including representatives from veteran service organizations and local community groups, view the implementation process as too lengthy and lacking transparency. For instance, stakeholders in Big Spring, Texas, noted that it took almost 2 years for the Secretary to decide whether to close the facility. During this period, there was a great deal of uncertainty about the future of the facility. As a result, there were problems in attracting and retaining staff at the facility, according to network and local VA officials. We also previously reported that a number of stakeholders we spoke with indicated that the implementation of CARES decisions has been influenced by competing stakeholders' interests--thereby undermining the process. In its February 2004 report, the CARES Commission also noted that stakeholder and community pressure can act as a barrier to change, by pressuring VA to maintain specific services or facilities. In 2007, we reported that VA does not use, or in some cases does not have, performance measures to assess its progress in implementing CARES or whether CARES is achieving the intended results. Performance measures allow an agency to track its progress in achieving intended results. Performance measures can also help inform management decision making by, for example, indicating a need to redirect resources or shift priorities. In addition, performance measures can be used by stakeholders, such as veterans' service organizations or local communities, to hold agencies accountable for results. Although VA has over 100 performance measures to monitor other agency programs and activities, these measures either do not directly link to the CARES goals or VA does not use them to centrally monitor the implementation and impact of CARES decisions. We also reported that VA lacked critical data, including data on the cost of and timelines for implementing CARES projects and the potential savings that can be generated by realigning resources. Given the importance of the CARES process, we previously recommended that VA develop performance measures for CARES. Such measures would allow VA officials to monitor the implementation and impact of CARES decisions as well as allow stakeholders to hold VA accountable for results. In responding to our recommendation, VA created the CARES Implementation Monitoring Working Group. This working group has identified performance measures for CARES and the group will monitor the implementation and impact of CARES decisions. VA has a variety of legal authorities available to help it manage real property. These authorities include enhanced-use leases (EUL), sharing agreements, and outleases. (See table 3 for descriptions of these authorities.) VA uses these authorities to help reduce underutilized and vacant property. For example, in 2005, in Lakeside (Chicago), Illinois, VA reduced its underutilized property at the medical center by nearly 600,000 square feet by using its EUL authority with Northwestern Memorial Hospital. VA also uses these authorities to generate financial benefits. For example, the VA Greater Los Angeles Healthcare System enters into a number of sharing agreements with the film industry. VA officials told us that these agreements are typically temporary arrangements--sometimes lasting a few days--during which film production companies use VA facilities to shoot television or movie scenes. According to VA officials, these agreements generate roughly $1 million to $2 million a year. However, legal restrictions associated with implementing some authorities affect VA's ability to dispose of and reuse property in some locations. For example, legal restrictions limit VA's ability to dispose of and reuse property in West Los Angeles and North Hills (Sepulveda) California. The Cranston Act of 1988 precluded VA from taking any action to dispose of 109 of 388 acres in the West Los Angeles medical center and 46 acres of the Sepulveda ambulatory care center. In 1991, when EUL authority was provided to VA, VA was prohibited from entering into any EUL relating to the 109 acres at West Los Angeles unless the lease was specifically authorized by law or for a childcare center. The Consolidated Appropriations Act of 2008 expanded the EUL restrictions to include the entire West Los Angeles medical center. The Consolidated Appropriations Act of 2008 also prohibits VA from declaring as excess or otherwise taking action to exchange, trade, auction, transfer, or otherwise dispose of any portion of the 388 acres within the VA West Los Angeles medical center. Budgetary and administrative disincentives associated with some of VA's available authorities may also limit VA's ability to use these authorities to reduce its inventory of underutilized and vacant property. For example: VA cannot retain revenue that it obtains from outleases, revocable licenses, or permits; such receipts must be deposited in the Department of the Treasury. VA has said that, except for EUL disposals, restrictions on retaining proceeds from disposal of properties are a disincentive for VA to dispose of property. In 2004, VA was authorized until 2011 to transfer real property under its jurisdiction or control and to retain the proceeds from the transfer in a capital asset fund for property transfer costs, including demolition, environmental remediation, and maintenance and repair costs. In our previous work, we reported several administrative and oversight challenges with using capital asset funds. Moreover, VA officials told us that this authority has significant limitations on the use of any funds generated by disposal. For example, VA officials we spoke with reported that the capital asset fund is too cumbersome to be used, and VA does not have immediate access to the funds because they have to be reappropriated before VA can use them. The maximum term for an outlease, according to VHA law, is 3 years; according to VA officials, this time limit can discourage potential lessees from investing in the property. Implementing an EUL agreement can take a long time. According to VA officials, EULs are a relatively new tool, and every EUL is unique and involves a learning process. In addition, VA officials commented that the EUL process can be complicated. According to VA officials, the average time it takes to implement an EUL can range generally from 9 months to 2 years. The officials noted that land due diligence requirements (such as environmental and historic reviews), public hearings, congressional notification, lease drafting, negotiation, and other phases contribute to the length of the overall process. VA has taken actions to reduce the time it takes to implement an EUL agreement, but despite changes to streamline the EUL process, some officials stated that it is still time consuming and cumbersome. VA can dispose of underutilized and vacant property under the McKinney- Vento Act to other federal agencies and programs for the homeless. However, VA officials stated that disposing of property under the McKinney-Vento Act also can be time-consuming and cumbersome. According to VA officials, the process can average 2 years. Under this law, all properties that the Department of Housing and Urban Development deems suitable for use by the homeless go through a 60-day holding period, during which the property is ineligible for disposal for any other purpose. Interested representatives of the homeless submit to the Department of Health and Human Services (HHS) a written notice of their intent to apply for a property for homeless use during the 60-day holding period. After applicants have given notice of their intent to apply, they have up to 90 days to submit their application to HHS, and HHS has the discretion to extend the time frame if necessary. Once HHS has received an application, it has 25 days to review, accept, or decline the application. Furthermore, according to VA officials, VA may not receive compensation from agreements entered into under the McKinney-Vento Act. Despite these challenges, VA has used these legal authorities to help reduce its inventory of unneeded space. In 2008, we reported that VA reduced underutilized space ( i.e., space not used to full capacity) in its buildings by approximately 64 percent from 15.4 million square feet in fiscal year 2005 to 5.6 million square feet in fiscal year 2007. Although the number of vacant buildings decreased over the period, the amount of vacant space remained relatively unchanged at 7.5 million square feet. We estimated VA spent $175 million in fiscal year 2007 operating underutilized or vacant space at its medical facilities. While VA's use of various legal authorities, such as EULs and sharing agreements, likely contributed to VA's overall reduction of underutilized space since fiscal year 2005, VA does not track the overall effect of using these authorities on its space reductions. Without such information, VA does not know what effect these authorities are having on its effort to reduce underutilized or vacant space or which types of authorities have the greatest effect. We concluded that further reductions in underutilized and vacant space will largely depend on VA developing a better understanding of why changes occurred and what impact these agreements had. Therefore, we recommended in our 2008 report that VA track, monitor, and evaluate square footage reductions and financial and nonfinancial benefits resulting from new agreements at the building level by fiscal year in order to better understand the usefulness of these authorities and their overall effect on VA's inventory of underutilized and vacant property from year to year. The officials said that tracking financial benefits will require a real property cost accounting system which VA is in the process of developing. According to VA officials, VA will institute a system in June 2009 that will track square footage reductions at the building level, but the system will not track financial benefits at this level. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to questions from you or other Members of the Subcommittee. For further information on this statement, please contact Mark L. Goldstein at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony were Nikki Clowers, Hazel Gumbs, Edward Laughlin, Susan Michal-Smith, and John W. Shumann. 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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Through its Veterans Health Administration (VHA), the Department of Veterans Affairs (VA) operates one of the largest integrated health care systems in the country. In 1999, GAO reported that better management of VA's large inventory of aged capital assets could result in savings that could be used to enhance health care services for veterans. In response, VA initiated a process known as Capital Asset Realignment for Enhanced Services (CARES). Through CARES, VA sought to determine the future resources needed to provide health care to our nation's veterans. This testimony describes (1) how CARES contributes to VHA's capital planning process, (2) the extent to which VA has implemented CARES decisions, and (3) the types of legal authorities that VA has to manage its real property and the extent to which VA has used these authorities. The testimony is based on GAO's body of work on VA's management of its capital assets, including GAO's 2007 report on VA's implementation of CARES (GAO-07-408). The CARES process provides VA with a blueprint that drives VHA's capital planning efforts. As part of the CARES process, VA adapted a model to estimate demand for health care services and to determine the capacity of its current infrastructure to meet this demand. VA continues to use this model in its capital planning process. The CARES process resulted in capital alignment decisions intended to address gaps in services or infrastructure. These decisions serve as the foundation for VA's capital planning process. According to VA officials, all capital projects must be based on demand projections that use the planning model developed through CARES. VA has started implementing some CARES decisions, but does not centrally track their implementation or monitor the impact of their implementation on its mission. VA is in varying stages (e.g., planning or construction) of implementing 34 of the major capital projects that were identified in the CARES process and has completed 8 projects. Our past work found that, while VA had over 100 performance measures to monitor other agency programs and activities, these measures either did not directly link to the CARES goals or VA did not use them to centrally monitor the implementation and impact of CARES decisions. Without this information, VA could not readily assess the implementation status of CARES decisions, determine the impact of such decisions, or be held accountable for achieving the intended results of CARES. VA has recently created the CARES Implementation Working Group, which has identified performance measures for CARES and will monitor the implementation and impact of CARES decisions in the future. VA has a variety of legal authorities available, such as enhanced-use leases, sharing agreements, and others, to help it manage real property. However, legal restrictions and administrative- and budget-related disincentives associated with implementing some authorities affect VA's ability to dispose and reuse property in some locations. For example, legal restrictions limit VA's ability to dispose of and reuse property in West Los Angeles and Sepulveda. Despite these challenges, VA has used these legal authorities to help reduce underutilized space (i.e., space not used to full capacity). In 2008, we reported that VA reduced underutilized space in its buildings by approximately 64 percent from 15.4 million square feet in fiscal year 2005 to 5.6 million square feet in fiscal year 2007. While VA's use of various legal authorities likely contributed to VA's overall reduction of underutilized space since fiscal year 2005, VA does not track the overall effect of using these authorities on space reductions. Not having such information precludes VA from knowing what effect these authorities are having on reducing underutilized or vacant space or knowing which types of authorities have the greatest effect. According to VA officials, VA will institute a system in 2009 that will track square footage reductions at the building level.
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We found that the 11 high-value, long-term SSACs we selected for review from three of the five VAMCs we visited took nearly 3 years (33.8 months) on average to develop and award. (See fig. 1.) The total time required for the development and award of these 11 high-value, long-term SSACs ranged from 18 to 46 months and the longest contracting phases were the solicitation and negotiation phases. According to leadership officials and contracting officers from all five of the network contracting offices we visited, establishing high-value, long- term SSACs in a timely manner has been challenging for several reasons, including (1) not always receiving a complete, actionable, and timely initial information package from the VAMC that contains information the contracting officer needs to begin acquisition planning; (2) lengthy review processes for high-value, long-term SSACs; (3) negotiation challenges with the affiliates on the price of high-value, long- term SSACs; and (4) VAMC resistance to developing and pursuing high- value, long-term SSACs. VAMC-based contracting officer's representatives and medical directors from all five of the VAMCs we visited also explained that establishing high-value, long-term SSACs has presented challenges for them. Specifically, 9 of the 14 contracting officer's representatives we spoke with noted that they are often asked to resubmit initial information packages to the contracting officer throughout the development of a SSAC due to form updates or policy changes that occurred since the time they created these documents. Moreover, VAMC officials from all five VAMCs we visited indicated that the length of time it takes to develop and award high-value, long-term SSACs presents many challenges for their VAMCs, including the potential for gaps in patient care and the need to repeatedly establish short-term solutions. We also found that VHA has not developed standards that can be used to measure the timeliness of developing high-value, long-term SSACs. However, during fiscal year 2016, VHA developed estimates for the maximum duration of each contracting phase, referred to as procurement action lead times (PALT). Currently, the PALT goal for the development and award of a high-value, long-term SSAC is between 20 and 21 months; however, we found that 10 of the 11 high-value, long-term SSACs we reviewed exceeded these PALT goals by as little as 1.4 months and as many as 25.8 months. According to VHA officials we interviewed, PALT goals are not used as performance standards for VAMC, network contracting office, and Medical Sharing Office staff responsible for the development of high-value, long-term SSACs. These officials told us that VHA is currently developing and conducting validity tests of revised PALT goals for several types of contracts, including SSACs, but there is no planned end date for these tests and they do not expect to implement revised PALT goals across VHA until at least fiscal year 2017. These officials explained that the revised PALT goals will be used for setting expectations with VAMC officials for the length of time it should take to develop and award several types of contracts, including SSACs. Federal internal control standards recommend establishing and reviewing performance standards at all levels of an agency. Absent such standards, VHA cannot ensure that its high-value, long-term SSACs are being developed in a timely manner. Additionally, we found that VHA does not collect data on the length of time each contracting phase took to complete for any SSACs, including the 11 high-value, long-term and 12 short-term SSACs we selected for review. Federal internal control standards state that information should be recorded and communicated to management and others within the agency that need it in a format and time frame that enables them to carry out their responsibilities. However, in contrast with these standards, VA is unable to analyze the time spent in each phase of SSAC development, and this inability has disadvantages in terms of management decisions and accountability for SSAC development. The absence of real-time data on the amount of time being spent within each contracting phase limits VA's ability to make informed management decisions, including changes to the assignment of staff that are either overburdened by their workloads or in need of additional training to build their competency with a particular type of contract or contracting phase. This lack of information prevents VHA from effectively setting clear and consistent objectives for organizational performance and making improvements as needed. Our report concluded that a lack of attention to the time spent to develop and award high-value, long-term SSACs has resulted in VHA's inability to ensure that contracts are being developed in a timely manner. To ensure the timely development of high-value, long-term SSACs, we recommended that VA (1) establish performance standards for appropriate development time frames for high-value, long-term SSACs and use these performance standards to routinely monitor VAMC, network contracting office, and Medical Sharing Office efforts to develop these contracts; and (2) collect performance data on the time spent in each phase of the development of high-value, long-term SSACs and periodically analyze these data to assess performance. VA concurred with these recommendations and said that it will take steps to address these weaknesses, including the creation of a workgroup that will establish performance standards for development time frames for high- value, long-term SSACs and the designation of an office within VHA to routinely monitor these performance standards. VA also said that it will assess its current data systems to determine whether a new or different system would be needed to capture all relevant data and that the Medical Sharing Office will collaborate with other stakeholders to determine the need for and the mechanism to collect additional data. We found that short-term SSACs are used to provide coverage to bridge the gap between an expired or expiring high-value, long-term SSAC and its replacement. Specifically, 6 of our 12 selected short-term SSACs were awarded as bridge contracts, which creates duplicative work for VAMC and contracting staff because they must simultaneously develop both the short-term SSAC bridge contract and the replacement high-value, long- term or low-value, long-term SSAC. Of the remaining 6 short-term SSACs we reviewed, 5 were awarded to allow affiliate services to begin while new high-value, long-term SSACs were being developed for the same services and 1 was awarded to fill a short-term staffing need at a VAMC. In addition, we found that the use of these 12 short-term SSACs was consistent with reasons reported by from the majority of the medical sharing team supervisors from the 21 network contracting offices. Specifically, 12 medical sharing team supervisors from the 21 network contracting offices (57 percent) reported that the most prevalent reason that they opt to award short-term SSACs is to avoid any gaps in services due to the length of time it takes to develop and award high-value, long- term SSACs. Federal internal control standards state an agency should provide for an assessment of the agency's risk associated with achieving its objectives, including identifying risks through forecasting and strategic planning. However, in contrast with these standards, VHA does not have a policy that requires VAMCs and network contracting offices to engage in timely acquisition planning to ensure that expiring high-value, long-term SSACs are replaced without the need to use a short-term SSAC as a bridge contract. Moreover, VA's governing directive for the development of SSACs does not specify when VAMC and network contracting office staff should begin acquisition planning activities to replace an existing high- value, long-term SSAC. As a result, VHA lacks assurance that its staff are performing and accountable for their roles in ensuring that replacement high-value, long-term SSACs are developed in time and that the agency is minimizing duplicative work when short-term SSACs are used as bridge contracts. We also found that VHA was further exposed to potential risks associated with using short-term SSACs because the Medical Sharing Office, the VHA Central Office entity with oversight authority of SSACs, does not consistently review available data on all SSACs awarded throughout VHA; in particular, it does not review the level of reliance on short-term SSACs. While this office creates monthly reports for all VISNs and network contracting offices that provide information on the status of their medical sharing contracts, including all SSACs, they rely on network contracting offices to determine if they are selecting the appropriate term for their contracts. This can potentially be problematic because 7 of the medical sharing supervisors from the 21 network contracting offices we contacted and leadership teams and contracting officers from 3 of the 5 network contracting offices we visited told us that at times they have purposefully developed short-term SSACs in lieu of high-value, long-term SSACs because the Medical Sharing Office does not review any short- term SSACs. In fact, we found 6 of the 12 short-term SSACs we selected for review were extended beyond their initial performance periods for up to 11 months resulting in total values for these 6 contracts that ranged from almost $686,000 to $1.4 million--well beyond the $500,000 Medical Sharing Office review threshold. Standards for internal control in the federal government state that control activities should occur at all levels of an agency to help ensure that management's directive are carried out by staff and that top-level reviews of actual performance by agency management are needed to track major agency achievements and compare these to plans, goals, and objectives that were previously established. In addition, we found that 7 of the 12 short-term SSACs we selected for review from two network contracting offices did not follow VA and VHA policy for the development of SSACs. Specifically, we found 5 short-term SSACs we reviewed from one network contracting office where (1) a solicitation was not issued to the affiliate, (2) the affiliate did not provide VHA a formal proposal outlining its services and instead submitted a price quote, and (3) negotiations were not conducted to address potential pricing issues before awarding the final contract. The contracting officer responsible for these 5 short-term SSACs explained that he was often given as little as 10 business days to develop and award a short-term SSAC before the prior short-term SSAC expired and that he did not have the skills needed to conduct negotiations with the affiliate. We found that this contracting officer's supervisor had reviewed all 5 of these contracts prior to their award; however, the review process did not identify the areas that did not adhere to VA and VHA policy requirements for the development of SSACs. Federal internal control standards recommend that agencies establish processes to ensure the proper execution of transactions, including the provision of the proper amount of supervision. However, without ensuring that contracting officers are adhering to VA and VHA policies and network contracting offices are effectively reviewing the development of short-term SSACs as required by VA and VHA policies, VHA may be at risk for overpaying for affiliate services provided through these contracts. Our report concluded that the lack of attention to this overreliance on short-term SSACs as bridge contracts exposes VHA to risks. To ensure the effective development and use of short-term SSACs, we recommended VA (1) develop requirements for VAMCs and network contracting offices to effectively engage in early acquisition planning for the replacement of expiring high-value, long-term SSACs, (2) prioritize the review of SSAC contract data to identify patterns of overreliance on short-term SSACs that avoid appropriate Medical Sharing Office oversight, and (3) develop standards for the minimum amount of time necessary to develop and award short-term SSACs to minimize cases of nonadherence to VA policy for these contracts. VA concurred with these recommendations, and laid out plans to develop new requirements and standards while also charging the Medical Sharing Office with conducting data reviews of short-term SSACs. We found a high level of turnover among medical sharing contracting officers in all 21 network contracting offices that was exacerbated by a high level of inexperience among contracting officers responsible for developing SSACs. Network contracting office medical sharing teams experienced significant turnover in recent years, with 23 percent (49 of 217) of medical sharing contracting officer full-time employee equivalents (FTEE) in fiscal year 2014 and 27 percent (65 of 239) of FTEEs in fiscal year 2015 either resigning or transferring to another VHA contracting team. Medical sharing supervisors offered several potential explanations for turnover on medical sharing teams, including job burnout, the complexity of medical sharing contracts, the workload associated with medical sharing teams, and frustration with the layers of review required for these contracts. Medical Sharing Office officials told us that this turnover hinders the SSAC development process because newer contracting officers have greater difficulty developing high-value, long-term SSACs due to a lack of experience and knowledge. They also told us that they believe it takes approximately 5 years for a contracting officer to become experienced in developing medical sharing contracts, including SSACs. We found, however, that more than half of medical sharing contracting officers had 2 years or less medical sharing contract experience and less than one-quarter had more than 4 years of experience developing medical sharing contracts. Federal internal control standards state that effective management of an organization's workforce, such as having the right personnel on board, is essential to achieving results. However, in contrast to these standards, VHA does not have a plan to address medical sharing contracting officer turnover. As a result, VHA lacks assurance that network contracting offices can maintain and develop the contracting officers' skillsets that are necessary for developing complex medical sharing contracts, such as SSACs. Moreover, we found that limited training opportunities for medical sharing contracting officers further erodes VA's knowledge base for developing high-quality and cost-effective SSACs. The Medical Sharing Office has developed and offered three in-person training courses designed to progressively build a contracting officer's competence in developing medical sharing contracts, including SSACs. Medical Sharing Office officials reported in February 2016 that over 90 percent of all participants for each of the training classes reported that the trainings increased their medical sharing competency and that the information presented would contribute to their job performance. Since fiscal year 2015, however, VHA has not consistently provided training for medical sharing teams in network contracting officers throughout VHA. VHA has canceled some of their course offerings due to budget constraints. In addition, VHA Central Office requested that the Medical Sharing Office cut the class size of each course offering by 25 percent. Federal internal control standards state that agencies should establish good human capital policies and practices, such as appropriate practices for training. In contrast to these standards, VHA has not determined how to either provide the existing training courses or develop alternatives that do not require travel in response to a changing budgetary environment. As a result, VHA cannot build the skills of its medical sharing contracting officers and overcome the challenges associated with their inexperience. Our report concluded that instability in the medical sharing workforce, due to high levels of turnover among medical sharing contracting officers, has limited VHA's ability to develop high-quality SSACs throughout VHA. To develop and maintain medical sharing expertise within the network contracting offices, we recommended that VA (1) create a plan to increase retention of contracting officers that work in medical sharing teams, and (2) develop mechanisms to either provide existing training courses or create training courses that do not require travel for contracting officers working within network contracting offices. VA concurred with both of these recommendations and summarized planned steps to address these recommendations, including the development of a retention plan and soliciting agency leadership for assistance in resource prioritization to fund VHA health care contracting training courses. We found that representatives from the five affiliates that provide services through SSACs to our selected VAMCs noted challenges related to receiving information on changes to VA and VHA requirements for SSACs. These included communication from VHA about what services the VAMC needed from the affiliate, the documentation requirements affiliates needed to submit to support their physician salary pricing, and changes to VHA's approach to negotiations. The affiliate representatives also noted coordination challenges related to responding to SSAC solicitations. For example, representatives reported that it was challenging for them to provide services to VAMCs under short-term SSACs because the length of these contracts does not provide a commitment from VHA for the physicians hired by the affiliate to fulfill the contract. These affiliate representatives explained that it can take a year or longer to recruit a well-qualified academic physician and short-term SSACs do not provide the funding commitment needed by the affiliate to recruit these physicians. Federal internal control standards state that information should be communicated both internally and externally to enable the agency to carry out its responsibilities; for external communications, these standards state that management should ensure that there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. In contrast to these standards, VHA's efforts to cultivate better communication and coordination with affiliates at the national level have been limited, consisting of three regional forums with all its affiliates in fiscal year 2012. Since 2012, VA has relied primarily on local coordination with affiliates in lieu of regional forums, due to travel restrictions associated with VA's recent budget shortfalls. As a result, VHA cannot ensure that it is effectively responding to the concerns of its affiliates. Our report concluded that concerns about VA's communication and coordination with its affiliates, as voiced by representatives from the five affiliates we spoke with, demonstrate potentially ineffective communication streams with these critical partners. To ensure VHA effectively communicates with its affiliates regarding SSACs, we recommended that VA reach out to all its affiliates, identify any concerns, and determine the most effective method of communicating with affiliates regarding SSAC development. VA concurred with this recommendation and said that the VHA's Office of Academic Affiliations and Medical Sharing Office will re-engage with the American Association of Medical Colleges to determine the best ways to gather input from affiliates on their concerns and determine the most effective method of communication with them regarding SSAC development. Furthermore, VA added that these offices will evaluate VA's current partnerships with affiliates to identify both highly functional relationships that could be highlighted as best practices and partnerships that could benefit from targeted intervention. Chairman Coffman, Ranking Member Kuster, 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. If you or your staff members have any questions concerning this testimony, 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 statement. Other individuals who made key contributions to this testimony include Marcia A. Mann, Assistant Director; Cathleen Hamann; Katherine Nicole Laubacher; Dharani Ranganathan; and Said Sariolghalam. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony summarizes the information contained in GAO's May 2016 report, entitled VA Health Care: Improvements Needed for Management and Oversight of Sole- Source Affiliate Contract Development (GAO-16-426). GAO found it took nearly 3 years on average to develop and award 11 selected high- value, long-term sole-source affiliate contracts (SSAC) from three of the five Department of Veterans Affairs (VA) medical centers (VAMC) GAO visited. The two remaining VAMCs GAO visited did not use high-value, long-term SSACs. High-value, long-term SSACs generally require the most oversight of all SSACs by the Veterans Health Administration (VHA), have total initial values of $500,000 or more, and provide affiliate services for more than 1 year. Officials from all five VAMCs GAO visited said that the lengthy development time frames of these contracts can impact VAMCs in several ways--including creating potential gaps in patient care and the need to repeatedly establish short-term solutions. GAO found that 10 of these 11 selected high-value, long-term SSACs exceeded the informal estimates created by VHA as planning guides for the expected development time frames that high-value, long-term SSACs should take. According to VA officials, these informal estimates are not used to measure the performance of this process and VHA has not established standards for the timely development of high-value, long-term SSACs. Federal internal control standards recommend establishing and reviewing performance standards at all levels of an agency. Absent such standards, VHA cannot ensure that its high-value, long-term SSACs are being developed in a timely manner. VHA uses short-term SSACs to overcome lengthy high-value, long-term SSAC development time frames, but lacks effective oversight for the development and use of short-term SSACs. Short-term SSACs have total initial values of less than $500,000, provide affiliate services for up to 1 year, and are not reviewed by VHA Central Office. Instead they are developed and awarded independently by contracting officers within VHA's network contracting offices. Of the 12 short-term SSACs that GAO reviewed, 7 did not adhere to VA and VHA policy for the development of short-term SSACs--including 5 where (1) a solicitation was not issued to the affiliate (a required document detailing VA's performance requirements to enable a prospective contractor to prepare its proposal); (2) the affiliate did not provide VHA a formal proposal outlining the services to be provided and instead submitted a price quote; and (3) negotiations were not conducted between the contracting officer and affiliate to address potential pricing issues before awarding the final contract. The contracting officer responsible for these five contracts cited the lack of adequate time to develop and award the contracts and a lack of contract negotiating skills as the primary factors that impacted his ability to ensure that these short-term SSACs adhered to VA and VHA policy requirements. By not developing standards for short-term SSACs, VA has limited assurance that contracting officers have enough time to develop and award these contracts and also adhere to VA and VHA policy requirements. GAO found a high level of inexperience among contracting officers responsible for developing SSACs in all 21 of VHA's network contracting offices. Specifically, about one-third of medical sharing contracting officers had 1 year or less experience developing medical sharing contracts, including SSACs, and more than half of medical sharing contracting officers had 2 years or less medical sharing contract experience. The high level of inexperience can be attributed in part to high turnover in recent years. About one-quarter of medical sharing contracting officers working within network contracting offices either left VA or were reassigned to other contracting teams. Inconsistent with federal internal control standards, VA does not have a plan to address the retention of its contracting workforce, nor has it taken adequate steps to expand training opportunities to enhance the level of competence.
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In the late 1980s, the Marine Corps began efforts to improve its chemical and biological protective suits because the ones used by U.S. armed forces at the time were bulky and heavy and could not be reused after laundering. Starting in 1989, the Marine Corps' exploratory development efforts and subsequent MCLIST Advanced Technology Transition Demonstration program identified, evaluated, and field tested a number of chemical defense materials. During the same time period, the Army began an exploratory development effort to evaluate materials that offered less weight and bulk and enhanced protection, and the Air Force and the Navy began pursuing improved materials for their chemical protective uniforms. Separate from the MCLIST program, the Marine Corps fielded the Saratoga chemical and biological protective overgarment in 1991. The Saratoga garment, made from materials manufactured by Blucher, a German company, had an inner liner made with activated carbon spheres rather than the carbon-impregnated foam used by the military services at the time. All of the military services eventually combined their chemical defense material improvement efforts. Marine Corps, Army, Air Force, and Navy officials signed a memorandum of agreement, effective in November 1993, that defined the new JSLIST program and set forth the services' respective responsibilities for the development, production, and deployment of the next-generation chemical and biological protective suits. The Marine Corps Nuclear, Biological, and Chemical Defense Office was designated as the lead agency for the JSLIST program. The MCLIST and Army programs, which ultimately became JSLIST, were research and development activities. Research and development activities are generally conducted in a more flexible environment than acquisition programs and often involve informal communications with prospective participants. DOD used market research to seek out existing foreign and domestic technologies for testing. The minimum requirements that applied to DOD's efforts to identify improved chemical defense materials were published in a series of annual Broad Agency Announcements. These announcements described various areas of scientific or technical interest, provided specific points of contact, and included a statement that proposals would be evaluated based on merit and responsiveness to a government requirement. According to Marine Corps officials, the JSLIST program evaluated 57 material combinations (including liners, outershells, and combinations of both). The program evaluation was conducted in two phases. At the completion of phase I, 5 of the 57 material combinations were qualified to enter phase II for developmental and operational testing. At the completion of phase II in April 1997, only one of the five material combinations tested was determined to be acceptable for use in protective suits--Blucher's Saratoga liner with a nylon and cotton outershell. (See app. I for further information on the JSLIST test program phases.) DOD is contracting for the suits through the National Industries for the Severely Handicapped and a company under section 8(a) of the Small Business Act. The contracts require that the suits be made from the Blucher material combination. Appendix II contains additional information on the JSLIST contracts. The JSLIST acquisition strategy includes a pre-planned product improvement program. DOD announced this new competition in the Commerce Business Daily in June 1997. DOD is seeking additional materials to address JSLIST objectives that were not met in the initial evaluation, such as a chemical protective garment that lasts for 60 days and improved chemical protective gloves and socks. Production is scheduled to begin in fiscal year 2000. Appendix III shows a timeline of key events in the MCLIST and JSLIST programs. Congress has raised concerns about the fact that the JSLIST material is produced by a sole-source company. The National Defense Authorization Act for Fiscal Year 1998 conference report noted that DOD should consider taking actions necessary to qualify additional sources of supply for chemical protective garment materials. Congress directed the Secretary of Defense to address this issue in DOD's next Nuclear, Biological, and Chemical Defense Annual Report to Congress. Because the MCLIST and Army demonstrations were research and development activities, they were not subject to the formal notification requirements that apply to acquisitions. However, DOD provided adequate notice of its interest in identifying improved chemical protective materials through three different mechanisms. First, DOD conducted informal market research efforts and contacted industry directly to identify materials to include in the research and development programs. These efforts involved foreign as well as domestic suppliers. Officials from the Army's Natick Research, Development, and Engineering Center, which managed MCLIST for the Marine Corps, told us that they traveled worldwide to locate promising technologies. Second, ongoing exploratory development projects at Natick identified technologies that were subsequently included in the demonstration programs. Marine Corps officials told us that they directed certain new and promising materials from these projects into the MCLIST demonstration program. Last, notice of three Broad Agency Announcements, published in the Commerce Business Daily, alerted industry of the government's interest in developing new technologies for chemical defense materials. The dates of the announcements are shown in table 1. Although these announcements did not specifically cite the MCLIST program or the Army's exploratory development effort, points of contact were named so that industry representatives could obtain further information concerning DOD's research and development efforts. Participation in the JSLIST program was limited only to those materials submitted under the MCLIST or Army's demonstrations; new companies or materials were excluded from entering JSLIST. DOD tested 57 material combinations, submitted by 13 companies, in the JSLIST program. However, reliance on informal communications--common in a research and development environment--resulted in some companies getting different information about deadlines for material submissions. Outside of the research and development programs, a company submitted an unsolicited proposal to the Marine Corps for an improved chemical defense material. The Marine Corps' subsequent rejection of the proposal was consistent with the Federal Acquisition Regulation. However, the Marine Corps could have referred the company to the Army's exploratory development program so that the material could have been considered for inclusion in JSLIST. Industry learned of the opportunity to participate in the MCLIST and Army research and development programs through informal discussions with DOD officials or by calling the points of contact listed in the Broad Agency Announcements. Participation in these programs resulted in 57 material combinations, submitted by 13 companies, being tested in JSLIST. However, because the MCLIST and Army programs operated separately, each had different timeframes and cutoff dates for submitting materials. For example, materials for the MCLIST program had to be submitted to Natick in time to make garments before field testing, which took place from April to June 1992. According to Marine Corps officials, industry was required to submit garments by September 30, 1992, for participation in the Army's demonstration, which was held in March 1993. If industry was submitting materials rather than fully constructed garments, the deadline was June 1992. The Army's program was industry's final opportunity to have materials entered in JSLIST. MCLIST participants were advised informally of the final date to submit materials to the Marine Corps program, but not all companies learned of the opportunity to submit materials to the Army program. For example, officials from the complainant company said that they were not told of the Army program's deadline for submission of materials until September 30, 1992, the last day submissions were allowed. Therefore, the company did not submit an improved material to Natick that could have been included in the Army's demonstration and JSLIST program. Officials from this company did not call the points of contact listed in the Broad Agency Announcement. Rather, they contacted a Natick official who had been involved with MCLIST but was not directly involved with JSLIST. In contrast, a company that fared poorly in MCLIST was advised by a Natick official who was also not named in the Broad Agency Announcements of its opportunity to submit an improved material for evaluation in the upcoming Army program. Because contacts between DOD officials and industry were informal and largely undocumented, we could not determine whether all companies that contacted the Natick officials named in the Broad Agency Announcements were told of the opportunity to participate in the Army's demonstration program. According to Marine Corps officials, the closing date of each Broad Agency Announcement represented the cutoff dates for material submissions to the demonstration programs. For example, the officials said that the closing date of the final announcement--September 30, 1992--was the deadline for entering materials in the Army's demonstration program. However, Natick officials told us that the Broad Agency Announcements were not connected to cutoff dates for material submissions to the demonstration programs. For example, the officials noted that the cutoff date for the MCLIST demonstration was simply tied to their need to receive materials and make garments in time for field testing. The three Broad Agency Announcements did not cite particular programs--such as MCLIST or JSLIST--or cutoff dates for material submissions and thus were not explicitly tied to the deadline for material submissions. Nothing in the third announcement sets it apart from the two previous announcements to indicate that September 30, 1992, was industry's last opportunity to submit a material to JSLIST via the Army's demonstration program. Furthermore, a fiscal year 1993 Broad Agency Announcement, issued a year after entry to JSLIST was closed, is nearly identical to the three previous announcements. In June 1992, 3 months before the closing date of the fiscal year 1992 Broad Agency Announcement, the complainant company submitted an unsolicited proposal to the Marine Corps for an improved chemical defense material. The company had developed this improved material after its initial submission to the MCLIST program. The proposal--submitted outside of the Advanced Technology Transition Demonstration process--was for a competitive alternative to the Saratoga suits that the Marine Corps had begun to field in 1991. The company offered to absorb a substantial share of the testing costs if its product did not meet the Marine Corps' requirements. In April 1993, more than 6 months after the deadline for submissions to the Army's demonstration program, the Marine Corps rejected the unsolicited proposal, stating that it was duplicative in nature to an existing Marine Corps effort. The rejection letter noted that the Marine Corps had already initiated a research and development effort based on the carbon sphere technology identified in the proposal. The Federal Acquisition Regulation provided that an unsolicited proposal be rejected when it resembled an ongoing acquisition or did not demonstrate an innovative and unique concept. The Marine Corps' actions in rejecting the proposal were therefore consistent with the Federal Acquisition Regulation. However, we believe the Marine Corps missed an opportunity to refer the firm to the Army's demonstration program, which ultimately became part of JSLIST, before it was too late for entry. Because a joint program was already planned at that time, the Marine Corps could have informed the company that the Broad Agency Announcement was still open, thus allowing the firm's potential entry into the Army's demonstration program. We could not determine whether the outcome of the JSLIST program would have differed if the firm's material had been assessed. The complainant company asserted that the transition to JSLIST had caused a significant change in requirements. The company was primarily concerned that the requirement for a single-use garment in MCLIST had changed to one that was launderable in JSLIST. Officials from the company stated that the changed requirements placed it at a disadvantage relative to the competition because it was not allowed to submit a different material under JSLIST. However, the basic requirements for a lightweight, launderable, chemical protective overgarment did not change during the transition. The requirements for MCLIST and JSLIST were based on assessments of the services' missions and the threat. DOD's basic requirement for both programs was to develop a lightweight, launderable, durable material that protected against chemical agent penetration and reduced heat stress. These fundamental requirements were reflected in the three Broad Agency Announcements issued from fiscal years 1990 to 1992. The latter two announcements added a requirement for protection from toxic aerosols. MCLIST and JSLIST both sought improved materials that could be laundered multiple times and reused, unlike the single-use garment that the Army, Air Force, and Navy were using at the time, which could not be laundered. Although the fundamental requirements did not change, each service added various service-unique requirements to the JSLIST program. For example, the Army required, in addition to the standard 30-day garment, a single-use, 7-day garment that would weigh less than the 30-day garment and provide the same level of chemical protection. In addition, the Air Force required chemical protection for liquid dispersed by air burst munitions or spray tanks. Although materials were tested that would accommodate these variations, the basic requirements for the overgarment did not change. The National Defense Authorization Act for Fiscal Year 1998 conference report urged DOD to consider taking actions necessary to qualify additional sources of supply for its chemical protective garment materials. The conferees directed the Secretary of the Army, as executive agent for the chemical-biological defense program, to report to the congressional defense committees on any plans to qualify such sources. The conferees also directed the Secretary of Defense to address the issue as a special area of interest in DOD's next annual report to Congress on the Nuclear, Biological, and Chemical Defense program. However, the subsequent annual report to Congress, issued in February 1998, did not address the issue of qualifying additional sources of supply. A DOD official told us that the reporting requirement had been overlooked. In May 1998, DOD issued an addendum to its February 1998 report to address the congressional reporting requirement. The addendum cited DOD's ongoing pre-planned product improvement program as a potential mechanism for identifying additional sources of supply for the requirements that were not achieved in the JSLIST program. The report emphasizes, however, that DOD's primary goal remains to provide the U.S. armed forces with the best chemical protective ensemble available. Because the MCLIST program and the Army's exploratory development efforts--which ultimately became the JSLIST program--were research and development activities, they were not subject to the same procedural requirements that apply to acquisition programs. In this context, we believe that the MCLIST and JSLIST programs were conducted fairly. DOD provided industry adequate notice of the government's interest in improved chemical defense garment materials and sufficient opportunity to participate in the programs. The basic requirement for a lightweight, less bulky overgarment that could be reused after laundering did not change in the transition from MCLIST to JSLIST, although each service added certain unique requirements. Although the informal nature of communications that characterizes the research and development environment may have contributed to a missed opportunity for DOD to evaluate the complainant's improved chemical defense garment material, the Marine Corps' rejection of the unsolicited proposal was consistent with the Federal Acquisition Regulation governing such proposals. DOD reviewed a draft of this report and fully concurred with the information as presented. To determine whether DOD provided sufficient notice to industry of its interest in new chemical defense materials and industry had sufficient opportunity to participate in the MCLIST demonstration, the Army's exploratory development effort, and the JSLIST program, we obtained and analyzed Broad Agency Announcements and information about DOD's formal and informal communications with industry regarding the programs. We gathered and analyzed information pertaining to the intent, timeframes, and participants in the MCLIST and Army's demonstration programs, which afforded industry entry to JSLIST. We discussed these programs with officials from the Office of the Secretary of Defense, Director of Defense Procurement; the Marine Corps Systems Command; the Army's Natick Research, Development, and Engineering Center; and selected contractor locations. We also reviewed the unsolicited proposal a company sent to the Marine Corps in June 1992 and the Marine Corps' response to the company. We determined whether the Marine Corps' rejection of the proposal was done in accordance with the Federal Acquisition Regulation. To determine whether basic requirements that materially affected the competition changed in the transition from MCLIST to JSLIST, we obtained and analyzed requirements documents, such as the Marine Corps' 1986 Required Operational Capability statement and the 1995 Joint Operational Requirements Document for JSLIST, as well as test plans for JSLIST. We discussed MCLIST and JSLIST requirements with officials from the Marine Corps Systems Command and industry officials. We also analyzed the requirements as stated in the Broad Agency Announcements. To report on DOD's response to the congressional reporting requirement in the Fiscal Year 1998 National Defense Authorization Act conference report, we interviewed officials at the Office of the Assistant to the Secretary of Defense for Nuclear, Chemical, and Biological Defense Programs and the Marine Corps Systems Command. We also reviewed DOD's February 1998 Nuclear, Chemical, and Biological Defense Annual Report to Congress and the May 1998 addendum to that report. We did not attempt to assess the accuracy of the JSLIST test results or determine whether the outcome of the JSLIST program would have differed if additional chemical defense materials had been evaluated. We conducted our review from February to June 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate congressional committees, the Secretary of Defense, and the Commandant of the Marine Corps. We will also provide copies to other interested parties on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. Because the Joint Service Lightweight Integrated Suit Technology (JSLIST) program was a joint effort, standardized test methods and procedures had to be developed that would be acceptable to all the services and recognize service-unique requirements. Testing occurred during two phases. Phase I began in October 1993; phase II began in August 1995 and resulted in the selection of the only material combination that was determined to be acceptable for use in the Department of Defense's chemical defense garments. During phase I, 600 suits made from 57 candidate material combinations (outershells, liners, or both) were tested. Phase I testing involved chemical agent penetration, aerosol penetration, heat stress, laundry tests, wear tests, suit design evaluation, physical properties and flame resistance tests, and user size and fit tests. Wear tests were conducted over 14 days at Camp Pendleton, California, and Camp Lejeune, North Carolina. Suit design evaluations took place at Camp Pendleton, California; Camp Lejeune, North Carolina; Brooks Air Force Base, Texas; U.S. Army Natick Research, Development, and Engineering Center, Massachusetts; Fort Rucker, Alabama; Norfolk Naval Station, Virginia; and Fort Bragg, North Carolina. To pass the tests, candidate materials had to equal or exceed the performance of the Battledress Overgarment, which was the suit used by the Army at that time, or the Saratoga, which was replacing the Battledress Overgarment in the Marine Corps. Those materials that did not pass chemical agent penetration and laundry tests were disqualified. Test garments and individual swatch samples were coded to ensure unbiased testing. Phase I culminated in a decision by the Marine Corps Systems Command to proceed to the engineering and manufacturing development phase, or phase II. Of the 57 material candidates, 5 were selected for phase II testing. During phase II, more than 3,000 suits (330 suits per candidate material plus the Battledress Overgarment and Saratoga control garments) were tested at 10 worldwide field locations using mission-oriented scenarios and individual user tasks. The purpose of these tests was to collect operational and technical data to assess the performance of each material configuration during mission-oriented activities and provide worn suits for follow-on laboratory tests. The coding procedure used in phase I was also used in phase II to continue unbiased testing. Arctic, tropic, and desert environmental conditions were represented during the tests. The wear periods were 7, 15, 30, and 45 days, and suits were laundered up to 6 times. Laboratory tests included chemical agent, flame resistance, aerosol penetration, and heat stress. As with phase I, the Army's Battledress Overgarment and the Marine Corps' Saratoga garment were the established baselines. Only one material combination was found to meet all program requirements--the nylon/cotton outershell over the Blucher Saratoga liner. Because Blucher's Saratoga liner with a nylon/cotton outer shell was the only material combination to pass the JSLIST phase II tests, the JSLIST production material is sole source. The Department of Defense is contracting for the JSLIST suits through the National Industries for the Severely Handicapped and another contractor under section 8(a) of the Small Business Act. Tex-Shield, Inc., Blucher's American distributor, is a directed sole source for the material from which the suits are to be fabricated. The contracts are not awarded competitively. Suit fabrication services are on the procurement list developed under the provisions of the Javits-Wagner-O'Day Act. Under the act, once a commodity or service has been added to the list by the Committee for Purchase from the Blind and Other Severely Handicapped, contracting agencies are required to procure the commodity or service directly from the workshops for blind or other severely handicapped individuals affiliated with the National Industries for the Severely Handicapped. For the JSLIST suits, the Marine Corps offered the requirement to the National Industries for the Severely Handicapped, which accepted as much of the work as it could, and the Marine Corps contracted for the balance of work with another contractor under section 8(a) of the Small Business Act. Neither contracting through the National Industries for the Severely Handicapped nor the contract with the section 8(a) contractor required publication of a notice in the Commerce Business Daily or the use of competitive procedures. MCLIST program began. First Broad Agency Announcement was released in Commerce Business Daily. Marine Corps fielded Saratoga suits. Second Broad Agency Announcement was released in Commerce Business Daily. Third Broad Agency Announcement was released in Commerce Business Daily. First MCLIST wear test was conducted at Camp Lejeune (hot/humid climate testing). A company submitted an unsolicited proposal to the Marine Corps. Second MCLIST wear test was conducted at Camp Pendleton (hot/dry climate testing). Deadline for submissions to Army demonstration program. According to Marine Corps, no additional materials were accepted after this time. Army wear test was conducted at Camp Pendleton. Marine Corps rejected the unsolicited proposal. JSLIST phase I testing began with 57 material combinations. JSLIST memorandum of agreement became effective. JSLIST phase II testing began. Phase II testing was completed, and Saratoga material was selected. JSLIST contracts were awarded. Preplanned Product Improvement Program was announced in Commerce Business Daily. John A. Carter William T. Woods 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 examined the Department of Defense's (DOD) research and development programs for improved chemical defense garment materials for U.S. armed forces, focusing on whether DOD: (1) provided sufficient notice to industry of the government's interest in identifying improved chemical defense materials; (2) provided industry sufficient opportunity to participate in the programs; (3) changed requirements in the transition of the Marine Corps Lightweight Integrated Suit Technology (MCLIST) program to the Joint Service Lightweight Integrated Suit Technology (JSLIST) program; and (4) responded to a congressional reporting requirement concerning sources of supply for the military's chemical defense materials. GAO noted that: (1) because the MCLIST program and the Army's exploratory development efforts--which ultimately became the JSLIST program--were research and development activities, they were not subject to the same procedural requirements that apply to acquisition programs; (2) in this research and development context, DOD provided sufficient notice to industry of its interest in improved chemical defense materials through market research, direct industry contacts, ongoing exploratory development projects, and Broad Agency Announcement notices published in the Commerce Business Daily; (3) DOD provided industry an adequate opportunity to participate in the research and development programs; (4) on the basis of the notice DOD provided to industry, a total of 57 material combinations, submitted by 13 companies, were evaluated in JSLIST after initial testing in MCLIST and the Army demonstration; (5) however, reliance on informal communications resulted in companies receiving different information about submission deadlines to MCLIST and the Army programs; (6) due in part to the lack of formal communications regarding deadlines of material submissions, the complainant company did not get an improved material into JSLIST for evaluation; (7) the complainant company, which already had one material in the MCLIST demonstration, submitted an unsolicited proposal to the Marine Corps for an improved chemical defense material after entry into MCLIST was closed; (8) the Marine Corps rejected the proposal in accordance with the Federal Acquisition Regulation because the material duplicated an existing Marine Corps effort; (9) GAO could not determine whether the outcome of JSLIST would have differed if this material had been assessed; (10) the basic requirements for a lightweight, launderable, chemical protective garment did not change in the transition from MCLIST to JSLIST; (11) however, the individual military services added certain mission-specific requirements under JSLIST; (12) DOD overlooked the congressional reporting requirement in the National Defense Authorization Act for Fiscal Year 1998 conference report; and (13) a May 1998 addendum to DOD's February 1998 Nuclear, Biological, and Chemical Defense Annual report to Congress stated that the preplanned product improvement program might identify additional sources of supply to meet those requirements that were not achieved in the JSLIST program.
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Title XIX of the Social Security Act is a federal and state entitlement program that pays for medical assistance for certain categories of low- income adults and children. This program, known as Medicaid, became law in 1965 and is jointly funded by the federal and state governments (including the District of Columbia and the Territories). Medicaid is the largest source of funding for medical and health-related services for America's poorest people. More than 50 million persons enrolled in the Medicaid program in fiscal year 2006. In fiscal year 2006, according to CMS, total outlays for Medicaid (federal and state) were approximately $324 billion, of which about $185 billion was paid by the federal government. Medicaid is jointly funded by the federal and state governments. The federal government shares in a state's Medicaid service costs through a matching formula. The federal matching rate for the cost of services provided to Medicaid beneficiaries is related to a state's per capita income and in federal fiscal year 2006 ranged from 50 percent to 76 percent. Although the federal government establishes general guidelines for the Medicaid program, requirements are established by each state. CMS, within the Department of Health and Human Services (HHS), is responsible for administering federal matching funds to the states and for legislation and regulations affecting the Medicaid program. CMS also provides guidelines, technical assistance, and periodic assessments of state Medicaid programs. Title XIX of the Social Security Act allows considerable flexibility within the states' Medicaid plans. Within broad national guidelines established by federal statutes, regulations, and policies, each state (1) establishes its own eligibility standards; (2) determines the type, amount, duration, and scope of services; (3) sets the rate of payment for services; and (4) administers its own program--including enrollment of providers. Medicaid policies for eligibility, services, and payment are complex and vary considerably, even among states of similar size or geographic proximity. Thus, a person who is eligible for Medicaid in one state may not be eligible in another state, and the services provided by one state may differ considerably in amount, duration, or scope from services provided in a similar or neighboring state. In addition, state legislatures may change Medicaid eligibility, services, or reimbursement during the year. To receive payment for services or goods provided to beneficiaries from Medicaid, providers must first enroll in the Medicaid program. To enroll, providers must submit a Medicaid enrollment application to the state or their fiscal agents who are responsible for determining whether the providers meet federal and state requirements for enrollment. The state or its fiscal agents are responsible for screening the applications based on CMS and state policies. Once an applicant is deemed eligible by the state or its fiscal agents, Medicaid providers can submit their claims to the state for payment. The state is responsible for claims processing and verifying the claim is accurate, complete, medically necessary, and covered under the state's Medicaid plan. After the claim is approved, the state pays the claim. The typical Medicaid payment process is illustrated in figure 1. When a Medicaid beneficiary receives care from a health care provider such as a hospital, physician, or nursing home, the provider bills the state Medicaid program for its services. The state in turn pays the provider from a combination of state funds and federal funds, which have been advanced by CMS each quarter. The state then files an expenditure report, in which it claims the federal share of the Medicaid expenditure as reimbursement for its payment to providers and reconciles its total expenditures with the federal advance. In addition to reimbursement for medical services, the state may claim federal reimbursement for functions it performs to administer its Medicaid program, such as enrolling new beneficiaries; reviewing the appropriateness of providers' claims; and collecting payments from third parties, which are payers other than Medicaid, such as Medicare, that may be liable for some or all of a particular health claim. Transaction 1: A Medicaid beneficiary receives care from a health care provider, such as a physician; the provider bills the state Medicaid program; and the state pays the provider by drawing on a pool of state funds combined with a quarterly advance on federal matching funds. Transaction 2: The state files an expenditure report, in which it claims the federal Medicaid matching share as reimbursement for its payments to providers and reconciles total quarterly expenditures with the federal advance. States may file claims for medical services and for administrative functions. Our analysis found that over 30,000 Medicaid providers at the selected states had over $1 billion in unpaid federal taxes as of September 30, 2006. This represents over 5 percent of the approximately 560,000 Medicaid providers paid by the selected states during federal fiscal year 2006. The amount of unpaid federal taxes we identified among Medicaid providers is likely understated because (1) we intentionally limited our scope to providers with agreed-to federal tax debt for tax periods prior to 2006, and (2) the IRS taxpayer data reflect only the amount of unpaid taxes either reported by the taxpayer on a tax return or assessed by IRS through its various enforcement programs and thus the unpaid tax debt amount does not include entities for which IRS had not identified that they did not file tax returns or underreported their income. As shown in figure 2, 87 percent of the approximately $1 billion in unpaid taxes was comprised of individual income and payroll taxes. The other 13 percent of taxes included corporate income, excise, unemployment, and other types of taxes. As shown in figure 2, over half of the unpaid taxes owed by Medicaid providers were payroll taxes. Employers are subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee's wages, the employer is deemed to have a responsibility to hold these amounts "in trust" for the federal government until the employer makes a federal tax deposit in that amount. To the extent these withheld amounts are not forwarded to the federal government, the employer is liable for these amounts, as well as the employer's matching Federal Insurance Contribution Act contributions for Social Security and Medicare. Individuals within the business (e.g., corporate officers) may be held personally liable for the withheld amounts not forwarded and they maybe assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Willful failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment up to 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to 1 year. The law imposes no penalties upon an employee for the employer's failure to remit payroll taxes since the employer is responsible for submitting the amounts withheld. The Social Security and Medicare trust funds are subsidized or made whole for unpaid payroll taxes by the general fund. Thus, personal income taxes, corporate income taxes, and other government revenues are used to pay for these shortfalls to the Social Security and Medicare trust funds. A substantial amount of the unpaid federal taxes shown in IRS records as owed by Medicaid providers had been outstanding for several years. As reflected in figure 3, about 56 percent of the $1 billion in unpaid taxes was for tax periods from calendar year 2000 through calendar year 2004, and approximately 29 percent of the unpaid taxes was for tax periods prior to calendar year 2000. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amount owed decreases. This is due, in part, to the continued accrual of interest and penalties on the outstanding tax debt, which, over time, can dwarf the original tax obligation. The amount of unpaid federal taxes reported above does not include all tax debts owed by Medicaid providers due to statutory provisions that give IRS a finite period under which it can seek to collect on unpaid taxes. There is a 10-year statute of limitations beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if the Medicaid providers owe federal taxes beyond the 10-year statutory collection period, the older tax debt may have been removed from IRS's records. We were unable to determine the amount of tax debt that had been removed. Although over $1 billion in unpaid federal taxes owed by Medicaid providers as of September 30, 2006, is a significant amount, it likely understates the full extent of unpaid taxes owed by these or other businesses and individuals. The IRS tax database reflects only the amount of unpaid federal taxes either reported by the individual or business on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by businesses and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. For example, during our audit, we identified instances from our case studies in which Medicaid providers failed to file tax returns for a particular tax period and IRS had not assessed taxes for these tax periods. Consequently, while these providers had unpaid federal taxes, they were listed in IRS records as having no unpaid taxes for that period. Further, our analysis did not attempt to account for businesses or individuals that purposely underreported income and were not specifically identified by IRS as owing the additional federal taxes. According to IRS, underreporting of income accounted for more than 80 percent of the estimated $345 billion annual gross tax gap. Finally, our analysis did not attempt to identify Medicaid providers who owed taxes under a separate TIN from the TIN that received the Medicaid payments. For example, sole proprietors and certain limited liability companies may file Medicaid claims under their Social Security numbers (SSN). If these Medicaid providers had employees, they would typically report the payroll taxes under an employer identification number (EIN) and not their SSNs. Consequently, the full extent of unpaid federal taxes for Medicaid providers is not known. In addition to the IRS tax database not reflecting all assessed tax amounts due, our past audits have also found that the IRS tax database contains coding errors that adversely affect IRS's collection activities. IRS's collection process is heavily dependent upon its automated computer system and the information that resides within this system. In particular, the codes in each taxpayer's account in IRS's tax database are critical to IRS in tracking the collection actions it has taken against a tax debtor and in determining what, if any, additional collection actions should be pursued. For example, IRS uses these codes to identify cases it should exclude from the continuous levy program, which is an automated method of collecting tax debt by offsetting certain federal payments made to individuals and businesses, as well as cases it should exclude from other collection actions. For all 25 cases that we audited and investigated, we confirmed that their activities were abusive and in many instances found criminal activity related to the federal tax system. Of these cases, 17 involved businesses with employees who had unpaid payroll taxes, most dating as far back as the late 1990s. However, rather than fulfill their role as "trustees" of this money and forward it to IRS, these Medicaid providers diverted the money for other purposes, including their own salaries. As stated earlier, willful failure to remit payroll taxes can be a criminal felony offense punishable by imprisonment up to 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to 1 year. Table 1 highlights 10 cases of businesses and individuals with unpaid taxes. Our investigations revealed that, despite their businesses owing substantial amounts of taxes to IRS, some owners had substantial personal assets--including expensive homes and luxury cars. We are referring the 25 cases detailed in our report to IRS for appropriate collection action and criminal investigation. The following provides illustrative detailed information on four cases we audited and investigated. Case 1: During the time the owners of the hospital owed over $5 million in payroll taxes, the owners purchased a vacation home worth about $1 million. IRS assessed a trust fund recovery penalty (TFRP) of nearly $2 million against the owners, filed federal tax liens totaling nearly $8 million against the owners and hospital, attempted to levy the owners' bank accounts, and proposed an injunction to close the hospital because the business continued to accumulate tax debt. The hospital received over $9 million in Medicaid payments during fiscal year 2006. Case 2: While owing over $2 million in unpaid payroll taxes, the nursing home owner and business were fined for jeopardizing the health and safety of their patients. The nursing home owner attempted to sell the business and other real estate property and promised to pay tax debts in full. However, the owner did not sell the business or real estate and took other actions to avoid federal tax liens. IRS fined the owner over $400,000 in a recent year for intentionally disregarding IRS's tax reporting and filing requirements. The owner also has a related business that owes over $1 million in unpaid taxes. The nursing home received over $6 million in Medicaid payments during fiscal year 2006. Case 4: The managing officer of a pharmacy sold off business assets without notifying IRS while knowing that the business owed over $800,000 in unpaid payroll taxes over 7 years. In an attempt to collect unpaid debts from the officer, IRS assessed a TFRP of nearly $3 million and filed federal tax liens against the officer and the business. The officer owns a related entity that also owes a large amount of taxes, and recently started up a new corporation using the same address as the pharmacy. The pharmacy received nearly $100,000 in Medicaid payments during fiscal year 2006. Case 8: A medical clinic owner owns a house worth nearly $4 million, several luxury vehicles, and a pleasure boat while owing taxes. The owner also borrowed over $2 million from the business and sold properties for about $1 million at the same time the business owed over $1 million in unpaid payroll taxes. In addition, IRS generated a tax return for the business in a recent year because the business owner did not file it. The medical clinic received over $2 million in Medicaid payments during fiscal year 2006. In addition to the 25 cases that we identified through IRS tax records, we separately also found a Medicaid provider that was recently convicted for failure to pay employment taxes owed by several nursing homes. The nursing home businesses received over $25 million in Medicaid payments during fiscal year 2006. According to court documents, the nursing homes owed over $14 million in unpaid taxes. At the same time the businesses owed taxes, the owner bought a 10,000 square foot house with a current estimated value of over $2 million. The court records indicate that the owner spent tens of thousands of dollars furnishing the house including crystal chandeliers, a 132-piece set of Haviland Bavarian porcelain china, and oriental rugs. The owner used company funds to pay personal expenses such as a housekeeper, children's nanny, monthly pension for a parent who never worked at the company, a sailboat, and jet-skis. While owing taxes, the owner also went on vacations to Hawaii and gambling trips to Las Vegas and Reno, Nevada. Court records also indicate that while in Hawaii, the owner bought a $16,000 Rolex watch, the day before one of the required federal tax deposits was due. CMS and the selected states do not prevent health care providers who have tax debts from enrolling in or receiving payments from Medicaid. CMS has not developed regulations to require states to (1) screen health care providers for unpaid taxes and (2) obtain consent for IRS disclosure of federal tax debts. CMS officials stated that the primary focus of the Medicaid program is to provide health care services for low income people and not the administration of taxes. Further, federal law generally prohibits the disclosure of taxpayer data to CMS and states and thus, CMS and states do not have access to tax data directly from IRS unless the taxpayer provides consent. Further, none of the seven states we contacted have ever implemented a continuous federal tax levy for Medicaid payments. Thus, Medicaid payments to providers that owe federal taxes are not being continuously levied. Federal law does not prohibit providers with unpaid federal taxes from enrolling in and billing Medicaid. Federal regulations and policies require the states, as part of their responsibilities for determining whether the providers meet Medicaid requirements for enrollment, to verify basic information on potential providers, including whether the providers meet state licensure requirements and whether the providers are prohibited from participating in federal health care programs. However, federal regulations and policies do not require the states to screen these providers for federal tax delinquency nor do they explicitly authorize the states to reject the providers that have delinquent tax debt from participation in Medicaid. CMS officials stated that the primary focus of the Medicaid program is to provide health care services for low income people and not the administration of taxes. CMS officials stated that such a requirement could be a burden to the states in their enrollment of providers and could adversely impact states' ability to provide health care to the poor. Consequently, the selected states' processes generally do not consider federal tax debts of prospective providers in the Medicaid enrollment process. Further, due to a statutory restriction on disclosure of taxpayer information, even if tax debts specifically were to be considered in enrollment in Medicaid, no coordinated or independent mechanism exists for the states to obtain complete information on providers that have unpaid tax debt. Federal law does not permit IRS to disclose taxpayer information, including tax debts, to CMS or Medicaid state officials unless the taxpayer consents, which neither CMS nor the states currently seek. Thus, certain tax debt information can only be discovered from public records if IRS files a federal tax lien against the property of a tax debtor or if a record of conviction for tax offense is publicly available. Consequently, CMS and state officials do not have ready access to information on unpaid tax debts to consider in making decisions on Medicaid providers. Although a provision of the Taxpayer Relief Act of 1997 authorizes IRS to continuously levy certain federal payments made to delinquent taxpayers, no tax debt owed by Medicaid providers has ever been collected using this provision of the law. In the 10 years since its passage, IRS had not determined whether Medicaid payments are federal payments and thus subject to the continuous levy program or determined the feasibility of incorporating these payments into the program. If there had been an effective levy program in place, we estimate that the selected states could have levied payments for the federal government and collected between $70 million to about $160 million of unpaid federal taxes during fiscal year 2006. This estimate was based on those debts that IRS reported to the Treasury Offset Program (TOP) as of September 30, 2006. Officials from all these selected states stated that they have a continuous levy program to offset Medicaid payments against their state debts. Available data indicate that the vast majority of Medicaid providers appear to pay their federal taxes. However, our work has shown that over 30,000 Medicaid providers have taken advantage of the opportunity to avoid paying their federal taxes. While Medicaid providers are relied on to deliver significant medical services to those most in need, they must also pay their fair share of federal taxes. Many of the individuals involved in our cases have consistently not paid their taxes yet have received millions of dollars in Medicaid payments and have faced no criminal consequences. At the same time, some of these individuals are living lives of luxury, financed in part by Medicare and Medicaid payments. Also, IRS has taken little action to explore the continuous levy of Medicaid payments, which over time potentially could have resulted in millions of dollars of collections or to aggressively pursue collection and criminal investigation of the individuals involved in our 25 case studies. We recommend that the Commissioner of the Internal Revenue Service take the following two actions: Conduct a study to determine whether Medicaid payments can be incorporated in the continuous levy program. Evaluate the 25 referred cases detailed in this report for appropriate additional aggressive collection action and criminal investigation as warranted. We received written comments on a draft of this report from the Acting Commissioner of Internal Revenue (see app. III) and Acting Administrator of CMS (see app. IV). We also received an e-mail response from FMS. IRS concurred with our recommendations. In response to our recommendation that IRS conduct a study to determine whether Medicaid payments can be incorporated in the continuous levy program, IRS stated that both a subgroup of the Federal Contractors Tax Compliance (FCTC) task force and IRS General Counsel have completed an independent study on whether the Medicaid payments can be incorporated into the continuous levy program. Both the FCTC task force and IRS General Counsel concluded that Medicaid disbursements do not qualify as federal payments and therefore cannot be incorporated in the continuous levy program. In response to a draft of our report, CMS expressed concern about the tone and language we used to discuss our findings. Specifically, CMS interpreted our finding that over 30,000 Medicaid providers had over $1 billion of unpaid federal taxes as implying that "there is some direct correlation between owing taxes and being a Medicaid provider." Our report clearly states that the vast majority of Medicaid providers are paying their taxes. For the 5 percent of Medicaid providers with tax debt, we simply reported on the facts of what we found, which do not require additional evaluation to satisfactorily address our objective. Furthermore, regarding our third objective, CMS interpreted our report as implying that there is an underlying connection between the activity (preventing providers with tax problems from participating in the Medicaid program) and the authority and responsibility to perform such activity. Again, it appears that CMS misinterpreted our findings. We specifically stated that federal law does not prohibit providers with unpaid taxes from enrolling in and billing Medicaid. Although CMS is not required to screen potential providers for tax debts, we are concerned that CMS stated it would be inappropriate to prevent medical providers that owe federal taxes participating in the Medicaid program--which would presumably include those egregious cases we identified in this report. We believe that any CMS action to prevent medical providers who refuse to pay their taxes from participating in the Medicaid program would help ensure the integrity of the Medicaid program and does not necessarily conflict with CMS's role in providing health care to low-income individuals. Both CMS and FMS expressed concern with their agencies involvement in the continuous levy program. CMS stated that we implied that CMS and the Medicaid agencies should be conducting the continuous levy on these payments. FMS stated that our report indicated that, because Medicaid payments include funds the states receive from the federal government, the Medicaid payment is a federal payment. Our report did not state that CMS and the Medicaid agencies should be conducting the continuous levy on Medicaid payments nor did we state that Medicaid payments are federal payments. However, we did report that IRS had not determined whether Medicaid payments are federal payments and recommended that IRS conduct a study to determine whether Medicaid payments can be incorporated in the continuous levy program. CMS and FMS also provided us technical corrections to the report which we incorporated, as appropriate. 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 the Secretary of the Treasury, the Commissioner of the Financial Management Service (FMS), the Acting Commissioner of Internal Revenue, the Acting Administrator of Centers for Medicare & Medicaid Services (CMS) and interested congressional committees. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this report, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. To identify the magnitude of unpaid federal taxes owed by Medicaid providers, we used a nonrepresentative selection of states. We selected the states of California, Colorado, Florida, Maryland, New York, Pennsylvania, and Texas based on the magnitude of payments made to Medicaid providers and the geographical location of those states. We obtained and analyzed Internal Revenue Service (IRS) tax debt data as of September 30, 2006. We also obtained and analyzed the selected states' federal fiscal year 2006 approved Medicaid payments to providers. We matched the Medicaid payment data to the IRS unpaid assessment data using the taxpayer identification number (TIN) field. To avoid overestimating the amount owed by Medicaid providers with unpaid tax debts and to capture only significant tax debts, we excluded from our analysis tax debts and paid claims meeting specific criteria to establish a minimum threshold for the amount of tax debt and for the amount of paid claims to be considered when determining whether a tax debt was significant. The criteria we used to exclude tax debts are as follows: tax debts that IRS classified as compliance assessments or memo accounts for financial reporting, tax debts from calendar year 2006 tax periods, and Medicaid providers with total unpaid taxes and Medicaid paid claims of less than $100. These criteria were used to exclude tax debts that might be under dispute or generally duplicative or invalid, and tax debts that were recently incurred. Specifically, compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We excluded tax debts from calendar year 2006 tax periods to eliminate tax debt that may involve matters that are routinely resolved between the taxpayer and IRS, with the taxes paid or abated within a short period. We further excluded tax debts and Medicaid-paid claims of less than $100 because they are insignificant for the purpose of determining the extent of taxes owed by Medicaid providers. Our analysis also did not attempt to identify Medicaid providers who owed taxes under a separate TIN from the TIN under which the Medicaid payments were received. As a result, the full extent of unpaid federal taxes for Medicaid providers is understated. To identify indications of abuse or potentially criminal activity, we selected 25 Medicaid providers for a detailed audit and investigation. The 25 providers were chosen using a nonrepresentative selection approach based on our judgment, data mining, and a number of other criteria. Specifically, we narrowed down providers to 25 with unpaid taxes based on the amount of unpaid taxes, number of unpaid tax periods, amount of payments reported by Medicaid, and indications that owner(s) might be involved in multiple companies with tax debts. For these 25 cases, we obtained copies of automated tax transcripts and other tax records (for example, revenue officer's notes) from IRS and performed additional searches of criminal, financial, and public records. In cases where record searches and IRS tax transcripts indicated that the owners or officers of a business were involved in other related entities that have unpaid federal taxes, we also reviewed the related entities and the owner(s) or officer(s), in addition to the original business we identified. In instances where we identified related parties that had both Medicaid payments and tax debts, our case studies included those related entities, combining unpaid taxes and combined Medicaid payments for the original individual/business as well as all related entities. Because our investigations were generally limited to publicly available information, our audit of the 25 cases may not have identified all related parties or all significant assets (i.e., personal bank data, companies established to hide assets) that the Medicaid providers own. To determine the extent to which Centers for Medicare & Medicaid Services (CMS) officials and the states are required to consider tax debts or other criminal activities in the enrollment of providers into Medicaid, we examined CMS policies and procedures, Medicaid regulations, and the selected policies for enrollment. We also discussed policies and procedures used to enroll providers into Medicaid with officials from the selected states. As part of these discussions, we inquired whether the selected states specifically consider tax debts or perform background investigations to determine whether a prospective provider is qualified before the enrollment to Medicaid is granted. To determine the extent to which Medicaid payments to providers are continuously levied to pay tax debts, we examined the statutory and regulatory authorities that govern the continuous levy program and interviewed officials from CMS, IRS, and Department of the Treasury's Financial Management Service (FMS) to determine whether any legal barriers existed. To determine the potential levy collections on Medicaid payments during fiscal year 2006, we used 15 percent and 100 percent of the total paid claim or total tax debt amount reported to the Treasury Offset Program (TOP), whichever was less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). We conducted our audit work from July 2006 through August 2007 in accordance with U.S. generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. To determine the reliability of the IRS unpaid assessments data, we relied on the work we performed during our annual audits of IRS's financial statements. While our financial statement audits have identified some data reliability problems associated with the coding of some of the fields in IRS's tax records, including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address this report's objectives. Our financial audit procedures, including the reconciliation of the value of unpaid taxes recorded in IRS's masterfile to IRS's general ledger, identified no material differences. For the selected states' Medicaid payment databases and FMS's TOP databases, we interviewed the selected states' and FMS officials responsible for their respective databases. In addition, we performed electronic testing of specific data elements in the databases that we used to perform our work. On the basis of our discussions with agency officials, review of agency documents, and our own testing, we concluded that the data elements used for this testimony were sufficiently reliable for our purposes. This appendix presents summary information on the abusive or potentially criminal activity associated with 15 of our 25 case studies. Table 2 shows the remaining case studies that we audited and investigated. As with the 10 cases discussed in the body of this report, we also found substantial abuse and potentially criminal activity related to the federal tax system during our review of these 15 Medicaid providers that also received Medicaid payments in federal fiscal year 2006. The case studies involving businesses primarily involved unpaid payroll taxes. In addition to the contact named above, the following individuals made major contributions to this report: Matthew Valenta, Assistant Director; Erika Axelson; Ray Bush; Jeremiah Cockrum; Bill Cordrey; Kenneth Hill; John Kelly; Tram Le; Barbara Lewis; Andrew McIntosh; John Ryan; Steve Sebastian; Robert Sharpe; Barry Shillito; Pat Tobo; and Jenniffer Wilson made key contributions to this report.
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In fiscal year 2006, outlays for Medicaid were about $324 billion; about $185 billion was paid by the federal government. Because GAO previously identified abusive and criminal activity associated with government contractors owing billions of dollars in federal taxes, the subcommittee requested GAO expand our work to Medicaid providers. GAO was asked to (1) determine if Medicaid providers have unpaid federal taxes, and if so, the magnitude of such debts; (2) identify examples of Medicaid providers that have engaged in abusive or criminal activities; and (3) determine whether the Centers for Medicare & Medicaid Services (CMS) and the states prevent health care providers with tax problems from enrolling in Medicaid or participating in the continuous levy program to pay federal tax debts. To perform this work, GAO analyzed tax data from the Internal Revenue Service (IRS) and Medicaid data from seven selected states based on magnitude of Medicaid payments and geography. GAO also performed additional investigative activities. Over 30,000 Medicaid providers, about 5 percent of those paid in fiscal year 2006, had over $1 billion of unpaid federal taxes. These 30,000 providers were identified from a nonrepresentative selection of providers from seven states: California, Colorado, Florida, Maryland, New York, Pennsylvania, and Texas. This $1 billion estimate is likely understated because some Medicaid providers have understated their income or not filed their tax returns. We selected 25 Medicaid providers with high federal tax debt as case studies for more in-depth investigation of the extent and nature of abuse and criminal activity. For all 25 cases we found abusive and related criminal activity, including failure to remit individual income taxes or payroll taxes to IRS. Rather than fulfill their role as "trustees" of federal payroll tax funds and forward them to IRS, these providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these providers diverted the payroll tax money for their own benefit or to help fund their businesses. Many of these individuals accumulated substantial assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some case studies involved businesses that were sanctioned for substandard care of their patients. Despite their abusive and criminal activity, these 25 providers received Medicaid payments ranging from about $100,000 to about $39 million in fiscal year 2006. CMS and our selected states do not prevent health care providers who have federal tax debts from enrolling in Medicaid. CMS officials stated that such a requirement for screening potential providers for unpaid taxes could adversely impact states' ability to provide health care to low income people. Further, federal law generally prohibits the disclosure of taxpayer data to CMS and states. No tax debt owed by Medicaid providers has ever been collected through the continuous levy program. During our audit, IRS had not made a determination on whether Medicaid payments are considered "federal payments" and thus eligible for its continuous levy program. For fiscal year 2006, if an effective levy was in place for the seven selected states, GAO estimates that the federal government could have collected between $70 million and $160 million.
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In 1980, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). This act, which created the Superfund program, was intended primarily to clean up those sites considered to be the most serious of the hazardous waste sites identified in the United States. As of March 7, 1995, EPA reported 15,723 sites in its inventory, of which 1,363 are considered the most hazardous. EPA is authorized to compel parties responsible for causing the hazardous waste pollution, such as waste generators or haulers and site owners or operators, to clean up the sites. If these parties, known as potentially responsible parties (PRPs), cannot be found, or if a settlement cannot be reached, EPA can conduct the cleanup. EPA uses funds from a trust fund established by CERCLA when it performs such cleanups. This trust fund, currently authorized at $15.2 billion, is financed primarily by a tax on crude oil and certain chemicals and by an environmental tax on corporations. After completing a cleanup, EPA can take action against the responsible parties to recover costs and replenish the fund. These costs can cover such items as EPA cleanup studies, removal actions, and program administration, as well as costs incurred by other agencies, such as the Department of Justice, in helping to administer the Superfund program. The process of recovering costs includes (1) conducting searches to identify the PRP(s) and assessing their liability and financial viability, (2) issuing both notice and demand letters to the PRP(s) for the recovery of costs, and (3) if warranted, initiating judicial action with the assistance of the Department of Justice, if the PRP(s) decide not to participate in negotiations to settle the case or if negotiations are unsuccessful. These steps must be completed within specified time periods that are cited in CERCLA. EPA has reported expenditures of over $10.1 billion for cleaning up nonfederal Superfund sites through fiscal year 1994. Barring major changes to the program, we estimate that such sites may cost the federal government about $37 billion more between 1995 and 2019 (in 1993 discounted present-value dollars). EPA's cost recovery workload has grown substantially over the years as cleanups have been completed and recoveries of costs have been sought from responsible parties. As of January 1995, EPA reported it had pursued actions to recover costs for 1,625 sites. Through the end of fiscal year 1994, EPA reported that the Superfund program had about $1.4 billion in binding agreements from responsible parties to reimburse the federal government. About $934 million of this amount had actually been collected, including about $9 million in fines and penalties. The remaining $8.7 billion of Superfund past costs include costs such as those not pursued, unrecoverable costs, and costs currently being sought through litigation. Although Superfund was enacted 15 years ago, the bulk of EPA's cost recovery settlements has occurred in the last 7 years. For example, during the first 8 years of the program, cost recovery activities resulted in binding cost recovery agreements totaling about $104 million. In contrast, such binding agreements in fiscal year 1994 alone totaled about $207 million. EPA's cost recovery workload to recover cleanup costs is likely to increase because the number of Superfund sites is expected to grow. In November 1994, we reported that between 2,500 and 2,800 nonfederal sites could be added to the then inventory of about 1,200 sites that were considered to be the most serious. After EPA has identified PRPs that are liable and able to pay, the success of EPA's cost recovery efforts depends in large part on the ability of staff to access accurate and complete cost data and related supporting documentation. For a typical cost recovery case, EPA may amass thousands of pages of (1) documents identifying work that was authorized and performed, referred to as work-performed documents and (2) financial documents, including travel vouchers and contract-related documents, showing site costs that were invoiced, approved, and paid. EPA has a number of financial and records management information systems to help support its cost recovery efforts. For instance, EPA operates two financial information systems to maintain Superfund cost data and two more to generate reports: the Integrated Financial Management System (IFMS), the agency's official financial information system, which contains all of the agency's core financial data since March 1989; the Financial Management System (FMS), the predecessor system to IFMS, which contains financial data both before and after the implementation of IFMS in March 1989. the Management and Accounting Reporting System, which is used to produce reports from IFMS data; and the Software Program for Unique Reports, the reporting system for FMS, which generates reports containing both IFMS and FMS data. According to EPA officials, the functionality of the Financial Management System and the Software Program for Unique Reports will be completely replaced by IFMS and the Management and Accounting Reporting System as of October 1, 1995. EPA also has two information management systems developed specifically to support Superfund cost recovery: the Superfund Cost Recovery Image Processing System (SCRIPS), which allows cost recovery staff to electronically capture, store, display, and print images of original Superfund financial documents, such as contract invoices, travel vouchers, and payroll records; and the Superfund Cost Organization and Recovery Enhancement System, which is designed to organize and edit financial information into easy-to-read cost summaries. EPA's Office of Solid Waste and Emergency Response has overall responsibility for the Superfund program. Other key EPA organizations with Superfund responsibilities include (1) the Office of Enforcement and Compliance Assurance, which is responsible for enforcement actions, and (2) the Office of Administration and Resources Management, which is responsible for financial management activities and the development of supporting information systems. EPA also has ten regional offices that have lead responsibility for carrying out the program within their geographical jurisdiction. These responsibilities include conducting or overseeing cleanup activities and pursuing cost recovery, including assembly of supporting documentation; negotiating settlements with PRPs; and collecting amounts owed the government. In December 1992, and again in February 1995, we reported that EPA's management of the Superfund program was a high-risk area and noted that EPA had recovered only a fraction of the cleanup costs from responsible parties. We have also previously reported that the low priority EPA has given to the cost recovery program had resulted in a backlog of cost recovery cases. EPA also recognizes its problems with Superfund cost recovery, having reported it as a material weakness in its fiscal year 1994 Federal Managers' Financial Integrity Act Report to the President and Congress. Concerning IFMS, EPA's Office of Inspector General (OIG) reported in 1991 and 1994 deficiencies with the agency's development and implementation of the system, such as problems with the integrity of payroll data and inadequate system development and user documentation. Also, IFMS has been on the Office of Management and Budget's (OMB) high-risk list since 1990. Our work was performed at several offices at EPA headquarters including the Office of Solid Waste and Emergency Response; Office of Enforcement and Compliance Assurance; Office of Inspector General; and the Financial Management Division in the Office of Administration and Resources Management. These offices are located in Washington, D.C., and Arlington, Virginia. We also performed work at (1) EPA regional offices in New York, New York; Philadelphia, Pennsylvania; Chicago, Illinois; and San Francisco, California; (2) the Department of Justice in Washington, D.C.; and (3) the office of Leonard G. Birnbaum and Company in Springfield, Virginia. We conducted our review from January 1994 to July 1995, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Administrator, Environmental Protection Agency. In August 1995, we received the agency's response from the Comptroller, the Director of the Financial Management Division, and the Director of the Policy and Program Evaluation Division. We have incorporated their comments where appropriate. Additional details on our scope and methodology are provided in appendix I. The automated information systems that EPA has in place fall short of providing the information and support that staff need to efficiently perform Superfund cost recovery work. Data in the central financial systems are insufficiently detailed, and are sometimes inaccurate or incomplete. Further, the records management systems do not provide for the efficient retrieval of supporting cost and work-performed documentation, which, if not located, can result in unrecovered costs. In addition, efforts to collect costs from responsible parties is more difficult, in part because the agency's financial system, IFMS, is not sufficiently sophisticated to address the complexity of the repayment agreements. As a result of these limitations, the cost recovery process is often longer and more tedious than necessary and must be supported by manual searches and ad hoc information systems. Having sufficiently detailed financial information is essential for preparing and supporting cost recovery actions. The Chief Financial Officers Act of 1990 requires that an agency's Chief Financial Officer develop and maintain an integrated agency accounting and financial management system that provides for (1) complete, reliable, consistent, and timely information that is responsive to the financial information needs of agency management and (2) the development and reporting of cost information. Further, the Joint Financial Management Improvement Program states that financial data reporting should be of proper scope, level of detail, timing, content, and presentation format to provide information of real value to users. EPA currently operates two financial management systems for maintaining Superfund cost data, IFMS and FMS. However, neither system currently records cost information at a level of detail that is often needed by EPA staff to prepare cost recovery packages. Specifically, EPA regions divide large or complex cleanup sites into smaller components called operable units. Cost recovery staff said that in order to properly assign the correct amount of costs to the appropriate PRP they need to be able to tracedetailed costs to these operable units. Because EPA systems do not currently record costs at the operable unit level, identifying which costs were incurred at different operable units becomes a time-consuming and tedious task. During the course of a cleanup, which often lasts for years, thousands of individual transactions are processed and stored, including payroll and travel costs for EPA employees, as well as contractor cleanup costs and costs incurred by other agencies, such as the Department of Justice and the U.S. Army Corps of Engineers. To trace these costs to individual operable units, EPA staff must identify all costs that have been recorded and accumulated by site, and then manually segregate the costs by operable unit. Staff in EPA's regions told us that this data limitation has resulted in wasted staff resources. For example, one region we contacted was managing a site with 18 operable units, involving $2.8 million in cost recovery. In order to identify costs at the operable unit level, three staff had to work full time for over 4 months to manually allocate the costs. This required them to go through numerous records, including individual time sheets and travel records. Similarly, a staff person in another region estimated that about 10 percent of his time was spent manually allocating costs, which he believed could be avoided if costs were recorded in greater detail. The independent public accounting firm's report on EPA's fiscal year 1993 financial statements for the Superfund Trust Fund stated that the system limitation may adversely impact EPA's ability to account for costs at Superfund sites and projects. The report noted that this could result in the failure to identify and recover these costs in cost recovery actions. EPA staff need accurate and complete financial data to efficiently and effectively pursue cost recovery actions. OMB Circular A-127 specifies that federal agencies should have financial management systems in place to process and record financial events effectively and efficiently and to provide complete, timely, and consistent information. It also states that these systems should have consistent internal controls over data entry, transaction processing, and reporting to ensure the validity of information and protection of federal government resources. Concerns exist about the integrity of data in IFMS. For example, in its 1994 report on IFMS, the OIG raised concerns about data integrity, including inaccuracies and omissions in the data. In our discussions with cost recovery staff, they too stated that they had encountered instances of inaccurate and incomplete data, including critical cost and site identification information, in the agency's financial information systems. Several of the examples cited by these staff are described below. Staff in three regions stated that they had identified instances of duplicative data. For example, during initial negotiations, one region initially overstated costs for a PRP by about $822,000. While staff identified and corrected this overstatement prior to final negotiations, they determined that the error was largely due to a cost figure that had been duplicated in the financial system. EPA staff were unsure whether this was a random problem or a systemic one. One region discovered, while attempting to support a cost summary it had provided to a PRP, that approximately $23,000 had been erroneously charged to a site. The overcharge occurred because contract lab costs that should have been charged to a site in another EPA region had instead been charged to this site, possibly due to a data entry error. Five regions expressed concerns that certain costs associated with work performed at individual sites, under national contracts, were not being recorded by site in the agency's financial management systems. For example, one EPA region reported in 1994 that about $90 million in technical assistance team contract charges associated with one of two national contracts could not be traced to specific sites through the agency's financial systems. According to EPA, most of these costs were incurred for non site-specific activities and are recovered from responsible parties as indirect costs through the annual allocation process. However, the regional analysis concluded that some of the costs that were site-specific in nature were not reflected in individual site accounts in IFMS. Two regions provided examples of missing or invalid data in the site/project identification field. This was corroborated by a report generated by EPA's Financial Management Division showing about 10,500 transactions, totaling about $129 million in expenditures, for which, according to EPA officials, the site/project identification field was missing. These examples are not intended to be representative of the overall integrity of data in the financial systems. However, EPA staff told us that as a result of these types of problems, they have to spend excessive time and effort in researching, reconciling, and correcting financial data needed to support cost recovery actions. EPA has no assurance that its application controls are sufficient to prevent these data quality problems. Such controls are critical for ensuring accurate data input, processing, and output. The independent public accounting firm that reviewed EPA's financial statements for the Superfund Trust Fund for fiscal year 1993 noted that weaknesses with the internal controls governing data entry made it possible for inaccurate or incomplete account numbers to be entered into IFMS. For example, they found there was no error check control of the site/project code portion of IFMS' account code. EPA officials believe IFMS contains adequate application controls. However, because these controls are not documented in accordance with federal policies, such as OMB Circular No. A-127 and the Joint Financial Management Improvement Program, we could not assess these controls to determine if they are sufficient to prevent data integrity problems. The lack of documentation for application controls was identified in the OIG's February 1995 report, in which the OIG stated that it could not assess application processing controls due to a lack of technical system documentation. The OIG reported that such an internal control weakness could adversely affect EPA's ability to ensure that (1) obligations and costs were in compliance with applicable laws, (2) funds, property, and other assets were safeguarded against unauthorized use or disposition, and (3) transactions were properly recorded to permit the preparation of reliable financial statements. The previously mentioned example of missing site identification data for technical assistance team costs could have been prevented had additional controls been in place. Such controls would have alerted senior financial managers that these costs had been approved and paid, but were at risk of being excluded from cost recovery actions because they had not been allocated, where possible, to a specific Superfund site. Until EPA addresses the need for documented controls, data integrity problems could continue to adversely affect the efficiency of performing cost recovery. In addition, when site/project codes are missing, EPA may lose the opportunity to recover related costs in specific cost recovery actions. To successfully defend its claims for cost recovery, EPA must be able to substantiate each cost item. To do this, the agency locates and provides a wide-range of supporting financial documents, such as invoices and travel vouchers, and supporting work-performed documents, such as contracts, contractor work assignments, and progress reports pertaining to a site. Such documents are needed to provide proof to PRPs and the courts that Superfund-led work to clean up hazardous waste sites was authorized, performed, invoiced, and paid. Despite the importance of these documents, EPA staff in regional offices believe that the difficulty in locating and retrieving supporting documents was a major contributor to the amount of time and effort required to assemble the packages detailing costs to be recovered. According to these staff, almost all financial documents generated since 1991 are available through the SCRIPS imaging system. However, most of the contract-related financial documents created prior to this time are not available from SCRIPS because the system was not operational until 1991. Pre-1991 contract-related financial documents are stored in EPA's financial management center in Research Triangle Park, North Carolina, and must be manually retrieved for inclusion in the cost recovery packages. Cost recovery staff said that it usually takes about 20 working days to retrieve these documents once identified, and that the time required to assemble the requisite financial documents could be substantially decreased if these documents could also be retrieved using SCRIPS. Staff also noted that the situation is worse for work-performed documents. There are estimated to be over 11 million pages of work-performed documents occupying about 6,000 linear feet of shelf space in EPA's ten regional offices. The regional offices maintain these work-performed documents as hard copy in various locations--some in off-site storage, some in records management centers, and some in working files maintained by EPA staff responsible for managing or overseeing the cleanup process. In many cases, cost recovery staff have to rely on their memories to identify which contractors were used at a site and where relevant documents might be located. Cost recovery staff also noted that if the documents cannot be found in EPA's offices, they must then try to obtain replacements from the contractors' files. Staff in several regions said that assembling work-performed documents from various locations inside and outside of the agency is a time-consuming or labor-intensive process. For example, in one region it typically takes 2 months to assemble such documents. Another region said it takes about 4 months to identify, retrieve, and review work-performed documents. Although locating supporting documentation can be labor-intensive, the effect of not locating needed documentation can be worse. According to cost recovery staff, if supporting documents cannot be located or otherwise supported, the corresponding cost items are removed from the cost recovery summary, even though these costs may be recoverable. We could not determine the amount that EPA has lost because of such missing documentation because EPA does not track this information. While EPA maintains a record showing the reasons why costs are excluded from final settlements with PRPs, costs excluded from initial negotiations due to missing documentation are not a part of this record. EPA regional offices are primarily responsible for managing accounts receivable after the government reaches cost recovery settlements with responsible parties. This requires EPA to establish accounts receivable in a timely manner, collect interest, accurately record collections, and identify and take action on delinquencies. OMB Circular A-127 requires that an agency's financial management systems provide reliable and timely information on amounts owed the government. It also requires that agency financial systems satisfy the core financial system requirements developed by the Joint Financial Management Improvement Program, including a variety of functions to support the establishment, management, and collection of accounts receivable. These functions include calculating and generating customer bills, tracking receivables to be paid for under an installment plan, and accurately identifying receivables that are past due. IFMS does not meet these requirements. Although IFMS includes an accounts receivable module, which EPA began using in 1989, the module does not meet the special requirements needed to manage the settlement agreements reached with PRPs. It lacks the capabilities to compute compound interest and manage installment payments. This module also lacks the ability to produce accurate aging reports for Treasury and EPA management. EPA has recognized that it has a receivables problem. It has reported this problem as a material weakness in its fiscal year 1994 Federal Managers' Financial Integrity Act Report. This weakness is very significant, especially given that EPA data show that uncollected Superfund cost recovery receivables totalled about $498 million at the end of fiscal year 1994. Because EPA has not yet resolved its problem with receivables, some regional offices have developed their own automated systems or manual procedures to overcome these limitations. For example, four regional offices have developed local PC-based systems to provide some of these accounts receivable capabilities, while another region uses a combination of manual procedures and IFMS capabilities. Staff in these regions pointed out that the locally developed systems or procedures give them the capability to perform basic debt-servicing functions that IFMS does not support. EPA has initiated efforts to address its information system limitations. These efforts include (1) reporting cost data in greater detail, (2) using a statistical tool to test the integrity of financial data, and developing a capability to require that the site/project field is complete and valid, (3) implementing and testing an imaging system to improve the agency's identification and retrieval of Superfund work-performed documentation, and (4) developing a PC-based information system to better manage accounts receivable. However, additional actions are needed to fully address the limitations and ensure that the agency obtains the best possible systems support for its cost recovery efforts. To address the need for more detailed cost data, in October 1995, EPA plans to begin using an expanded 41-digit account code structure in IFMS. This expanded structure should provide the capability to record costs in greater detail, such as by site operable unit, and thus better support EPA's cost recovery efforts. To assess financial data reliability, EPA's Financial Management Division has recently developed an automated statistical sampling tool. The Division instructed the regions and finance centers in March 1995 to begin using this statistical tool as part of the agency's internal control evaluations. In August 1995, EPA officials stated that the results of the initial testing are currently being reviewed. In response to our concerns, EPA officials told us they intend to issue guidance for automated statistical testing of the integrity of financial data needed for cost recovery. Regarding application controls, EPA officials acknowledged that the capability to require that the site/project field be completed when financial transactions are entered into IFMS would be beneficial. They said that a new project cost accounting subsystem of IFMS, scheduled for implementation by October 1995, should provide this capability. With respect to the requirement that financial systems be documented in accordance with federal policies, EPA officials also reported that they intend to work with the OIG in improving the documentation of application controls in IFMS. As noted earlier, difficulties in locating and retrieving financial and work-performed documentation has been a major contributor to the amount of time and effort required to assemble cost recovery packages. Although EPA has two efforts underway that may improve certain aspects of its records management capabilities, neither project, as currently planned, will address the agency's difficulties in locating pre-1991 financial documents, or millions of work-performed documents that occupy growing amounts of space in EPA locations nationwide. One project involves the development of an imaging system, called the Superfund Document Management System (SDMS). SDMS is intended to provide a number of advanced capabilities, such as full-text indexing, electronic redaction, and security controls. The system is being tested in EPA's regional office in San Francisco, California, using documents related to its largest Superfund site. This site accounts for about 25 percent of the region's Superfund documents. Although SDMS may provide an effective means for locating Superfund-related program documentation, EPA has not assessed the use of SDMS for cost recovery in other regions. A second project, initiated in 1993, involves microfilming over a million pages of documentation pertaining to 60 expired nationally-managed contracts and creating an automated index of these documents. The project, which is being funded by EPA and implemented by the Department of Justice, is intended to overcome difficulties that EPA regions and Justice have experienced in obtaining copies of this documentation. This effort may substantially improve the accessibility and retrievability of work-performed documents related to the expired national contracts. However, EPA has no plans to assess whether this effort should be expanded to include other region-specific work-performed documents that are used extensively in cost recovery, such as documents pertaining to contracts managed by EPA regions. Although SCRIPS provides electronic access to financial documents generated since 1991, an EPA official in the Financial Management Division told us that the agency had not evaluated the costs or benefits of expanding this system to include pre-1991 financial documents, or included such a project in the agency's Five-Year Plan. Agency officials explained that this has not been a high priority. Recognizing that IFMS' accounts receivable management capabilities needed improvement, EPA has initiated plans to strengthen these capabilities beginning in early fiscal year 1996. The agency plans to implement a Cost Recovery Collection Tracking System (CTS), which is being developed in EPA's Chicago, Illinois, regional office. CTS will run on personal computers that are connected to a local area network in the region. The system is intended to provide (1) a demand letter billing capability for actions initiated subsequent to an administrative or judicial order, (2) timely collection information to EPA managers, (3) tracking reports concerning cost recovery collections, and (4) direct uploading of collections data to IFMS. EPA's Financial Management Division plans to have CTS designed, developed, and tested in the Chicago regional office by September 30, 1995, and plans to distribute CTS to all of its regional offices by December 31, 1995. Given that the development of receivables management capabilities could affect the collection of and accounting for billions of dollars, it is critical that EPA implement a system that effectively safeguards these public assets. As outlined in OMB Circulars A-123, A-127, and A-130, agencies are required to (1) perform an assessment of the potential risks associated with the operation of a system and (2) provide some assurance that appropriate controls are in place to reduce risks such as data entry errors and fraudulent manipulation of accounts receivable data. Although EPA officials told us that risk assessment was an inherent part of the development of CTS, they could not provide us with documentation demonstrating that the agency had performed a risk assessment or ensured that necessary controls will be in place. EPA's financial and records management systems do not efficiently support cost recovery, a critical business process that is vital to the continued existence of the Superfund program. Because of limitations in these systems, cost recovery staff cannot fully rely on them to provide the information needed for cost recovery. Instead, they laboriously search and reconcile paper records to ensure that the information supporting cost recovery cases is accurate, reliable, and complete. Aware of these limitations, EPA is taking steps to improve support for cost recovery. However, the agency could further ensure that it is obtaining the best possible support for cost recovery by (1) implementing its planned automated statistical testing of the integrity of financial data needed for cost recovery and developing a baseline on the extent of any integrity problems; (2) improving the documentation of its financial systems' application controls; (3) assessing how best to use records management systems to meet cost recovery users' needs; and (4) ensuring that all risks associated with the collection and management of receivables have been addressed. These additional actions could further improve EPA's efforts to recover billions of Superfund dollars through cost recovery actions, make cost recovery more efficient, and lower the risks of losing recoverable dollars. To improve EPA's ability to recover costs associated with cleaning up hazardous waste sites, we recommend that the Administrator of the Environmental Protection Agency take steps to ensure that cost recovery data and supporting documentation are complete and accurate by implementing planned automated statistical testing of the integrity of financial data needed for cost recovery and developing a baseline on the extent of any integrity problems identified, improving the documentation of financial systems' application controls to help ensure accurate data input, processing, and output, assessing whether efforts to improve records management systems for cost recovery should be expanded, including evaluating how best to improve the retrieval of pre-1991 financial documents, and performing a risk assessment and determining if additional controls are needed for accounts receivable. EPA officials, including the Comptroller, the Director of the Financial Management Division, and the Director of the Policy and Program Evaluation Division, provided comments on a draft of this report. Overall, the officials agreed with our recommendations and with our conclusions that the agency's systems supporting cost recovery needed improvement. The agency provided additional information on the status of its improvement activities, which we have incorporated where appropriate. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies to the Administrator of the Environmental Protection Agency, Director, Office of Management and Budget, and interested congressional committees. Copies will also be made available to others upon request. Please call me at (202) 512-6253 if you or your staff have any questions concerning this report. Other major contributors are listed in appendix II. To evaluate how well EPA's information systems support the Superfund cost recovery process, we used a structured interview document to discuss cost recovery efforts with staff from five of EPA's ten regional offices: Region 2 (New York), Region 3 (Philadelphia), Region 5 (Chicago), Region 7 (Kansas City); and Region 10 (Seattle). We chose regions 2, 3, and 5 because they had the highest levels of direct expenditures on cleanups. We chose regions 7 and 10 because they provided geographical diversity. We analyzed numerous documents related to cost recovery from each of these regions. Because integrity of data in EPA's financial systems has a direct impact on how well these systems support cost recovery, we sought information from cost recovery staff on the extent of problems with the financial data. However, because these staff were unable to provide quantified information on the extent of such problems, we relied on their oral responses and some documented instances in reaching our conclusions. We also contacted by phone records management officials in all ten EPA regions concerning the volume of documentation maintained and researched for supporting cost recovery. We met with representatives and analyzed workpapers and documents from the three firms involved in the audit of EPA's fiscal year 1993 financial statements for the Superfund Trust Fund. These firms were Leonard G. Birnbaum and Company; KPMG Peat Marwick; and American Power Jet Company. We met with officials from EPA's OIG and reviewed its past and current reports related to Superfund and cost recovery. We also met with officials in the Department of Justice's Environment and Natural Resources Division concerning the quality of the cost recovery documentation that it receives from EPA and uses to pursue cost recovery actions. To evaluate the extent to which EPA's planned information systems modifications could improve the efficiency of cost recovery efforts, we (1) applied relevant segments of the information systems audit methodology published by the EDP Auditors Foundation, (2) interviewed officials from several EPA headquarters offices in Washington, D.C., and from EPA regional offices involved in developing new information systems or modifications to existing systems, and (3) reviewed and analyzed documents on EPA's actions, including documentation on users' requirements, feasibility, costs, benefits, and detailed specifications pertaining to the agency's efforts to enhance and develop system capabilities to support cost recovery. We also reviewed EPA planning documents, including the agency's Five-Year Plan, and Strategy and Master Work Plan for IFMS. Our work was performed at several offices at EPA headquarters including the Office of Solid Waste and Emergency Response, Office of Enforcement and Compliance Assurance, Office of Inspector General, and the Financial Management Division in the Office of Administration and Resources Management. These offices were located in Washington, D.C., and Arlington, Virginia. We also worked at (1) EPA regional offices in New York, New York; Philadelphia, Pennsylvania; Chicago, Illinois; and San Francisco, California; (2) the Department of Justice in Washington, D.C.; and (3) the office of Leonard G. Birnbaum and Company in Springfield, Virginia. We conducted our review from January 1994 to July 1995, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Administrator, Environmental Protection Agency. In August 1995, we received the agency's response from the Comptroller, the Director for the Financial Management Division, and the Director for the Policy and Program Evaluation Division. We have incorporated these comments where appropriate. Ronald W. Beers, Assistant Director William G. Barrick, Project Manager Robert C. Reining, Deputy Project Manager James V. Rinaldi, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 the adequacy of the Environmental Protection Agency's (EPA) information systems that support the Superfund cost recovery process, focusing on whether planned modifications to the information systems will improve the efficiency of EPA cost recovery efforts. GAO found that: (1) EPA financial and records management systems do not provide all the detailed cost information EPA staff need for the Superfund cost recovery process; (2) EPA staff have to conduct excessive manual searches and reconciliations to gather the needed data, which prolongs the cost recovery process; (3) EPA financial management systems are not sophisticated enough to cope with the complexity of certain transactions and the data contained in the systems are not always accurate; (4) EPA internal controls to prevent inaccurate data entry are inadequate and undocumented; and (5) although planned information systems modifications will improve cost information collection and retrieval, EPA needs to do more to enhance its records management capabilities.
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The President's budget request is proposing to maintain taxpayer service levels with fewer staff by realizing efficiency gains; it also proposes to increase enforcement by adding staff. The President's FY 2009 budget request of $11.4 billion for IRS is 4.3 percent more than the FY 2008 enacted budget and represents an increase of less than 1 percent for taxpayer service and 7 percent for enforcement, as shown in table 1. The budget request increases IRS-wide staff levels, measured in full-time equivalents (FTEs), by 2 percent, with a 1.4 percent decrease in taxpayer service FTEs and a 5.2 percent increase in enforcement FTEs, as shown in table 2. The President's budget proposal is consistent with longer-term trends for IRS. Compared to actual spending in FY 2006, the proposed FY 2009 budget increases taxpayer service funding by 3.7 percent, a real decrease after inflation, while increasing IRS's enforcement funding by 10 percent. The budget request proposes to maintain taxpayer service at recent levels. As an example, the key taxpayer service measures shown in table 3 are projected to remain relatively stable through FY 2009. In order to maintain taxpayer service at recent levels despite a decrease in real spending and staffing, IRS expects to realize efficiency gains. For instance, IRS expects to devote 207 fewer FTEs to the labor-intensive processing of paper returns because of expected increases in electronic filing. These expected efficiency gains are consistent with past trends-- between 1999 and 2007, IRS reduced staff devoted to processing paper returns by about 1,800 FTEs. IRS's ability to maintain or improve taxpayer service beyond 2009 will likely depend on its ability to continue to improve efficiency. To this end, in recent reports, we made recommendations to further increase electronic filing. We recommended that IRS determine the actions needed to require software vendors to include bar codes on printed returns, and we suggested that the Congress mandate electronic filing by certain paid tax preparers. IRS agreed with our bar code recommendation and outlined the actions it would take. Some of the real spending decrease proposed for FY 2009 is because of one-time investments made in FY 2008 or carryovers in funds from FY 2008. For instance, the budget request proposes a $31 million reduction in funding for taxpayer assistance centers and outreach. However, IRS officials told us that this reduction includes funding used for long-term investments in FY 2008 that would not need to be duplicated in FY 2009. IRS officials also told us that a $7.7 million decrease in funding for the Taxpayer Advocate offsets a funding increase in FY 2008 that is being used to lower the Advocate's outstanding caseload. Finally, an $8 million reduction in the Volunteer Income Tax Assistance (VITA) program reflects FY 2008 funding that was not spent and carried over into FY 2009. The budget request for IRS's enforcement programs includes nonlegislative and legislative initiatives. According to the proposal, the five nonlegislative enforcement initiatives would cost about $338 million in FY 2009 and are expected to raise about $2 billion of direct revenue annually starting in FY 2011. In addition, the budget request estimates that the enforcement initiatives would generate at least another $6 billion annually in indirect revenue. The indirect revenue results from improved voluntary compliance induced by taxpayers' awareness of expanded IRS enforcement. The budget request also proposes increases in examination coverage for corporations with assets of $10 million or more from a planned 6.6 percent for FY 2008 to 6.8 percent for FY 2009. The coverage rate would increase to 7.6 percent in FY 2010 as new enforcement staff hired in FY 2009 complete training and can audit more returns. The budget request includes 16 legislative initiatives budgeted at $23 million for FY 2009 that it says would raise about $36 billion in revenue over 10 years; if none were enacted, IRS would not need the $23 million. We have reported on three of the proposals. In 2006, we suggested that the Congress consider an idea for reducing securities capital gains noncompliance. In 1991, we supported the notion that payments to corporations be reported on information returns. Finally, in 2007, we described ways to mitigate the compliance costs related to these information returns and to other information returns associated with credit and debit card payments. The revenue expected from IRS's enforcement initiatives is modest compared to the net tax gap, which was last estimated at $290 billion for tax year 2001. As we noted in our statement to this Committee last year, no single approach, such as IRS enforcement, is likely to fully and effectively address noncompliance. Multiple approaches are needed because noncompliance has multiple causes and spans different types of taxes and taxpayers. Hiring needed staff for the nonlegislative initiatives will be challenging for IRS's Large and Mid-Size Business (LMSB) and Small Business/Self- Employed (SB/SE) divisions. For instance, the initiatives call for adding 1,431 revenue agents in addition to those who must be replaced from attrition, a high number relative to past years. IRS divisions have previously hired large numbers of staff in a short time because of specific budget initiatives, but officials reported that hiring gradually over time would reduce challenges. If IRS were to fall behind in its hiring efforts, it would not need all $226 million of the funding for staff for FY 2009 initiatives. Responding to our recommendations from last year, IRS included more information on initiatives in the FY 2009 proposed budget, including ROI information for all nonlegislative initiatives. Last year, we recommended that IRS have available basic descriptive, cost, and expected performance information on all new initiatives and include such information in future budget submissions. This year, the budget request has sections explicitly entitled, for instance, "Initiative Summary," "Implementation Plan," "Expected Benefits," and "ROI." Four of the five nonlegislative enforcement initiatives for FY 2009 were revisions of FY 2008 initiatives, but with more total funds requested and generally more informative justifications than for FY 2008. However, IRS's ROI calculations have limitations that reflect the challenges of estimating ROIs. For example, the calculations do not account for benefits that are harder to measure, such as improved voluntary compliance. Another example showing ROI limitations is the $51 million National Research Project (NRP) initiative for which IRS estimates the ROI to be $0.40 per $1.00 invested. NRP funds research audits in order to develop more effective enforcement programs. The ROI calculation only includes direct revenue resulting from the research audits, not the potential for increased revenue from improved enforcement programs; nor does the calculation include the benefits of the Department of the Treasury's use of NRP data to provide the basis for legislative recommendations. Although the budget request for IRS provides performance measure data, it does not provide ROI analyses for programs or activities other than the new initiatives. As we noted in our recent report, analytic data such as ROI can be helpful to managers and the Congress when making resource allocation decisions. ROI analyses, even with their limitations, can help answer questions such as the following: What are the implications for IRS's resource allocation of the lower costs per taxpayer contact for some services compared to others as shown in table 4? Are there extra benefits that offset the higher costs of some services, or could costs be reduced by promoting increased reliance on the lower- cost options? Similar questions can be asked about enforcement based on table 5: Is IRS appropriately allocating resources between field audits, often conducted at a taxpayer's business, and correspondence audits, which are simpler and conducted by mail? For the rows in table 5 with average recommended additional tax per return greater for correspondence audits than for field audits, could resources be reallocated from field audits to correspondence audits in order to help close the tax gap? Are there other benefits to field audits, such as a greater impact on voluntary compliance, that are not captured in IRS's data? We recognize that developing ROI estimates for IRS's ongoing programs such as examinations and taxpayer service will be a challenge. However, because of the potential benefits of ROI analyses, we recommended in our previous report on the FY 2009 budget request that the Commissioner of Internal Revenue extend the use of ROI in future budget proposals to cover major enforcement programs. At that time, IRS officials said that because of the short time frame for our report, they did not have time to fully analyze its recommendations, and, therefore, were unable to respond. We have agreed to meet with IRS to further discuss the ROI recommendation. IRS's BSM program, initiated in 1999, involves the development and delivery of a number of modernized tax administration, internal management, and core infrastructure projects that are intended to provide improved and expanded service to taxpayers as well as IRS internal business efficiencies. Key tax administration projects include CADE, which is intended to provide the modernized database foundation to replace the existing Individual Master File processing system that contains the repository of individual taxpayer information; AMS, which is intended to enhance CADE by providing applications for IRS employees and taxpayers to access, validate, and update accounts on demand; and MeF, which is to provide a single standard for filing electronic tax returns. We recently reported that while IRS has continued to make progress in implementing BSM projects and improving modernization management controls and capabilities, challenges and risks remain, and further improvements are needed. As shown in table 6, the FY 2009 budget request for the BSM program is less than the enacted FY 2008 budget by over $44 million and about $185 million less than the amount the IRS Oversight Board is proposing. When we asked about the impact of this reduction on its operations, IRS told us that the proposed funding level will allow it to continue developing and delivering its primary modernization projects but did not provide details on how plans to deliver specific projects or benefits to taxpayers would be affected. MeF is the project with the largest difference between the requested budget and the FY 2008 enacted amount. IRS has made progress in implementing BSM projects and meeting cost and schedule commitments for most deliverables, but three project milestones experienced significant cost or schedule delays. During 2007, IRS completed milestones of the Filing and Payment Compliance (F&PC), a tax collection case analysis support system; MeF; CADE; and AMS. Our analysis of reported project costs and completion dates showed that 13 of the 14 associated project milestones that were scheduled for completion during this time were completed within 10 percent of cost estimates, and 11 of the 14 milestones were completed within 10 percent of schedule estimates. However, a milestone for CADE exceeded its planned schedule by 66 percent and experienced a 15 percent cost increase; another milestone for the same project incurred a 153 percent schedule delay, and a milestone for MeF experienced a 41 percent schedule delay (see fig. 1). IRS has taken steps to address our prior recommendations to improve its modernization management controls and capabilities. However, work remains to fully implement them. For example, in July 2005, we recommended that IRS fully revisit the vision and strategy for the BSM program and develop a new set of long-term goals, strategies, and plans consistent with the budgetary outlook and IRS's management capabilities. We also noted that the vision and strategy should include time frames for consolidating and retiring legacy systems. In response, IRS has developed a Modernization Vision and Strategy framework and supporting 5-year Enterprise Transition Plan. However, the agency has yet to develop long-term plans for completing BSM and consolidating and retiring legacy systems. We also recommended in February 2007 that IRS ensure that future BSM expenditure plans include a quantitative measure of progress in meeting scope expectations. We further recommended that, in developing this measure, IRS consider using earned value management since this is a proven technique required by the Office of Management and Budget for measuring cost, schedule, and functional performance against plans. While IRS has developed an approach to address our recommendation, it has not yet fully implemented it. Future BSM project releases continue to face significant risks and issues, which IRS is addressing. Specifically, the agency recently identified significant risks and issues with planned system deliveries of CADE and AMS and reported that maintaining alignment between the two systems will be a significant challenge and source of risk for the BSM program. IRS recognizes the potential impact of identified risks and issues on its ability to deliver projects within cost and schedule estimates and has developed mitigation strategies to address them. While mitigation strategies have been developed, the risks and challenges confronting future releases of CADE and AMS are nevertheless significant, and we will continue to monitor them and actions to address them. IRS also made further progress in addressing high-priority BSM program improvement initiatives during the past year. In September 2007, IRS completed another cycle of initiatives and initiated a new cycle, which was scheduled to be completed at the end of March 2008. Initiatives that were addressed in the 6-month cycle ending in September 2007 included IT human capital, information security, and process improvements (e.g., developing and implementing standardized earned value management practices for major projects). IRS's program improvement process continues to be an effective means of regularly assessing, prioritizing, and incrementally addressing BSM issues and challenges. However, more work remains for the agency to fully address these issues and challenges. Finally, we recently reported that efforts to address human capital challenges continue, but more work remains. IRS developed an IT human capital strategy that addresses hiring critical personnel, employee training, leadership development, and workforce retention, and agency officials stated that they plan to undertake a number of human capital initiatives to support their human capital strategy, including conducting analyses of turnover rates and continuing efforts to replace key leaders lost to retirement. However, a specific plan with time frames for implementing these initiatives has not been developed. We recommended that IRS complete such a plan to help guide the agency's efforts in addressing its IT human capital gaps and measure progress in implementing them. IRS agreed with our recommendation and stated that it intends to develop a plan to implement its IT human capital strategy. The Economic Stimulus Act of 2008 is resulting in a significant workload increase not anticipated in the FY 2008 budget. As part of the legislation, IRS received $202 million in a supplemental appropriation. However, because IRS could not find an alternative according to responsible officials, it has reallocated resources from enforcement to taxpayer service and is allowing some deterioration in telephone service. IRS will begin sending economic stimulus payments to more than 130 million households in early May, after the current tax filing season, and is scheduled to be done by mid-July. These include an estimated 20 million retirees and disabled veterans, and low-wage workers who usually are exempt from filing a tax return but will be eligible for stimulus payments. Taxpayers required to file a tax return must do so by April 15 in order to receive a stimulus payment by mid-July. People who are not required to file a tax return, but are doing so to receive a stimulus payment, are required to file an IRS Form 1040A by October 15, 2008. As part of the legislation, IRS received a supplemental appropriation of $202 million to help fund its costs for implementing the stimulus package. This funding will remain available until September 30, 2009. As shown in table 7, IRS plans to spend the bulk of the funding--$151.4 million--for Operations Support, most of it on postage for two mass mailings and on IT support. IRS also expects to spend $50.7 million for Taxpayer Services, including $26.2 million for staffing and overtime for telephone assistors. IRS is expecting 2.4 million additional telephone calls in March and April with questions for IRS assistors about the economic stimulus legislation. These calls are in addition to the more than 14 million calls typically answered by IRS assistors between January and mid-April. To help meet the increased telephone demand, IRS is shifting about half of its over 2,000 Automated Collection System (ACS) telephone staff from collecting delinquent taxes to answering economic stimulus telephone calls from March through May. To accommodate this shift, IRS stopped sending out some ACS-generated notices, such as notices of levy, several weeks ago. According to IRS officials, it takes about 3 to 4 weeks before this adjustment in ACS-generated notices affects the ACS workload. IRS originally estimated that the revenue foregone by shifting ACS staff to be up to $681 million. However, according to IRS officials, in early April, IRS revised its foregone revenue estimate down to $565 million, shown in table 7, largely because of lower-than-expected demand for telephone assistance in March. According to IRS officials, IRS's priority is to respond to taxpayers' questions about the stimulus program; therefore, the officials are monitoring call volume and adjusting the number of ACS staff answering telephones accordingly. When call volume is low, ACS staff work on outstanding ACS collection cases. However, IRS officials stated that this work does not produce the same revenue as the ACS-generated notices, particularly revenue generated from notices of levy. When IRS adjusts the volume of ACS-generated notices, it takes several weeks before that adjustment affects ACS workload. IRS officials do not want to resume sending ACS-generated notices until they are sure ACS staffers are available to handle the resulting workload. Should the lower-than-expected call volume continue, IRS may have an opportunity to shift the ACS staff back to their most productive collection work. This could further reduce the revenue foregone from using ACS staff to answer stimulus-related telephone calls. To date, IRS has not reduced its projections for future stimulus-related call volume. If the projections are reduced, IRS may be able to resume sending out at least some ACS-generated notices. According to IRS officials, IRS considered alternatives to shifting ACS staff, including contracting out, using other IRS staff, or using Social Security Administration or other federal staff, but decided the alternatives were not feasible. For example, contracting out was not deemed feasible because of insufficient time to negotiate the contract and conduct background checks and training. Another cost--although not measured in dollars--is the decline in telephone service shown in table 7. Because of the increased call volume, IRS expects its assistor level of service to drop from 82 percent (the 2008 goal) to as low as 74 percent--the lowest level since 2002. IRS is already experiencing some declines in telephone service. As of March 29, the level of service had dropped to 80 percent, taxpayers were waiting a minute and a half longer than last year, and they were hanging up 43 percent more often while waiting to speak to an assistor. Between March 3 and March 29, IRS assistors answered over 572,000 stimulus-related calls. IRS expects call volume to increase rapidly in upcoming weeks as taxpayers receive their stimulus notices in the mail. Because IRS is in the early stages of implementing the stimulus legislation, IRS officials do not have much information about the actual costs. Through March, IRS estimates that it has spent almost $103 million, mostly for postage. In commenting on a draft of our earlier report on the FY 2009 budget request and 2008 tax filing season, IRS officials said that, because of the short time frame for our report, they did not have time to fully analyze our recommendation and, therefore, were unable to respond at the time. They provided technical comments at that time and again for this statement, and we made those changes where appropriate. We have agreed to meet with IRS to further discuss the ROI recommendation. Mr. Chairman, this concludes my prepared statement. Mr. Powner and I would be happy to respond to questions that you or other Members of the Subcommittee may have at this time. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, on (202) 512-9110 or [email protected] or David A. Powner, Director, Information Technology Management Issues, on (202) 512-9296 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Joanna Stamatiades, Assistant Director; Carlos E. Diz; Sarah A. Farkas; Charles R. Fox; Leon H. Green; Carol M. Henn; Lawrence M. Korb; Paul B. Middleton; Karen V. O'Conor; Sabine R. Paul; Cheryl M. Peterson; and Neil A. Pinney. 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 fiscal year 2009 budget request for the Internal Revenue Service (IRS) is a road map for how IRS plans to allocate resources and achieve ambitious goals for improving enforcement, improving taxpayer service, increasing research, and continuing to invest in modernized information systems. One complicating factor in implementing IRS's plans in the immediate future is the recent passage of the Economic Stimulus Act of 2008, which creates additional, unanticipated workload for IRS. GAO was asked to (1) assess how the President's budget request for IRS allocates resources and justifies proposed initiatives; (2) determine the status of IRS's efforts to develop and implement its Business Systems Modernization (BSM) program; and (3) determine the total costs of administering the economic stimulus legislation. To meet these objectives, GAO drew upon and updated recently issued reports. The President's fiscal year 2009 budget request for IRS is $11.4 billion, 4.3 percent more than last year's enacted amount. The request proposes to maintain taxpayer service at recent levels, in part by realizing efficiency gains from electronic filing, despite a decrease in staffing. It also proposes a 7 percent increase in enforcement spending, including spending for 21 legislative and nonlegislative initiatives. The legislative proposals are projected to cost $23 million in fiscal year 2009, funding that IRS would not need if the proposals are not enacted. Similarly, if IRS were to fall behind in its proposed enforcement hiring efforts, it would not need all $226 million of the associated funding. IRS justified its nonlegislative enforcement initiatives with return on investment (ROI) analyses, which are useful, despite limitations, for making resource allocation decisions. The budget request does not provide ROI information for activities that constitute a large part of the budget request--activities other than the proposed initiatives. The request for BSM is over $44 million lower than the fiscal year 2008 enacted amount. IRS said this funding level will allow it to continue its primary modernization projects, but it did not describe how specific projects or benefits to taxpayers would be affected. IRS has continued to make progress in implementing BSM projects and improving modernization management controls and capabilities. However, further improvements are needed. For example, the agency has yet to develop long-term plans for completing BSM and consolidating and retiring legacy systems. IRS estimated that the costs of implementing the economic stimulus legislation may be up to a total of $767 million--including a $202 million supplemental appropriation. In addition to the supplemental appropriation, IRS is reallocating hundreds of collections staff to answering taxpayer telephone calls, resulting in up to $565 million in foregone enforcement revenue. In addition, IRS expects some deterioration in telephone service because of the increased call volume. For example, IRS is expecting its assistor level of service to drop to as low as 74 percent compared to its goal of 82 percent.
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MDA is the agency responsible for designing, developing, producing, and procuring targets for testing the nation's ballistic missile defense system. In 2001, MDA initiated a Targets and Countermeasures Program Office. The MDA's Targets and Countermeasures program oversees the design, development, fabrication, and production of ballistic missile targets and countermeasures to be used in the MDA flight test program. These targets must represent the full spectrum of threat missile capabilities (separating and nonseparating reentry vehicles, varying radar cross sections, countermeasures, etc.) and ranges. The appropriate targets are engaged by both strategic and tactical missile defense systems developed by MDA, the Army, and the Navy. MDA originally used numerous contractors to design and build the various targets; however in December 2003 Lockheed Martin was awarded a contract to be the lead systems integrator for most of the existing targets. The lead systems integrator was chosen to provide system-level management, implement a single organization and management structure, and to manage all processes. Additionally, MDA contracted with Lockheed Martin to plan and develop a new family of targets called the Flexible Target Family (FTF) because existing targets were deemed no longer able to meet test needs due to aging components and an evolving threat. MDA's original goals for FTF included commonality of components across the family of short, medium and long-range targets, the purchase of inventory, reduced cycle time in the building of individual targets, increased complexity, cost savings, and ground, air, and sea launch capabilities. Although the development of FTF began in 2005, the first FTF target has yet to be delivered. While MDA manages the targets program, the Missile Defense Executive Board (MDEB), which was created in March 2007, provides advice and recommendations on the missile defense program. Specifically, the MDEB reviews the implementation of strategic policies and plans, program priorities, and investment options for protecting the United States and its allies from missile attacks. The MDEB is chaired by the Under Secretary of Defense for Acquisition, Technology and Logistics, who is authorized to make recommendations to the Deputy Secretary of Defense on missile defense issues. According to its charter, the board will provide to the Under Secretary a recommended strategic program plan and a feasible funding strategy for approval. Recommendations will be based on a business case analysis that considers the best approach to field integrated defense capabilities in support of joint objectives. A consistent business case analysis approach will facilitate the delivery of capabilities to the war fighter in a timely, efficient, cost-effective manner. The board will review the missile defense program and recommend changes in the missile defense strategic plan. In addition, Congress has mandated that DOT&E annually assess the adequacy and sufficiency of the BMDS test program. Congress has also mandated that DOT&E perform other BMDS program related test and evaluation responsibilities. The number of target failures and anomalies during flight tests has increased over time. From 2002 through 2005, 7 percent (3 of 42 launches) of the targets launched had in-flight target failures and anomalies, while from 2006 through 2007, 16 percent (6 of 38 launches) of the targets launched had in-flight failures or anomalies. Though problems providing reliable and timely targets have negatively affected many of the missile defense elements, THAAD and GMD missile defense elements have been affected the most. GMD experienced a target failure in 2007 in which the primary objectives failed to be achieved. THAAD experienced one failure and two anomalies between 2006 and 2007. The immediate effect of a target delay or problem is on an individual flight test. For example, unavailable targets have delayed tests such as FTT-08 and FTM-15. There are longer term effects of these delays on subsequent tests and demonstration of capability in the flight test program. Specifically, MDA's flight test program has been restructured to reflect target deficiencies and availability. For example, validating GMD capability has been delayed due to target availability and a failure. The THAAD flight test program has decreased the amount of flight tests due to reduced availability of targets. Additionally, target failures and anomalies caused THAAD to replan key objectives in their flight test plan due to the inability to collect necessary information during flight tests. Since we briefed your staff in July 2008, MDA has experienced two additional target anomalies. The target flown in a recent sensor test (FTX- 03) under-flew the planned trajectory. Test reports indicate that target trajectory fell short of what was planned and thus did not reach the anticipated intercept area. While the anomaly did not prevent MDA from achieving the sensor test objectives, had this been an intercept attempt, the target anomaly would have precluded the launch of the interceptor due to safety restrictions on the test range. In September 2008, the THAAD element was unable to complete a planned flight test because the target missile malfunctioned and did not have enough momentum to reach the intercept area. Therefore, the two THAAD interceptors taking part in the flight test were not launched. At the same time, the unit cost of targets has grown exponentially, from $4.5 to $8.5 million from 2002 to 2006 to current estimates of $32 to $65 million for the targets planned from 2008 to 2010. Many factors contribute to this cost growth, including increased complexity of targets to better reflect an evolving threat and late changes to target requirements on contract. In addition, the shift to a lead systems integrator resulted in an increase in composite hourly labor rates. MDA has also encountered development problems with the FTF program and the total cost of FTF remains unclear. According to information provided by MDA in July 2008, nonrecurring engineering costs plus the cost to purchase some test assets is at least $1 billion, of which about $553 million has already been spent. Difficulties with target availability are traceable to (1) supplier base and problems incorporating requirements into the contracts and establishing program baselines for existing targets and (2) the lack of a sound business case for FTF development. Regarding existing targets, inventory is aging for key components. For example, motors used in some targets are now over 40 years old. In addition, vendors who previously supplied targets to MDA are leaving the market due to lack of business. MDA has also experienced program and requirements issues with the existing targets on contract. According to MDA officials, several target contracts did not capture all of the needed test requirements. Furthermore, target technical, cost, and schedule baselines were not always established in a timely manner. MDA officials acknowledged that they have only recently established these baselines for all missions planned to take place in the next 2 years. MDA began the FTF without establishing a sound business case. We have previously reported on the importance of using a solid, executable business case before committing resources to a new product development effort. A sound business case demonstrates that (1) the identified needs are real and necessary and are best met with the chosen concept and (2) the chosen concept can be developed and produced with existing resources--such as technical knowledge, funding, time and management capacity. According to a July 2006 MDA briefing, the decision to commit to a lead systems integrator and FTF was not based on a formal cost or business case analysis. The briefing further indicated that the FTF cost estimates considered at the time only included integration costs and did not address nonrecurring engineering costs, unit costs for FTF configured targets, or the costs to purchase existing target systems through the prime contract. Nor was there any indication that FTF costs had been reviewed by independent cost organizations within the Department of Defense. It is also unclear whether MDA evaluated all alternatives before committing to a lead systems integrator and the FTF. MDA did perform a study to identify requirements design attributes and candidate configurations for a family of targets by reviewing existing systems. However, in a July 2006 assessment, MDA stated that other alternatives for improving legacy targets were not considered at that time. We also could not identify an original approved FTF acquisition strategy. Originally, the lead systems integrator proposed using existing launch vehicles for short- and medium-range missions, and developing a new long-range launch vehicle family while maximizing the reuse of existing target system designs. However, MDA committed to a riskier strategy that required developing a single common architecture across three target system families. Early in the development of FTF, MDA underestimated the technical and design challenges involved in the development of a new target family. By May of 2006, MDA recognized that the funding set aside for FTF development was no longer adequate and made a decision to focus developmental efforts on the ground-launched 72-inch long-range target needed for near-term missions and defer other key capabilities. Despite the focus on the 72-inch ground-launched target, development problems have delayed the first launch from July 2008 to April 2009. The 72-inch target qualification process has been more difficult and costly than expected and development is still not complete. Of the 69 components in development, 24 had not passed the qualification process as of August 2008. In addition, according to the targets program director, the qualification process completion date has moved from early October to November 2008. Delays have also occurred because development of the 72-inch target began without a stable design. Eleven of the remaining unqualified components are considered critical technologies and are currently being redesigned. MDA acknowledged both underestimating the difficulty in using components never qualified for this shock and vibration environment and underestimating the complexity of combining multiple launch vehicle and mission requirements. Similarly, the 52-inch target's first flight will occur no earlier than fiscal year 2012, representing a 3 year slip from the original expectations of first flight in fiscal year 2009. This slip has resulted in the need to initiate an interim target development effort to satisfy near-term target requirements of the Aegis flight test program. MDA recently began implementing a series of management initiatives to improve the targets program, such as establishing technical, cost, and schedule baselines for all missions in the 2-year integrated master test plan. The new program director and staff have also begun drafting long- term target capability requirements, and developing and implementing a new cost model for targets. In addition, plans have been made to improve risk management by (1) considering program-wide issues, and (2) including programmatic risks, cost and schedule in the risk assessments. Overall, the success of the flight test program depends on the success of FTF. However, the current FTF acquisition strategy will yield fewer targets at higher costs and the entire FTF might not be fully pursued. For example, key capabilities such as the air-launched targets have been deferred and MDA is considering whether to continue with the 52-inch target development. Further, the initial plan for 10 to 12 72-inch target flights per year has been reduced to 4 to 5 flights per year. In addition, the development and production of the first four 72-inch targets cost has grown 63 percent, from $248 million to at least $405 million, and the cost to complete development of the entire FTF is not known. Given that the GMD and THAAD flight test programs have already been negatively affected by target difficulties, further changes to the flight test program could become necessary if the FTF program does not deliver its capabilities as scheduled. Targets are sophisticated and expensive missiles that are essential to flight testing the ballistic missile defense system. As such, management of the targets program must be both effective in supplying enough reliable targets and efficient as to their cost. Increasing problems with target failures and anomalies have caused degradations in the missile defense flight test program. The strategy of supplanting the use of existing targets, which contain aging components, with a new family of targets, has not gone as planned. The new FTF has been delayed, costs have increased, and the program's scope is being reduced. The difficulties with executing FTF are due, at least in part, to the fact that a sound business case was not established before proceeding with the program and the attendant contracting strategy. MDA has recently initiated a series of actions to improve the targets program in general, and the FTF program specifically. Even so, the availability of targets for flight tests continues to be problematic, and as a result the scope of the flight test program has been reduced to better match available targets. The availability of targets is also dependent on the ultimate success of the FTF program. We recommend that the Secretary of Defense take the following two actions: Require the Director, MDA to establish a revised business case for providing reliable and timely targets for a robust flight test program. Such a business case should, among other things, determine the best approach for providing an ample supply of quality targets to support the missile defense flight test program, including consideration of approaches other than the FTF. demonstrate that the chosen approach--including the attendant acquisition and contracting strategy-can be executed with available technologies, funding, time, and management capacity. establish separate cost, schedule, and performance baselines for each class of target under development against which progress can be measured. reflect input from key organizations, such as the Missile Defense Executive Board, independent cost estimators, and the Director, Operational Test and Evaluation. Align MDA's plans and resources with the targets program approach resulting from the above business case. The Congress has repeatedly stressed the need for robust testing of the Ballistic Missile Defense System and has become concerned with the health of the MDA targets program. The Congress has also expressed concern that the FTF program is proceeding at a slower pace and greater cost than expected. Therefore, Congress may wish to consider whether to require the Secretary of Defense to report the departmentally approved missile defense target development and procurement strategy, business case, and baselines to the Congressional Defense Committees. DOD provided written comments on a draft of this report. These comments are reprinted in appendix II. DOD also provided technical comments, which we incorporated as appropriate. In our first recommendation, we outlined four components that the Secretary of Defense should require in a revised business case for the missile defense targets program. DOD partially concurred with this recommendation. In responding to the first component of the business case, which is to determine the best approach for providing an ample supply of quality targets, DOD stated that MDA is reviewing the acquisition strategy for targets. It is important that the review be a fresh look at the business case for targets, which is why we recommended that approaches other than the FTF be considered as well. DOD's response failed to make it clear whether such approaches will be included in the MDA review. In responding to the second component of the business case, to demonstrate that the chosen approach could be executed with available technologies, funding, time, and management capacity, DOD explained that the review underway will result in an approach that will be technologically achievable, executable within budget, and will support the flight test schedule. DOD noted that the delivery of the first four 72-inch FTF targets will inform the review in the area of cost. While we agree that such cost information will be important, we also note that the 72-inch targets have already experienced cost overruns, qualification problems, and delivery delays. As such, they remain unproven, which underscores the need for the business case review to remain open to other approaches to supplying targets. DOD also partially concurred with the third component of the business case, to establish cost, schedule, and performance baselines for each class of target. DOD indicated that baselines are established for each individual target procured and that a baseline for each class of target would be redundant. While individual baselines are appropriate for legacy systems in production, the key issue is establishing baselines for new classes of targets under development, like the FTF. In the course of our review, MDA could not provide a full cost estimate or a baseline for the FTF developmental effort. We have modified the recommendation to deal specifically with establishing baselines for new classes of targets under development, like the FTF. DOD partially concurred with the last component of the first recommendation, which recommends that the business case reflect input from key organizations, such as the MDEB, independent cost estimators, and DOT&E. DOD acknowledged that the MDEB and DOT&E inputs have been extremely valuable but that the decision regarding the targets business case should be reserved for the Director of MDA. Our recommendation calls for the input of key organizations but does not suggest that their approval is required. Thus, it does not pose a challenge to the MDA Director's decision making authority. MDA has not always obtained such input on key decisions. For example, DOT&E was not consulted for the recent decision to cancel an important GMD flight test. Also, estimates of MDA costs have typically not been obtained from independent cost estimators. Regarding our second recommendation to align MDA's plans and resources with the targets program, DOD partially concurred, stating that revisions to the acquisition strategy will be incorporated into the Program Budget development. Finally, DOD did not concur with a third recommendation, subsequently removed from the final report, to report the departmentally approved missile defense target development and procurement strategy, business case, and baselines to the Congressional Defense Committees. DOD preferred to rely on briefings to Congressional staff to convey this information. MDA began developing the new target family without a complete acquisition strategy, baselines, or a business case and the program has already experienced qualification problems, schedule delays and cost overruns. Because of the importance of an ample supply of reliable targets to the success of the Ballistic Missile Defense System, we continue to believe that the Secretary of Defense needs to ensure that MDA takes a fresh look at alternatives when it establishes a revised acquisition strategy and business case. The departmentally approved approach should then be reported to the Congressional Defense Committees because MDA's targets program and strategy are of interest to the Congress, as evidenced by the language that requested our assessment. Accordingly, we have elevated the recommendation for executive action to a matter for congressional consideration. We will send copies of this report to the Secretary of Defense, the Director, MDA, appropriate congressional committees, and other interested parties. This report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions concerning this report and its appendixes, 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. The major contributors are listed in appendix III. GAO undertook this work in response to a mandate contained in the Conference Report accompanying the National Defense Authorization Act for Fiscal Year 2008 (H.R. Rep. No. 110-477). We focused our review on the following three objectives: (1) Is the Missile Defense Agency (MDA) meeting the need for reliable and timely targets for the flight test program? (2) What are the causes of any deficiencies or delays? (3) What are the prospects for resolution of any problems identified? We will follow up on this briefing by September 30, 2008, with a report. Technical comments from the agency were incorporated as appropriate. Our scope & methodology is described on slide 29. The Ballistic Missile Defense System (BMDS) and its elements verify design performance and assess capabilities in a variety of ways, including flight testing BMDS missiles to track or intercept live targets that represent real-world missile threats. MDA's Targets and Countermeasures program oversees the design, development, fabrication, and production of ballistic missile targets and countermeasures to be used in the BMDS test program. Target systems are ballistic missiles and are available in numerous configurations designed to test the performance of the system's sensors and weapons. The target systems include launch vehicles, payloads, instrumentation, and flight controls. In December 2003, MDA awarded Lockheed Martin a contract to be the Lead Systems Integrator (LSI) for most of the existing targets and FTF target development. Lockheed Martin now subcontracts with vendors who previously supplied targets directly to MDA. In-flight target failures and anomalies All targets used to date were predecessors to FTF. FTF has not delivered a new development target yet. Existing targets include off-the-shelf components with some modifications, new productions of existing designs, and modifications. Effect of target problems on elements is greater than in-flight anomalies and failures. THAAD and GMD affected most by target problems. First FTF launch was scheduled for July 2008, now April 2009 Deferrals of subsequent developmental work LV-2 air launch, all sea launch, LV-3, Common-liquid Rocket Boosters, and the 52" configured FTF have been deferred. 52" configured FTF was assumed to be available for first use in FY 2009. increasing complexity of targets (including existing targets) late changes to target requirements on contract schedule delays shift to Lead Systems Integrator - higher labor rates, additional oversight of subcontractors Cost increases associated with recent target failures and anomalies are only partially estimated.~$87 M cost increase associated with FTG-03 failure ~$80 M associated with target availability and affordability Unknown cost implications for Radar Data Collection "anomalies" MDA has estimated some cost for FTF, but total nonrecurring development remains unclear because some cost figures include the purchase of test assets. According to information MDA provided July 15, 2008, nonrecurring cost plus the cost to purchase some test assets are estimated at about $1.2 billion. Sunk costs are about $553 million. Supplier base problems with existing targets: Aging inventory/diminishing sources Motors used in some targets are over 40 years old. Vendors are leaving the market due to lack of business. Target contracts have not captured all element testing requirements. Target technical, cost, and schedule baselines were not always established before targets were placed on contract. MDA acknowledges they have recently established these baselines for all missions in the next 2 years. Flat charges assessed to each element do not represent actual use. Flight test costs. According to MDA, contracting with an LSI increased costs; the magnitude of the increase exceeded expectations. For example, composite hourly labor rates were 32% higher in 2004 than prior to the contract with the LSI. Effective cost of subcontractor labor is higher on prime contract due to management oversight of subcontractors. Heritage components put in unverified environment, failures due to high vibration and shock levels.11 of 69 components are considered critical. As of April 2008, all 11 were in redesign or failure analysis. 5 of these critical components were not projected to complete qualification testing until September at the earliest. As of April 2008, 35 components had not completed qualification testing. By June 2008, 28 components remained unqualified. MDA acknowledged (1) underestimating the difficulty in using components never qualified for this shock and vibration environment and (2) underestimating the complexity of combining multiple launch vehicle and mission requirements. identify requirements, design attributes, and candidate configurations for a family of targets by reviewing existing systems. In a July 2006 assessment, MDA stated that other alternatives for improving legacy targets were not considered at that time. According to a July 2006 MDA briefing, the decision to adopt the FTF and a LSI was not based on a formal cost or business case analysis. FTF original cost estimates only included the integration costs and did not address: nonrecurring engineering costs, unit costs for FTF configured targets, or the costs to purchase existing target systems through the prime contract. A formal analysis of the relative merits and costs of each alternative could not be performed when the commitments to the LSI and the FTF were made because cost estimates were not available. We could not identify an original approved FTF acquisition strategy. MDA did, however, provide a May 2006 FTF briefing that stated: At that time, the majority of the investment required for the FTF LV (LV-2 and LV-3) family design effort had been expended. LV-2 development cost estimated at $248 million (FY06 dollars). Completion of entire FTF LV family is required to realize substantial yearly recurring cost reductions. Assumed 10 to 12 LV missions per year. Completion of the entire FTF family is required to support the increased pace and complexity of BMDS testing 2-4 years in the future. Design and cost implications of the FTF requirements were underestimated. In May 2006, MDA acknowledged that significant technology and design challenges were inherent in FTF. Initial FTF requirements "levied functional capabilities and operational environments far above existing targets' current qualifications." Choice of nonproprietary, single common architecture required new "clean-sheet-of-paper" designs. Only capable of marginal reuse of existing designs. Funding set aside was no longer adequate to resource the development. Decision made to focus on ground-launched LV-2 for near- term missions, and delay other key capabilities. Full FTF LV family may not be fully pursued. The LV-3 and the LV-2 air-launched capabilities are deferred; LV-2 air launch considered a key capability which provides greater test flexibility. Assumption of 10-12 LV-2 flights per year, including 4 GMD tests, is no longer valid, expect only 4-5 per year. The development and production costs of the first 4 LV-2s have grown from $248 M to $405 M (a 63 percent increase). MDA is considering whether to continue with 52" development First 52" flight will occur no earlier than FY12 (delayed from FY09). The cost to complete development of the FTF is not known. MDA recently began implementing a series of management initiatives for BMDS target acquisition. Establishing technical, cost, schedule baselines for all missions in the 2-year integrated master test plan. Implementing a requirements stabilization process requiring higher-level approval for target changes. Drafting long-term target capability requirements Drafting initial comprehensive plan to validate system-level models and simulations. Improving risk management by (1) considering program-wide issues, (2) including programmatic risks, cost & schedule. Developing and implementing a new cost model for targets. New program director and personnel. BMDS flight test program has changed to reflect target availability and deficiencies. THAAD flight test program extended. GMD flight test objectives delayed. Success of flight test program assumes success of FTF. If everything goes as planned, the targets program may be able to meet the future needs of the BMDS test plan. MDA's Integrated Master Test Plan is modified as often as every quarter. Key deferred work not in funding plan-including air- launched LV-2 capability. without demonstrating a sound business case. Specifically, MDA did not show that the FTF could be developed and produced within existing resources. Assumptions underlying the FTF development have changed, including whether the concept of a "family" of targets can be accomplished. MDA has taken actions to improve target acquisition deficiencies, but these actions may not be enough to provide an adequate supply of targets. To assess the ability of MDA's targets program to provide support for the BMDS test efforts, we analyzed test plans and schedules, flight test reports, budget documents, and program execution reviews. We also analyzed program directives and acquisition policies and procedures. We interviewed MDA officials from GMD, THAAD, Aegis BMD, and the Targets and Countermeasures program offices as well as officials from MDA's Business, Test, and Engineering directorates. We also interviewed officials from DOD's Office of the Director, Test and Evaluation, and the Space and Missile Defense Command. Our analysis covered data ranging from December 2003 through July 2008. We conducted this performance audit from February 2008 through 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. Major contributors to this report were David B. Best, Ivy G. Hubler, Steven B. Stern, Robert S. Swierczek, Letisha T. Watson, and Alyssa B. Weir.
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The Missile Defense Agency (MDA) is likely to spend $460 million annually on missiles used as targets for flight tests. Executing these tests depends on the quality and availability of targets. Congress asked GAO to assess (1) if MDA is providing reliable targets; (2) the causes of any deficiencies; and (3) if resolutions exist for any problems identified. To do this, GAO analyzed acquisition policies and procedures; flight test data; and budget, program execution, and acquisition materials; and interviewed MDA and DOD officials. MDA has difficulty in both supplying targets for missile defense testing as well as in developing a new family of short, medium and long-range targets. The number of target failures and anomalies (failing to achieve one or more non-critical mission objective or partially achieving a critical mission objective) during flight tests has increased since 2006, contributing to delays in flight tests and modification of flight test objectives. In addition, the average unit cost of targets has grown significantly, from $4.5 million to $8.5 million from 2002 to 2006 to current estimates of $32 million to $65 million for the targets planned from 2008 to 2010. Many factors contribute to this cost growth, including increased complexity of targets to better reflect an evolving threat and late changes to target requirements on contract. MDA's difficulty in supplying existing targets is driven by diminishing sources for components, unanticipated costs, and problems incorporating requirements into contracts and establishing program baselines. MDA has also encountered problems developing the new family of targets, an effort currently estimated to cost at least $1 billion. The problems are due, at least in part, to the fact that a sound business case was not established before proceeding with the program and the attendant contracting strategy. The decision to pursue this new family of targets was made without a formal cost analysis and it is unclear whether MDA evaluated all alternatives before making this commitment. GAO also could not identify an original approved acquisition strategy for the new family of targets. Consequently, developmental problems have arisen in the new family of targets, leading to cost growth, delayed flight tests, and deferral of several key capabilities. MDA is taking a series of actions to address these problems, such as: (1) establishing technical, cost, and schedule baselines for all missions in the 2-year integrated master test plan; (2) drafting long-term target capability requirements; (3) developing a new cost model for targets; (4) making plans to improve risk management by considering program-wide issues, and including programmatic risks, cost and schedule in risk assessments. However, the prospects for resolution of the target acquisition problems are unclear and the overall success of the Ballistic Missile Defense System flight test program depends on the success of a new family of targets under development.
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Education administers and oversees federal student aid programs authorized by HEA, monitors participants' activities, and establishes program requirements. Among these financial aid programs is FFELP. The five principal entities involved in FFELP are students, schools, lenders, guaranty agencies,and Education. At schools participating in FFELP, students apply to a participating lender for a loan. The school verifies the student's eligibility and determines the loan amount the student is eligible to receive. The student then receives the loan from the lender. The guaranty agency guarantees the loan against default. The guaranty agency is the intermediary between Education and the lender, insuring the loan against default and making certain that the lender and the school meet program requirements. The lender is responsible for servicing and collecting the loan, and, if the student defaults on the loan, the lender files a claim with the guaranty agency for reimbursement of most of its loss.Education reimburses guaranty agencies for most of their claims paid to lenders for defaulted loans and for some of their administrative costs. Most lenders contract with a third-party entity to service the loan and collect payments from borrowers. HEA designates which entities are eligible to make FFELP loans to students. In general, an eligible lender is defined as under certain circumstances, a national or state chartered bank, a mutual savings bank, a savings and loan association, a stock savings bank, or a credit union; a pension fund as defined in the Employee Retirement Income Security an insurance company that is subject to examination and supervision by an agency of the United States or a state; in any state, a single agency of the state or a single nonprofit private agency designated by the state; under certain circumstances, an eligible institution; under certain circumstances, the Student Loan Marketing Association or the Holding Company of the Student Loan Marketing Association, including any subsidiary of the Holding Company, or an agency of any state functioning as a secondary market; under certain circumstances, a guaranty agency; a Rural Rehabilitation Corporation; under certain circumstances, any nonprofit private agency functioning in any state as a secondary market; and a consumer finance company subsidiary of a national bank. The majority of organizations making loans to students fall into one of these eligible lender categories. However, organizations that do not meet HEA criteria may still participate in FFELP by contracting with an eligible lender to serve as its trustee.These ineligible lenders fall into two categories: (1) secondary marketsthat have not been designated as an eligible lender for a state and (2) private companies that wish to make and hold student loans. Ineligible lenders generally contract with trustees for three purposes. First, ineligible lenders contract with trustees to allow the ineligible to originate student loans or to purchase them from another originating lender. Second, ineligibles use trustees to securitize portfolios of student loans.Third, trustees are used when ineligibles need to raise the capital necessary to make or purchase student loans without securitizing other loans. For example, some secondary markets raise capital by selling tax-exempt bonds to investors. This report is concerned primarily with trustee arrangements used to enable ineligible lenders to make and hold student loans. At FFELP's outset the government expected to share the program's financial risks with state-designated guaranty agencies. However, when states failed to establish such agencies, the Congress enacted legislation with several incentives to increase lender and guaranty agency participation. For example, the Congress provided federal funds for guaranty agencies to use as seed money to pay claims to lenders. In providing these incentives, the Congress kept the financial risk almost entirely with the federal government. The Congress has since shifted some risk back to the guaranty agencies and lenders by reducing the maximum reimbursement and insurance rates on defaulted loans. These actions were intended to encourage both lenders and guaranty agencies to work with borrowers to prevent them from defaulting on their loans. Apart from the defaults that occur when borrowers fail to repay their loans, some loans lose their federal guarantee because lenders, servicers, or guaranty agencies fail to follow the Department's requirements for making, servicing, and collecting loans or because of fraudulent activity at these organizations. When these latter circumstances occur, Education may assess penalties, refuse to make future payments, or recover payments already made to lenders and agencies for such things as interest subsidies and insurance claims. In 1998, HEA was amended to include a provision stating that eligible lenders that act as trustees are responsible for meeting statutory and regulatory requirements for the loans they hold as trustees. Loss of the federal guarantee due to servicer problems has occurred under the auspices of trustee arrangements in the past. For example, in the late 1980s, Bank of America served as trustee for the California Student Loan Finance Corporation--a California secondary market. Education determined that the loan servicer, United Education and Software Company, failed to transfer certain information to its new computer system and then created a computer program that falsely added collection activity information for a large volume of loans held by the secondary market. As a result, student loans totaling approximately $400 million lost their federal guarantee. However, servicer problems that may result in loan guarantee loss can also occur on loans held by eligible lenders and are not unique to trustee arrangements. The Department of Education reports that approximately 125 trustee arrangements exist between eligible and ineligible lenders. These arrangements account for $25.3 billion in outstanding loans-- approximately 19 percent of the outstanding balance of all FFELP loans as of December 1999.The 125 arrangements represent liaisons between 16 eligible lender trustees and 31 ineligible lenders. Ineligible lenders can be further grouped as 17 secondary markets and 14 other ineligibles. Table 1 shows the outstanding balance of loans held via trustee arrangements for the two categories of ineligible lenders. Costs of trustee arrangements fall into two categories--payments to initiate the agreement and annual fees to maintain it. The ineligible lenders we interviewed reported that initiation costs were generally a flat fee ranging between $2,500 and $20,000. Some of these ineligible lenders, such as some secondary markets, reported that their trustee (who serves as trustee for raising capital as well as for originating and purchasing loans) charged this initiation fee each time they issued bonds to raise capital. Annual trustee fees reported by ineligible lenders ranged between $4,500 and $75,000, depending on a number of factors. These lenders reported that the fees could be a flat fee or calculated as a percentage of outstanding loan balances or on the outstanding balance of bond issues. Ineligible lenders reported that annual costs are used to maintain the arrangement and cover the necessary services provided by the trustee, such as transferring documents between the trustee and the ineligible lender for signature, handling paperwork associated with the guarantors and servicers involved in the loan transactions, and carrying out administrative activities associated with obtaining financing to originate or purchase loans. Some eligible and ineligible lenders reported that a variety of other factors could influence the size of both initiation and annual fees. Some of these factors included the structure of the trustee arrangement and the complexity of the the geographic region in which the trustee and ineligible lender are the trustee's decision to charge administrative fees on a per-loan basis rather than as a flat fee, the additional services the trustee will perform for the ineligible lender, such as payroll services, and the strength of the trustee's relationship with the ineligible lender. Although some ineligible lenders feared that the provision of HEA that makes trustees fully responsible for trustee-held loans might have an impact on costs, they reported that costs did not significantly increase or decrease after the 1998 amendments were enacted and that they did not see a change in the role of the trustee.According to ineligible lenders we interviewed, current initiation and annual trustee fees do not prohibit them from conducting business in the student loan market. The trustee arrangements we reviewed shared several characteristics. Trustees and ineligible lenders reported similar (1) criteria used by trustees to evaluate ineligibles before they entered into arrangements, (2) elements in trustee arrangement contracts, (3) amounts of review performed of ineligible lenders, and (4) amounts of day-to-day interaction between the trustee and the ineligible lender. For example, trustees reported that most important in deciding whether to enter an arrangement is the business reputation of the ineligible lenderand the reputation of the loan servicing organization it has chosen. In addition, some trustees review the structure of the financing method used by the ineligible lender to raise the capital necessary to originate or purchase loans. This review might include examining a rating agency's report on the transaction. Trustees and ineligible lenders also reported that their contracts included similar clauses covering trustee and ineligible lender resignations and requirements placed on the ineligible lender. For example, they reported that trustee resignation clauses allow the trustee to resign from the arrangement by giving a specific number of days' notice to the ineligible lender, such as 60 or 90 days. If the ineligible lender is unable to locate another trustee within that time period, the resignation clause sometimes provides for additional time to obtain a new trustee. In any event, most trustees and ineligible lenders reported that the trustee would probably remain in place until a new one can be engaged, even if the designated time periods have elapsed. The trustee arrangements we reviewed were also similar in the requirements placed on the ineligible lender and the amount of monitoring the trustee performed. For example, trustees generally require ineligible lenders to abide by HEA requirements and to oversee the loan servicer, but the trustees perform limited monitoring activities. One trustee reported that the monitoring is not specific or regular and mostly involves a review of annual reports and audits. Other trustees reported limiting their monitoring to a review of financial statements. Eligible lender trustees and ineligible lenders reported limited day-to-day interaction. For example, some trustees reported that they interact with the ineligible lender only when it is necessary to sign forms, such as quarterly reports that must be submitted to the Department of Education. One trustee reported no daily interaction. Trustee arrangements come with some protections to ensure the federal government's investment in FFELP is secure while allowing ineligible lenders to participate in the program. The most direct protection comes from an HEA provision that holds eligible lenders fully responsible for any loans they hold as trustees should the loans lose the federal guarantee. For example, although Education officials and other FFELP participants believe the probability of large-scale problems is low, a loan may lose its guarantee because of servicing errors or because of negligence on the part of the servicer or the lender. When these problems occur, the federal government will not reimburse the guarantor or the lender for the associated dollar loss. However, because some problems may not be found until after the federal government has already provided reimbursement, the government may have to recover these monies from the parties involved. According to Education officials, the HEA provision that holds trustees responsible for an ineligible lender's loans allows the federal government to recoup the losses from the eligible lender trustee rather than the ineligible lender. Education officials further stated the ability to recoup losses from a trustee is important since they believe they do not have direct oversight authority of ineligible lenders. These officials believe the federal government is likely to recover its losses from trustees for two reasons. First, most financial institutions that serve as eligible lender trustees are subject to federal (and in many instances, state) oversight. For example, bank regulatorspromulgate regulations and policies that prescribe safeand sound banking activities and examine banks to assess their safety and soundness. Among the most important of these regulations are those dealing with minimum capital standards. These capital standards provide benchmarks against which regulators can assess the safety and soundness of a bank's operations as well as its financial condition. Education officials stated that because ineligible lenders are generally not subject to financial safety and soundness reviews by government agencies, Education lacks assurance that these lenders would be able to meet their financial obligations in the program. Second, because most eligible lender trustees also hold student loans in their own name and receive regular FFELP- related payments from the government for those loans, the federal government has additional sources from which to recover any repayments due the government on ineligible lenders' loans that lose their guarantee. For example, lenders usually receive special allowance payments (SAP) and interest subsidiesfor the FFELP loans they hold. If the government were owed monies on an ineligible lender's loans, it could recover those funds by withholding the SAP on the eligible lender trustee's self-originated loans. Because ineligible lenders do not receive any payments directly from Education, it does not have an ability to collect liabilities by offset. Both eligible and ineligible lenders reported that trustee arrangements have had a positive effect on the student loan market. For example, both participant groups believe that market participation and loan availability are positively affected since trustee arrangements allow lenders that do not meet HEA's eligible lender definition to make and hold loans, thus increasing the amount of loan capital available to students. These trustee arrangements allow ineligible lenders not only to originate loans, but also to purchase loans that other lenders have originated. This purchasing role--the primary role for many ineligible secondary markets--permits originating lenders to free up capital to make new loans to students. Eligible and ineligible lenders agree that participation by ineligible lenders increases competition among lenders and can, in turn, contribute to improved service and lower costs for student borrowers. Some ineligible lenders, however, believe that two factors--HEA requirements and the general evolution of financial markets--could affect their participation in the student loan market in the future. HEA currently states that a bank functioning as an eligible lender cannot have as its primary consumer credit function the making or holding of student loans. Education, in its FFELP regulations, interprets the act to mean that the lender's FFELP loans--or in the case of a bank holding company, the FFELP loans of the company's wholly owned subsidiaries as a group-- cannot total more than one-half of the lender's combined consumer credit loan portfolio, including home mortgages held by the lender or its subsidiaries. This provision is commonly known as the 50-percent rule. Strict application of this rule would require eligible lenders to include loans they hold as a trustee for an ineligible lender in this calculation, although the regulations do not specifically address these loans. Education officials told us that although Education has inconsistently applied the regulations in the past, it currently interprets the provision as excluding trustee-held loans in determining the lender's primary consumer credit function, but has not formally promulgated its interpretation. Lenders have expressed confusion regarding application of the rule. For example, some ineligible lenders and other student loan market participants believe that the 50- percent rule applies to loans held as a trustee and thus believe that only a handful of large banks have sufficient consumer credit capacity to serve as a trustee. Similarly, while a few eligible lender trustee representatives interpreted the rule as not applying to trustee-held loans, some other representatives were not sure how the rule should be interpreted. Of those who were unsure, one trustee representative was not concerned because either calculation--including or excluding the loans--would place the bank in compliance with the act. Representatives of one bank incorrectly interpreted an exception to the 50-percent rule.On the other hand, a representative of another bank stated he had turned down eligible lender trustee business because the additional trustee-held loans would put the bank above its 50-percent allocation of student loans. A second factor that is perceived by ineligible lenders as having the potential to limit their participation in FFELP is evolution in the financial markets. Most ineligible lenders we interviewed stated that the number of available trustees has decreased as eligible lender banks have merged with each other in recent years. Recent mergers include First National Bank of Chicago and Bank One, Norwest and Wells Fargo, and Firstar Bank with Star Bank and Mercantile Bank (St. Louis); financial market analysts expect this consolidation activity to continue. Four ineligible lenders reported they had a difficult time obtaining their current trustee arrangement, one taking over a year to do so. Several others said that finding a trustee in the future would become more problematic. Ineligible lender representatives also expressed concern that because trustees also originate student loans for themselves, trustees may decide to end their eligible lender trustee services rather than continue to provide the mechanism for a competitor to do business. A few ineligible lenders stated they were uncomfortable with trustees having the final say as to which ineligible lenders can participate in the student loan market. Given these issues, some ineligible lenders believe their market presence could diminish in the future. Given current law and the federal regulations that govern FFELP, trustee arrangements between eligible and ineligible lenders serve an important role in enabling ineligible lenders to participate in FFELP, and in protecting the federal government's investment in the program. The presence of an eligible lender from whom the government can recoup its financial losses is critical since Education has no direct oversight authority to ensure that ineligible lenders are operating their programs in accordance with HEA. Obtaining a trustee arrangement does not appear to be a widespread problem among ineligible lenders to date. However, if eligible lenders remain unclear and therefore continue to interpret the 50-percent rule as applying to loans they hold as a trustee, and if the financial industry continues to consolidate, the number of trustees could decline. This decline could, in turn, reduce competition in the student loan market. To clarify eligible lenders' capacity to serve as trustees for ineligible lenders, the Secretary of Education should formally clarify Education's interpretation of how the HEA provision prohibiting banks or their subsidiaries from holding FFELP loans that total more than one-half of their combined consumer credit loan portfolio applies to loans held by the trustee for an ineligible lender. Education agreed with our recommendation that it clarify its interpretation of how the HEA provision applies to loans held by the trustee for an ineligible lender. Education said that it has not yet decided which policy to establish nor how to formalize the decision once it is made. Education did not say when it expected to implement our recommendation. Education also provided technical comments, which we incorporated where appropriate. (See app. II for a copy of Education's comments.) We are sending copies of this report to the Honorable Richard Riley, Secretary of Education; eligible lender trustees; ineligible lenders; and other interested parties. Copies will also be made available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-7215. Other major contributors to this report are listed in appendix III. We focused our review on trustee arrangements created to allow ineligible lenders to originate or purchase student loans. To determine the number of existing trustee arrangements, we obtained data from Education's lender database, including the names of the parties involved in each trustee arrangement, the lender identification numberassociated with each arrangement, and the outstanding loan balances. These data represent the best information available, and an Education official acknowledged that the list might be incomplete. To verify the parties involved in the identified arrangements and to determine the type of student loan transactions that made up the outstanding balance associated with a particular lender identification number, we surveyed eligible and ineligible lenders. For each lender identification number on the trustee arrangement list, we asked the lenders to verify whether the account was used for originations and/or purchases of student loans, securitizations, or some combination of these transactions. We also asked lenders to provide us with information on any additional identification numbers used for trustee arrangements. We conducted follow-up interviews as necessary to ensure that we received accurate information. In determining the total outstanding balance of loans associated with trustee arrangements, we included information only for arrangements that allow ineligible lenders to originate or purchase student loans and securitizations of these loans. Further, we included balance information only for the Student Loan Marketing Corporation's privatized business and the ineligible lenders it owns, such as Nellie Mae Corporation, because these organizations must use a trustee to originate or purchase loans. To obtain detailed information on the identified trustee arrangements, the costs associated with them, and the key characteristics they shared, we interviewed Education officials, eligible lender trustee representatives, and representatives of ineligible secondary markets and other ineligible lenders. In addition, we conducted joint interviews with three sets of trustees and ineligible lenders involved in trustee arrangements and obtained a written response from another. Further, we obtained information through interviews about the impact of the 1998 amendments to HEA on the number of eligible lenders willing to serve as trustees and on the costs of trustee arrangements. To determine the protections offered the federal government by trustee arrangements, we identified and synthesized applicable legislation and regulations and reviewed sample documents for trustee arrangements. We also interviewed eligible and ineligible lenders, guaranty agencies, servicers, Education officials, and other student loan market participants on the responsibilities of an eligible lender trustee and the process Education uses to oversee market participants and to recoup any losses it may incur on defaulted loans. To determine the effects of trustee arrangements on participation in the student loan market and the availability of student loans, we interviewed eligible and ineligible lenders, secondary markets, guaranty agencies, servicers, Education officials, and other student loan market participants. We obtained the perspectives of participants on whether trustee arrangements have a positive or negative effect on lenders' participation in the student loan market and identified past, current, and potential problems lenders faced in using trustee arrangements. Because of the competitive nature of the student loan market, information obtained from the lender community was sometimes general in nature. We also obtained Education officials' interpretation of applicable laws and their views on the effects of past rulings regarding trustee arrangements. MajorManagementChallengesandProgramRisks:Departmentof Education(GAO/OCG-99-5, Jan. 1999). Risk-BasedCapital:RegulatoryandIndustryApproachestoCapitaland Risk(GAO/GGD-98-153, July 20, 1998). High-RiskSeries:StudentFinancialAid(GAO/HR-97-11, Feb. 1997). StudentLoanLenders:InformationontheActivitiesoftheFirst IndependentTrustCompany(GAO/HRD-90-183FS, Sept. 25, 1990). The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Ordersbymail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Ordersbyvisiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Ordersbyphone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system)
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Pursuant to a congressional request, GAO provided information on student loan trustee arrangements, focusing on the: (1) number and cost of trustee arrangements and their shared characteristics; (2) benefits and protections afforded the federal government through use of trustee arrangements; and (3) effect of trustee arrangements on market participation and the availability of student loans. GAO noted that: (1) the Department of Education reports that approximately 125 trustee arrangements exist between 16 eligible lender trustees and 31 ineligible lenders for the purpose of originating or purchasing student loans; (2) these arrangements account for $25.3 billion in outstanding loans--approximately 19 percent of the outstanding balance of all Federal Family Education Loan Program (FFELP) loans as of December 1999; (3) costs of trustee arrangements fall into two categories--costs to initiate the arrangement and annual costs to maintain it; (4) ineligible lenders GAO interviewed said that the costs did not prohibit them from conducting business in the student loan market; (5) the amount charged by an eligible lender for its trustee services varied and was based on the volume of loans the ineligible lender was anticipated to originate and on the number and kind of other services the trustee provided; (6) both eligible and ineligible lenders reported little, if any, change in the availability of lenders to serve as trustees or the costs of these arrangements since 1998; (7) several characteristics were common among the trustee arrangements GAO reviewed, including the criteria used by trustees to evaluate ineligible lenders before they entered into trustee arrangements, the various elements of the trustee arrangement contracts, and the day-to-day interaction between the trustee and the ineligible lender; (8) trustee arrangements come with some protections to ensure the federal government's investment in FFELP is secure while allowing ineligible lenders to participate in the program; (9) most financial institutions that serve as eligible lender trustees are subject to federal oversight; (10) because most eligible lender trustees also hold student loans in their own name and receive regular FFELP-related payments from the government for those loans, the federal government has recourse for recovering any repayments due the government on ineligible lenders' loans that lose the federal guarantee; (11) Education officials stated that because ineligible lenders are generally not subject to financial safety and soundness reviews by government agencies, Education lacks assurance that these lenders would be able to meet their financial obligations in the program; and (12) both eligible and ineligible lenders said they believe that market participation and loan availability are positively affected by trustee arrangements which allow lenders to make and hold loans.
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CBP has developed a layered security strategy that provides multiple opportunities to mitigate threats and allows CBP to focus its limited resources on cargo containers that are the most likely to pose a risk to the United States. Risk management is a strategy called for by federal law and presidential directive and is meant to help policymakers and program officials most effectively mitigate risk while allocating limited resources under conditions of uncertainty. This layered security strategy is composed of different but complementary initiatives and programs, such as CSI and C-TPAT, which build on each other and work with other federal security programs, such as the Department of Energy's (DOE) Megaports Initiative. This layered strategy attempts to address cargo container security comprehensively while ensuring that security attention is directed toward the highest-risk containers within the supply chain. CBP's CSI program aims to identify and examine U.S.-bound cargo that pose a high risk of concealing WMD or other terrorist contraband by reviewing advanced cargo information sent by ocean cargo carriers. As of January 2008, CBP operated CSI in 58 foreign seaports, which, at the time, accounted for 86 percent of all U.S.-bound cargo containers. As part of the CSI program, CBP officers, usually stationed at foreign seaports, seek to identify high-risk U.S.-bound cargo containers by using information from cargo carriers as well as reviewing databases and interacting with host government officials. When requested by CBP, host government customs officials examine the high-risk container cargo by scanning it using various types of nonintrusive inspection (NII) equipment, such as large-scale X-ray machines, or by physically searching a container's contents before it is sent to the United States. Initiated in November 2001, the C-TPAT program aims to secure the flow of goods bound for the United States by developing a voluntary antiterrorism partnership with stakeholders from the international trade community. To join C-TPAT, a company submits a security profile, which CBP compares to its minimum security requirements for the company's trade sector. CBP then reviews the company's compliance with customs laws and regulations and any violation history that might preclude the approval of benefits--which includes reduced scrutiny or expedited processing of the company's shipments. CBP data show that from 2004 through 2006, C-TPAT members were responsible for importing about 30 percent of U.S.-bound cargo containers, specifically importing 29.5 percent of the 11.7 million oceangoing cargo containers off-loaded in the United States in the first 9 months of 2007. As of May 2008, there were over 8,400 C-TPAT members from the import trade community that had various roles in the supply chain. To more effectively implement the components of its layered security strategy, CBP has worked to promote international partnerships to enhance security so that high-risk cargo can be identified before it arrives in the United States. For the CSI program, CBP has negotiated and entered into nonbinding, reciprocal arrangements with foreign governments, specifying the placement of CBP officials at foreign seaports and the exchange of information between CBP and foreign customs administrations. These arrangements allow participating foreign governments the opportunity to place their customs officials at U.S. seaports and request inspection of cargo containers departing from the United States that are bound for their respective countries. CBP also works with other customs organizations to enhance international supply chain security. For example, CBP has taken a lead role in working with foreign customs administrations and the WCO to establish and implement international risk-based management principles and standards, similar to those used in the CSI and C-TPAT programs, to improve the ability of member customs administrations to increase the security of the global supply chain while facilitating international trade. The member countries of the WCO, including the United States, adopted such risk-based principles and standards through the WCO Framework of Standards to Secure and Facilitate Global Trade (commonly referred to as the SAFE Framework), in June 2005. To improve maritime container security, the SAFE Port Act was enacted in October 2006 and requires, among other things, that CBP conduct a pilot program to determine the feasibility of scanning 100 percent of U.S.-bound containers. It also specifies that the pilot should test integrated scanning systems that combine the use of radiation portal monitors and NII equipment, building upon CSI and the Megaports Initiative. To fulfill this and other requirements of the SAFE Port Act, CBP and DOE jointly announced the formation of SFI in December 2006. The first phase of SFI is the International Container Security project--commonly known as the SFI pilot program. The SFI pilot program tests the feasibility of 100 percent scanning of U.S.-bound container cargo at seven overseas seaports and involves the deployment of advanced cargo scanning equipment and an integrated examination system. The advanced cargo scanning equipment--NII and radiation detection equipment--produce data to indicate the presence of illicit nuclear and radiological material in containers. The integrated examination system then uses software to make this information available to CBP for analysis. According to CBP, it will review the scan data at the foreign seaport or at CBP's National Targeting Center-Cargo (NTCC) in the United States. If the scanning equipment indicates a potential concern, both CSI and host government customs officials are to simultaneously receive an alert and the specific container is to be further inspected before it continues on to the United States. As shown in table 1, under the SFI pilot program, three SFI seaports are to scan 100 percent of U.S.-bound container cargo that passes through those seaports, while the other four seaports are to deploy scanning equipment in a more limited capacity. As required by the SAFE Port Act, CBP was to issue a report in April 2008 on the lessons learned from the SFI pilot program and the need and feasibility of expanding the 100 percent scanning system to other CSI seaports, among other things. As we prepared this statement, CBP had not yet issued this report. Every 6 months after the issuance of this report, CBP is to report on the status of full-scale deployment of the integrated scanning systems at foreign seaports to scan 100 percent of U.S.-bound cargo. We identified challenges in nine areas that are related to the continuation of the SFI pilot program and the longer-term 100 percent scanning requirement: (1) workforce planning, (2) the lack of information about host government cargo examination systems,(3) measuring performance outcomes, (4) undefined resource responsibilities for the cost and labor for implementation, (5) logistical feasibility for scanning equipment and processes, (6) technological issues, (7) the use and ownership of scanning data, (8) a perceived disparity between 100 percent scanning and the risk management approach of CBP's international partners, and (9) potential requests for reciprocity from foreign governments. In our prior work examining the CSI and C-TPAT programs, we reported that CBP faced challenges identifying an appropriate number of positions for the programs and finding enough qualified people to fill these positions. For example, we reported in 2005 and again in 2008 that CBP's human capital plan did not systematically determine the optimal number of officers needed at each CSI seaport to carry out duties that require an overseas presence (such as coordinating with host government officials or witnessing the examinations they conduct) as opposed to duties that could be performed remotely in the United States (such as reviewing databases). Determining optimal staffing levels is particularly important since CBP reports facing ongoing challenges identifying sufficient numbers of qualified employees to staff the program. For example, CBP officials reported that 9 qualified applicants applied for 40 permanent positions at CSI seaports. We also reported that according to CBP officials, to fill open CSI positions, officers have in some cases been deployed who have not received all required training. We recommended in April 2005 that CBP revise the CSI staffing model to consider (1) what functions need to be performed at CSI seaports and what can be performed in the United States, (2) the optimum levels of staff needed at CSI seaports to maximize the benefits of targeting and inspection activities in conjunction with host nation customs officials, and (3) the cost of locating targeters overseas at CSI seaports instead of in the United States. CBP agreed with our recommendation on CSI's staffing model and said that modifications to the model would allow program objectives to be achieved in a more cost- effective manner. CBP said that it would evaluate the minimum level of staff needed at CSI seaports to maintain ongoing dialogue with host nation officials, as well as assess the staffing levels needed domestically to support CSI activities. However, as of January 2008, CBP's human capital plan did not systematically make these determinations. The ability of the SFI pilot program--and by extension the 100 percent scanning requirement of the SAFE Port and 9/11 Acts--to operate effectively and enhance maritime container security depends, in part, on the success of CBP's ability to manage and deploy staff in a way that ensures that critical security functions are performed. Under the CSI program, CBP operated and conducted cargo container scanning at 58 foreign seaports as of January 2008; however, given that additional scanning equipment will be used in the SFI pilot program, and fulfilling the 100 percent scanning requirement will naturally increase the number of containers to be scanned at the more than 700 seaports that ship cargo to the United States, the SFI pilot program and 100 percent scanning requirement will generate an increased quantity of scan data. According to European customs officials, for there to be value added in these additional scans, the scan data must be reviewed. Therefore, in implementing the 100 percent scanning requirement, CBP will face staffing challenges because more CBP officers will be required to review and analyze these data from participating seaports. As we reported in January 2008, CBP does not systematically collect information on CSI host governments' examination equipment or processes. We noted that CBP must respect the sovereignty of countries participating in CSI and, therefore, cannot require that a country use specific scanning equipment or follow a set of prescribed examination practices. Thus, while CBP has set minimum technical criteria to evaluate the quality and performance of equipment being considered for use at domestic seaports, it has no comparable standards for scanning equipment used at foreign seaports. In addition, CBP officials stated that there are no plans to evaluate examination equipment at foreign seaports against the domestic criteria. CBP officials added, however, that the capabilities of scanning equipment are only one element for determining the effectiveness of examinations that take place at CSI seaports. It is better, in their view, to make assessments of the processes, personnel, and equipment that collectively constitute the host governments' entire examination systems. However, in January 2008, we reported that CBP does not gather this type of information and recommended that CBP, in collaboration with host government officials, improve the information gathered at each CSI port by (1) establishing general guidelines and technical criteria regarding the minimal capability and operating procedures for an examination system that can provide a basis for determining the reliability of examinations and related CSI activities; (2) systematically collecting data for that purpose; and (3) analyzing the data against the guidelines and technical criteria to determine what, if any, mitigating actions or incentives CBP should take to help ensure the desired level of security. CBP partially concurred with this recommendation in terms of improving the information gathered about host governments' examination systems. In particular, CBP agreed on the importance of an accepted examination process and noted that it continues to improve the information it gathers. CBP did not indicate that it would systematically pursue information on these host government examination systems. It did state that it was working through the WCO to address uniform technical standards for equipment. We reported that while CBP engaged with international trade groups to develop supply chain security requirements, these requirements do not specify particular equipment capabilities or examination practices. Both the SAFE Port and 9/11 Acts require DHS to develop technical and operational standards for scanning systems; therefore, the challenges that CSI has faced in obtaining information about host governments' examination systems are relevant to the SFI pilot program and the 100 percent scanning requirement. However, as noted earlier in this statement, the United States cannot compel foreign governments to use specific equipment for the SFI pilot program or the 100 percent scanning requirement, thus challenging CBP's ability to set and enforce standards. In addition, because CBP does not systematically collect information on the efficacy of host governments' examinations systems, it lacks reasonable assurance that these examinations could reliably detect and identify WMD unless it implements our January 2008 recommendation to determine actions to take to ensure the desired level of security. This is particularly important since currently, under CSI, most high-risk cargo containers examined at international seaports are not re-examined upon arrival at domestic seaports. In our reviews of the CSI and C-TPAT programs, we identified challenges with CBP's ability to measure program performance because of, among other things, the difficulty in determining whether these programs were achieving their desired result of increasing security for the United States. In the past, we and the Office of Management and Budget (OMB) have acknowledged the difficulty in developing outcome-based performance measures for programs that aim to deter or prevent specific behaviors. In the case of C-TPAT, we noted in our March 2005 and April 2008 reports that CBP had not developed a comprehensive set of performance measures and indicators for the programs, such as outcome-based measures, to monitor the status of program goals. A senior CBP official stated that developing these measures for C-TPAT, as well as other CBP programs, has been difficult because CBP lacks the data necessary to determine whether a program has prevented or deterred terrorist activity. We recommended that CBP complete the development of performance measures, to include outcome-based measures and performance targets, to track the program's status in meeting its strategic goals. CBP agreed with our recommendation on developing performance measures, and had developed initial measures relating to membership, inspection percentages, and validation effectiveness. However, as we reported in April 2008, CBP had yet to develop measures that assess C-TPAT's progress toward achieving its strategic goal to ensure that its members improve the security of their supply chains pursuant to C-TPAT security criteria. Given that, as with CSI and C-TPAT, the purpose of the SFI pilot program and the 100 percent scanning provision is to increase security for the United States, the same challenges related to defining and measuring performance could also apply to the SFI pilot program and the 100 percent scanning provision. Without outcome-based performance measures, it will be difficult for CBP and DHS managers and Congress to effectively provide program oversight and determine whether 100 percent scanning achieves the desired result--namely increased security for the United States. While CBP and DOE have purchased security equipment for foreign seaports participating in the SFI pilot program, it is unclear who will pay for additional resources--including increased staff, equipment, and infrastructure--and who will be responsible for operating and maintaining the equipment used for the statutory requirement to scan 100 percent of U.S.-bound cargo containers at foreign seaports. According to CBP, the average cost of initiating operations at CSI seaports was about $395,000 in 2004 and $227,000 in 2005. By comparison, CBP reported that it and DOE have spent approximately $60 million, collectively, to implement 100 percent scanning at the three foreign seaports fully participating in the SFI pilot program. The SAFE Port and 9/11 Acts did not require nor prohibit the federal government from bearing the cost of scanning 100 percent of U.S.-bound cargo containers. According to customs officials in the UK who participated in the SFI pilot program at the Port of Southampton, resource issues will inhibit their ability to implement permanently the 100 percent scanning requirement. For example, these customs officials commented that to accommodate the SFI pilot program at the Port of Southampton, existing customs staff had to be reallocated from other functions. The UK customs officials further stated that this reallocation was feasible for the 6-month pilot program, but it would not be feasible on a permanent basis. Similarly, a customs official from another country with whom we met told us that while his country does not scan 100 percent of exports, its customs service has increased its focus on examining more exported container cargo, and this shift has led to a 50 percent increase in personnel. European government officials expressed concerns regarding the cost of equipment to meet the 100 percent scanning requirement, as well as the cost of additional personnel necessary to operate the new scanning equipment, view and transmit the images to the United States, and resolve false alarms. Though CBP and DOE have provided the bulk of equipment and other infrastructure necessary to implement the SFI pilot program, they have also benefited from host nation officials and port operators willing to provide, to varying degrees, the resources associated with additional staffing, alarm response protocols, construction, and other infrastructure upgrades. However, according to CBP, there is no assurance that this kind of mutual support is either sustainable in the long term or exists in all countries or at all seaports that export goods to the United States. Logistical issues, such as crowded terminal facilities and the variety of transportation modes at terminals, could present challenges to the SFI pilot program and implementation of 100 percent scanning. Seaports may lack the space necessary to install additional scanning equipment needed to comply with the 100 percent scanning requirement. For example, we observed that scanning equipment at some seaports is located several miles away from where cargo containers are stored, which could add to the time and cost requirements for scanning these containers. Similarly, while some seaports have natural bottlenecks that allow for container scanning equipment to be placed such that all outgoing containers would have to pass through the equipment, not all seaports are so configured, and the potential exists for containers to be shipped to the United States without being scanned. Another potential logistical vulnerability is related to the transportation modes by which cargo containers arrive and pass through seaports. For example, cargo containers that arrive at a seaport by truck or rail are generally easier to isolate, whereas transshipment cargo containers--those moved from one vessel to another--are only available for scanning for a comparatively short time and may be more difficult to access. For example, UK customs officials stated that it was not possible to route transshipment containers that arrived by sea through the SFI equipment. As a consequence, the scanning of transshipment containers has not begun at the Port of Southampton. CBP and European customs officials evaluating the SFI pilot program stated that while the pilot has been comparatively successful at relatively lower-volume seaports, such as Southampton, implementing 100 percent scanning would be significantly more challenging at seaports with a higher volume of cargo container traffic or greater percentages of transshipment cargo containers. The SFI pilot program currently faces technology challenges, such as mechanical breakdowns of scanning equipment because of environmental factors, inadequate infrastructure for the transmission of electronic information, and difficulties in integrating different generations of scanning equipment. Environmental conditions at some sites can compromise the effectiveness of radiation detection equipment used in the SFI pilot program. For example, two of the three seaports fully participating in the SFI pilot program experienced weather-related mechanical breakdowns of scanning equipment. Specifically, at the Port of Southampton, a piece of radiation scanning equipment failed because of rainy conditions and had to be replaced, resulting in 2 weeks of diminished scanning capabilities. Additionally, Port Qasim in Pakistan has experienced difficulties with scanning equipment because of the extreme heat. Because of the range of climates at the more than 700 other international seaports that ship cargo to the United States, these types of technological challenges could be experienced elsewhere. The limited infrastructure at some foreign seaports poses a challenge to the installation and operation of radiation detection equipment, as well as to the electronic transmission of scan data to CBP officers in the United States. Many seaports are located in remote areas that often do not have access to reliable supplies of electricity or infrastructure needed to operate radiation portal monitors and associated communication systems. For example, at Port Salalah in Oman, a key challenge has been the cost of data transmission, because of low bandwidth communications infrastructure, to send data to the CBP officers who review the scans. Prior to SFI, the CSI office in Port Salalah already used transmission technology that cost annually about 10 times that of other SFI seaports. To participate in SFI, CBP originally planned to procure additional technology costing approximately $1.5 million each year to transmit the SFI data from Port Salalah. However, CBP was able to devise a lower-cost option that involved sharing communications infrastructure with existing CSI operations at the port because U.S.-bound container volume is relatively low in Oman. While CBP reported that this solution could keep data transmission costs down at other low-volume seaports, it is unclear whether this could be accomplished at higher-volume seaports. In addition to compatibility with existing infrastructure, SFI seaports have experienced compatibility issues with equipment from different generations. According to CBP, there are various manufacturers of equipment used at CSI seaports, and although the integration of equipment and technology at SFI pilot program seaports has generally been successful, it has not been without challenges. For example, at Port Salalah integration of a large number of new pieces of equipment by new vendors caused operational delays. The legislation that mandated the SFI pilot program and 100 percent scanning does not specify who will have the authority or responsibility to collect, maintain, disseminate, view, or analyze scan data collected on cargo containers bound for the United States. While the SAFE Port Act specifies that SFI pilot program scan data should be available for review by U.S. government officials, neither it nor the 9/11 Act establishes who is to be responsible for managing the data collected at foreign seaports. Other unresolved questions include ownership of data, how proprietary information is to be treated, and how privacy concerns are to be addressed. For example, officials from UK Customs stated that UK privacy legislation barred sharing information on cargo containers with CBP unless a specific risk was associated with the containers. To comply with UK laws, while still allowing CBP to obtain scan data on container cargo, UK Customs and CBP negotiated working practices to allow CBP to use its own handheld radiation scanning devices to determine whether cargo containers emitted radiation, but this was only for purposes of the SFI pilot program. According to the European Commission, for 100 percent scanning to go forward, the transfer of sensitive information would have to take place systematically, which would only be possible if a new international agreement between the United States and the European Union (EU) was enacted. In the absence of agreements with the host governments at the more than 700 seaports that ship cargo to the United States, access to data on the results of container scans could be difficult to ensure. Some of CBP's international partners, including foreign customs services, port operators, trade groups, and international organizations, have stated that the 100 percent scanning requirement is inconsistent with widely accepted risk management principles, and some governments have expressed to DHS and Congress that 100 percent scanning is not consistent with these principles as contained in the SAFE Framework. Similarly, some European customs officials have told us that the 100 percent scanning requirement is in contrast to the risk-based strategy behind CSI and C-TPAT, and the WCO has stated that implementation of 100 percent scanning would be "tantamount to abandonment of risk management." In addition, some of CBP's international partners have stated that the requirement could potentially reduce security. For example, the European Commission noted that there has been no demonstration that 100 percent scanning is a better means for enhancing security than current risk-based methods. Further, CBP officials have told us that the 100 percent scanning requirement may be a disincentive for foreign countries or companies to adopt risk-based security initiatives, such as CSI, C-TPAT, or the SAFE Framework. Similarly, in April 2008, the Association of German Seaport Operators released a position paper that stated that implementing the 100 percent scanning requirement would undermine mutual, already achieved, security successes and hinder maritime security by depriving resources from areas that present a more significant threat and warrant closer scrutiny. Implementation of the 100 percent scanning requirement could result in calls for reciprocity of scanning activities from foreign officials and be viewed as a barrier to trade. European customs officials, as well as officials from the WCO, have objected to the unilateral nature of the 100 percent scanning requirement, noting that this requirement contrasts with prior multilateral efforts CBP has implemented. Similarly, the Association of German Port Operators published a position paper stating that the legislative requirement inherently ignores the international character of global maritime trade and is a classic example of an issue that should have been discussed with and passed by the legislative body of an international organization, such as the WCO. In its report on the SFI pilot program, the European Commission expressed concern that it would be difficult for EU customs administrations to implement a measure designed to protect the United States that would divert resources away from strengthening EU security. Customs officials from Europe, as well as members of the World Shipping Council and the Federation of European Private Port Operators, indicated that should implementation of the 100 percent scanning requirement be pursued, foreign governments could establish similar requirements for the United States, forcing U.S. export cargo containers to undergo scanning before being loaded at U.S. seaports. According to CBP officials, the SFI pilot program, as an extension of CSI, allows foreign officials to ask the United States to reciprocate and scan 100 percent of cargo containers bound for their respective countries. CBP officials told us that CBP does not have the personnel, equipment, or space to scan 100 percent of cargo containers being exported to other countries, should it be requested to do so. In addition to the issue of reciprocity, European and Asian government officials, as well as officials from the WCO, have stated that 100 percent scanning could constitute a barrier to trade. For example, the Association of German Seaport Operators stated that the 100 percent mandate would amount to an unfair nontariff trade barrier between the United States and foreign seaports. Similarly, senior officials from the European Commission expressed concern that a 100 percent scanning requirement placed on foreign seaports could disrupt the international trading system. Further, the WCO passed a unanimous resolution in December 2007, expressing concern that implementation of 100 percent scanning would be detrimental to world trade and could result in unreasonable delays, port congestion, and international trading difficulties. Mr. Chairman and members of the subcommittee, this concludes my prepared statement. We look forward to working with CBP and the Congress to track progress of the SFI pilot and to identify the way forward for supply chain security. I would be happy to respond to any questions you may have. For information about this testimony, please contact Stephen L. Caldwell, Director, Homeland Security and Justice Issues, 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. This testimony was prepared under the direction of Christopher Conrad, Assistant Director. Other individuals making key contributions to this testimony include Frances Cook, Stephanie Fain, Emily Hanawalt, Valerie Kasindi, Robert Rivas, and Sally Williamson. Supply Chain Security: U.S. Customs and Border Protection Has Enhanced Its Partnership with Import Trade Sectors, but Challenges Remain in Verifying Security Practices. GAO-08-240. Washington, D.C.: April 25, 2008. Supply Chain Security: Examinations of High-Risk Cargo at Foreign Seaports Have Increased, but Improved Data Collection and Performance Measures Are Needed. GAO-08-187. Washington, D.C.: January 25, 2008. Maritime Security: The SAFE Port Act: Status and Implementation One Year Later. GAO-08-126T. Washington, D.C.: October 30, 2007. Maritime Security: One Year Later: A Progress Report on the SAFE Port Act. GAO-08-171T. Washington, D.C.: October 16, 2007. Maritime Security: The SAFE Port Act and Efforts to Secure Our Nation's Seaports. GAO-08-86T. Washington, D.C.: October 4, 2007. Combating Nuclear Smuggling: Additional Actions Needed to Ensure Adequate Testing of Next Generation Radiation Detection Equipment. GAO-07-1247T. Washington, D.C.: September 18, 2007. Maritime Security: Observations on Selected Aspects of the SAFE Port Act. GAO-07-754T. Washington, D.C.: April 26, 2007. Customs Revenue: Customs and Border Protection Needs to Improve Workforce Planning and Accountability. GAO-07-529. Washington, D.C.: April 12, 2007. Cargo Container Inspections: Preliminary Observations on the Status of Efforts to Improve the Automated Targeting System. GAO-06-591T. Washington, D.C.: March 30, 2006. Combating Nuclear Smuggling: Efforts to Deploy Radiation Detection Equipment in the United States and in Other Countries. GAO-05-840T. Washington, D.C.: June 21, 2005. Homeland Security: Key Cargo Security Programs Can Be Improved. GAO-05-466T. Washington, D.C.: May 26, 2005. Maritime Security: Enhancements Made, but Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Container Security: A Flexible Staffing Model and Minimum Equipment Requirements Would Improve Overseas Targeting and Inspection Efforts. GAO-05-557. Washington, D.C.: April 26, 2005. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Cargo Security: Partnership Program Grants Importers Reduced Scrutiny with Limited Assurance of Improved Security. GAO-05-404. Washington, D.C.: March 11, 2005. Homeland Security: Process for Reporting Lessons Learned from Seaport Exercises Needs Further Attention. GAO-05-170. Washington, D.C.: January 14, 2005. Port Security: Better Planning Needed to Develop and Operate Maritime Worker Identification Card Program. GAO-05-106. Washington, D.C.: December 10, 2004. Maritime Security: Substantial Work Remains to Translate New Planning Requirements into Effective Port Security. GAO-04-838. Washington, D.C.: June 30, 2004. Homeland Security: Summary of Challenges Faced in Targeting Oceangoing Cargo Containers for Inspection. GAO-04-557T. Washington, D.C.: March 31, 2004. Container Security: Expansion of Key Customs Programs Will Require Greater Attention to Critical Success Factors. GAO-03-770. Washington, D.C.: July 25, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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U.S. Customs and Border Protection (CBP), within the Department of Homeland Security (DHS), is responsible for preventing weapons of mass destruction from entering the United States in cargo containers that are shipped from more than 700 foreign seaports. The Security and Accountability for Every (SAFE) Port Act calls for testing the feasibility of scanning 100 percent of U.S.-bound cargo containers, and the Implementing Recommendations of the 9/11 Commission Act (9/11 Act) requires scanning 100 percent of U.S.-bound cargo containers by 2012. To fulfill these requirements, CBP created the Secure Freight Initiative (SFI) and has initiated a pilot program at seven seaports. This testimony discusses challenges related to the SFI pilot program and implementation of the requirement to scan 100 percent of U.S.-bound container cargo. This testimony is based on GAO products issued from July 2003 through April 2008 and ongoing work. To conduct this work, GAO reviewed reports from CBP and international partners on SFI and other container security programs, and interviewed CBP and foreign customs officials. GAO identified challenges in nine areas that are related to the continuation of the SFI pilot program and the longer-term 100 percent scanning requirement: (1) Workforce planning: The SFI pilot program could generate an increased quantity of scan data. Therefore, more CBP officers will be required to review and analyze data for participating seaports. (2) Host nation examination practices: The SAFE Port and 9/11 Acts require DHS to develop standards for the scanning systems, but CBP lacks information on host nation equipment and practices. (3) Measuring performance: CBP has had difficulties defining performance measures for its container security programs; therefore, it will be difficult to assess if 100 percent scanning achieves increased security. (4) Resource responsibilities: Neither the SAFE Port Act nor the 9/11 Act specifies whether the United States would bear the costs of implementing 100 percent scanning. (5) Logistics: Space constraints can require seaports to place scanning equipment miles from where cargo containers are stored, and some containers are only available for scanning for a short period of time and may be difficult to access. (6) Technology and infrastructure: Environmental conditions can damage equipment and cause delays, and infrastructure capacity and equipment compatibility have presented difficulties in the SFI pilot program. (7) Use and ownership of data: Legislation specifies that scan data should be available to CBP officials, but the data are often generated and collected by foreign seaports and, in some cases, will require international agreements for transfer to CBP officials. (8) Consistency with risk management: International partners state that 100 percent scanning is inconsistent with accepted risk management principles and diverts resources away from other security threats. (9) Reciprocity and trade concerns: Foreign governments could call for reciprocity of 100 percent scanning, requiring the United States to scan cargo containers, and some view this requirement as a barrier to trade.
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FECA provides cash benefits to eligible federal employees who suffer temporary or permanent disabilities resulting from work-related injuries or diseases. Labor's Division of Federal Employees' Compensation in the Office of Workers' Compensation Programs (OWCP) administers the FECA program and charges agencies for whom injured employees worked for benefits provided. These agencies subsequently reimburse Labor's Employees' Compensation Fund from their next annual appropriation. FECA benefits are adjusted annually for cost-of-living and are neither subject to age restrictions nor taxed. USPS increaseshas large FECA program costs. At the time of their injury, 43 percent of FECA beneficiaries in 2010 were employed by USPS, as shown in table 1. One way to measure the adequacy of FECA benefits is to consider wage replacement rates, which are the proportion of pre-injury wages that are replaced by FECA. Wage replacement rates that do not account for missed career growth capture the degree to which a beneficiary is able to maintain his or her pre-injury standard of living whereas wage replacement rates that account for missed career growth capture the degree to which a beneficiary is able to maintain his or her foregone standard of living (i.e., standard of living absent an injury). Data limitations can preclude calculating wage replacement rates that account for missed career growth; however, doing so provides a more complete story of the comparison between an injured worker and his or her counter-factual of having never been injured. Wage replacement rates can be targeted by policy-makers; however, there is no consensus on what wage replacement rate policies should target. FECA beneficiaries receive different benefits past retirement age than workers who retire under a federal retirement system. Specifically, under FERS, federal retirees have a benefit package comprised of three components: the FERS annuity, which is based on years of service; the TSP, which is similar to a 401(k); and Social Security benefits. FECA benefits do not change at retirement age and beneficiaries cannot receive a FERS annuity and FECA benefits simultaneously. In addition, FECA beneficiaries cannot contribute to their TSP accounts post-injury, but they can receive benefits accrued from contributions made to their TSP accounts prior to being injured. In addition, Social Security benefits attributable to federal service are offset by FECA. If an individual has an extended disability and no current capacity to work, OWCP determines that he or she is a total-disability beneficiary and calculates long-term FECA benefits as a proportion of the beneficiary's entire income at the time of injury. In 2010, 31,880 FECA beneficiaries received long-term total-disability cash benefits. Alternatively, if an individual recovers sufficiently to return to work in some capacity, OWCP determines that he or she is a partial-disability beneficiary and reduces his or her FECA benefits from the total-disability amount. For such partial-disability beneficiaries, OWCP calculates long- term benefits based on any loss of wage earning capacity (LWEC), as compared to their pre-injury wages. A beneficiary's LWEC may be based on the difference between their pre-injury wages and their actual post-injury earnings if the beneficiary has found employment that OWCP determines to be commensurate with their rehabilitation. Alternatively, OWCP constructs a beneficiary's LWEC based on the difference between pre-injury wages and OWCP's estimate of what the FECA beneficiary could earn in an appropriate job placement (constructed earnings). In 2010, 10,594 FECA beneficiaries received long-term partial-disability cash benefits. In addition to our work on FECA benefit levels, we have also conducted work on program integrity and management. We have identified several weaknesses in these areas. Most recently, in April 2013, we found examples of improper payments and indicators of potential fraud in the FECA program, which could be attributed, in part, to oversight and data- access issues. We also found that FECA program requirements allow claimants to receive earnings, and earnings increases, without necessarily resulting in adjustment of FECA compensation. We recommended that the Secretary of Labor assess the feasibility of developing a cost-effective mechanism to share FECA compensation information with states. Labor agreed with the recommendation and stated that it will undertake a review to determine whether such data sharing and reporting is feasible. Our simulations of the effects of compensating non-USPS and USPS total-disability beneficiaries at the single rate (regardless of the presence of dependents) of either 66-2/3 or 70 percent of wages at injury, reduced the median wage replacement rates. Median wage replacement rates overall, and within the subgroups we examined, were generally lower under the 66-2/3 percent compensation proposal. Compared to the current FECA program, both proposals reduced 2010 median wage replacement rates for total-disability non-USPS and USPS beneficiaries, as shown in figure 1. The decreases in the overall median wage replacement rates were due to the greater proportion of beneficiaries who had a dependent--73 percent of non-USPS beneficiaries and 71 percent of USPS beneficiaries. Beneficiaries with a dependent received lower compensation under both proposals whereas beneficiaries without a dependent saw their compensation increase or stay the same. As shown in the middle group of bars in figure 1, the results of our simulation indicate that median wage replacement rates for USPS beneficiaries were generally higher than those for non-USPS beneficiaries. In both cases, the wage replacement rates account for missed income growth, as they are simulated based on 2010 take-home pay. All else equal, FECA beneficiaries who would have experienced more income growth--from the time of injury through 2010--had lower wage replacement rates than did those beneficiaries who would have experienced less income growth absent their injury. In general, USPS beneficiaries missed less income growth due to their injury than did non- USPS beneficiaries. Consequentially, USPS beneficiaries had higher wage replacement rates than non-USPS beneficiaries. For example, 4 out of 5 USPS beneficiaries in our analysis would have had less than 10 percent income growth had they never been injured. In contrast, 2 out of 5 non-USPS beneficiaries would have had less than 10 percent income growth, absent an injury. Under our simulations, both proposals increased the difference in wage replacement rates between beneficiaries with and without a dependent, increasing the magnitude and reversing the direction of the difference in median wage replacement rates, as shown in figure 2. Had we been able to account for the actual number of dependents, beneficiaries with dependents would have had lower wage replacement rates and thus the difference between median wage replacement rates would have been smaller under FECA and larger under both proposals. For other beneficiary subgroups we examined, the proposals did not reduce wage replacement rates disproportionately to the reduction in the overall median. However, we found that under current FECA policy and both proposals, wage replacement rates for some beneficiaries, such as those who, due to injury earlier in their careers, missed out on substantial income growth, were substantially lower than the overall median. FECA was not designed to account for missed income growth and thus total- disability beneficiaries who missed substantial income growth had lower wage replacement rates--outweighing the cumulative effect of FECA's annual cost of living adjustments--as shown in figure 3. According to our retirement simulation comparing current FECA benefits to FERS benefits, we found that the overall median FECA benefit package (FECA benefits and TSP annuity) for both USPS and non-USPS FECA beneficiaries was greater than the current median FERS retirement benefit package (FERS annuity, TSP annuity, and Social Security). Specifically, the median FECA benefit package for non-USPS beneficiaries was 32 percent greater than the current median FERS--and 37 percent greater for USPS FECA beneficiaries. This implies that in retirement, FECA beneficiaries generally had greater income from FECA and their TSP in comparison to the FERS benefits they would have received absent an injury. Although the overall median FECA benefit was substantially higher than the median FERS benefit for 2010 annuitants, the difference between the two varies based on years of service. Our simulations showed that median FECA benefit packages were consistently greater than median FERS benefit packages across varying years of service; however, the gap between the two benefits narrowed as years of service increased. This occurred in large part because FERS benefits increase substantially with additional years of service. For example, under our simulation non- USPS beneficiaries whose total federal career would have spanned less than 10 years had a median FECA benefit that was about 46 percent greater than the corresponding FERS benefit. In contrast, non-USPS beneficiaries whose total federal career would have spanned 25-29 years had a median FECA benefit that was 16 percent greater than the corresponding FERS benefit. For USPS beneficiaries, those whose total federal career would have spanned less than 10 years had a median FECA benefit that was about 65 percent greater than the corresponding FERS benefit, while beneficiaries whose total federal career would have spanned between 20 and 24 years had a median FECA benefit that was 23 percent greater than the corresponding FERS benefit. Based on our simulation, we found that reducing FECA benefits once beneficiaries reach retirement age to 50 percent of wages at the time of injury would result in an overall median for the reduced FECA benefit package (reduced FECA plus the TSP) that was about 6 percent less than the median FERS benefit package for non-USPS annuitants. Under our simulation, for USPS annuitants, the reduced FECA benefit package would be approximately equal to the median 2010 FERS benefit package. This implies that under the proposed reduction, both USPS and non- USPS FECA beneficiaries would have similar income from their FECA benefit package in comparison to their foregone FERS benefit. In addition, under our simulation reduced FECA benefits were similar or less than FERS benefits across varying years of service. However, as years of service increase, the gap between the two benefits widened. For example, we found that non-USPS beneficiaries whose total federal career would have spanned less than 10 years had a median reduced FECA benefit that was about 2 percent greater than the corresponding FERS benefit. In contrast, those non-USPS beneficiaries whose total federal career would have spanned 25-29 years had a median reduced FECA benefit that was 19 percent less than the corresponding FERS benefit. Similarly, USPS beneficiaries whose total federal career would have spanned less than 10 years had a median reduced FECA benefit that was about 13 percent greater than the corresponding FERS benefit. In contrast, USPS beneficiaries whose total federal career would have spanned 25 to 29 years had a median reduced FECA benefit that was 20 percent less than the corresponding FERS benefit. Because FERS had only been in place for 26 years in 2010, our simulation did not capture the "mature" FERS benefit that an annuitant could accrue with more years of service. Consequently, it is likely that our analysis understates the potential FERS benefit when we consider 2010 benefit levels. As a result, we conducted a simulation of a "mature" FERS that was coupled with the assumption that individuals have 30-year federal careers. Based on this simulation, we found that the median current FECA benefit packages for non-USPS beneficiaries were on par or less than the median FERS benefit package--depending on the amount an individual contributes toward their TSP account for retirement. As shown on the right sides of figures 4 and 5, under the default scenario where there is no employee contribution and the employing agency contributes 1 percent to TSP, the median FECA benefit package is about 1 percent greater than the median FERS benefit package. However, under a scenario where each employee contributes 5 percent--and receives a 5 percent agency match--the median FECA benefit package is about 10 percent less than the median FERS benefit package. Similarly, our simulation showed that for USPS annuitants, the median FECA benefit package was about 13 percent greater than the median FERS benefit package under the 1 percent agency contribution scenario, and about 4 percent less than the median FERS benefit package under the 10 percent contribution scenario. Our simulation also found that, for both non-USPS and USPS annuitants, the median reduced FECA benefit package under the proposed changes was less than the median FERS benefit package--regardless of the simulated contributions to TSP accounts. Specifically, under a scenario where there is no employee contribution--and a 1 percent contribution from the employing agency--the median reduced FECA benefit package is about 31 percent less than the median FERS benefit package for non- USPS annuitants and 22 percent less than the median FERS benefit package for USPS annuitants. Under a scenario where each employee contributes 5 percent--and receives a 5 percent agency match--the median reduced FECA benefit package is about 35 percent less than the FERS benefit package for non-USPS annuitants and about 29 percent less than the FERS benefit package for USPS annuitants. Effects of Proposed FECA Revisions on Partial-disability Beneficiaries Depend on Post-Injury Earning Capacity and Employment Over Time We found partial-disability beneficiaries to be fundamentally different from total-disability beneficiaries, as they receive reduced benefits based on their potential to be re-employed and have work earnings. However, there is limited information available about the overall population of partial- disability beneficiaries. They do not all find work and their participation in the workforce may change over time, and their individual experiences will determine how they would fare under the proposed revisions. Partial-disability beneficiaries in the case studies we examined fared differently under both FECA and the proposed revisions to pre-retirement compensation, depending on the extent to which they had work earnings in addition to their FECA benefits. To consider this larger context, we conducted total income comparisons for the partial-disability case studies we examined. We defined the post-injury total income comparison to be the sum of post-injury FECA benefits and any gross earnings from employment at the time of the LWEC decision, as a percentage of pre- injury gross income. Among the seven partial-disability case studies we examined, those beneficiaries with constructed earnings LWECs had post-injury total income comparisons that were substantially less than those with actual earnings LWECs. As shown in table 2, the beneficiaries in case studies 5- 7 had constructed earnings LWECs and had post-injury total incomes that ranged from 29 to 65 percent of their pre-injury income under current FECA policy. This range was substantially lower than the total income comparisons for the beneficiaries in case studies 1-4 with actual earnings LWECs (77-96 percent). We found that by definition, at the time of their LWEC decision, those beneficiaries with constructed earnings LWECs earned less than the income OWCP used to calculate their LWECs. Consequently, their total income comparisons--FECA benefits plus earnings, as a percentage of pre-injury wages--are necessarily lower than those with actual earnings LWECs. We also found that beneficiaries in our case studies were affected differently by the proposed revisions to pre-retirement benefits. As expected, the beneficiaries who did not have a dependent (case studies 2, 4, and 7) experienced either slight increases or no change in their post- injury total income comparisons under the proposed revisions to pre- retirement benefits. Under both proposals, the beneficiaries in our case studies who had a dependent (case studies 1, 3, 5, and 6) experienced declines in their post-injury total income comparisons.decreases in total income comparisons were relatively small compared to the impact of not having actual earnings. For instance, the beneficiary with a constructed earnings LWEC in case study 6 experienced declines in total income comparisons of about 3 to 4 percentage points between current FECA policy and the proposals. However, the beneficiary's total income comparisons under current FECA policy and the proposals were over 30 percentage points lower than those of the beneficiary in case study 3 who had the lowest total income comparisons of those beneficiaries with actual earnings LWECs. Due to the importance of actual work earnings on partial-disability beneficiaries' situations, we have previously concluded that a snapshot of post-injury total income comparisons is insufficient to predict how beneficiaries fare over the remainder of their post-injury careers. Employment at the time of OWCP's LWEC decision does not necessarily imply stable employment over time, as beneficiaries can find, change, or lose jobs over time. We have also found that the proposals to reduce FECA benefits at retirement age would primarily affect those partial-disability beneficiaries who continue to receive FECA benefits past retirement age. As we reported in December 2012, among those partial-disability beneficiaries who stopped receiving FECA benefits in 2005-2011, 68 percent did so due to their election of OPM retirement or other benefits, such as Veterans Affairs disability benefits. At that time, Labor officials told us that because many variables affect retirement benefits, they cannot predict why partial-disability beneficiaries would potentially choose to retire instead of continuing to receive FECA benefits. Only 17 percent of partial- disability beneficiaries who stopped receiving FECA benefits were beneficiaries who died (i.e., received benefits from injury until death). These aggregate numbers do not track individual beneficiaries' decisions to elect retirement or to continue receiving FECA benefits past retirement age, but they suggest that there is a substantial percentage of partial- disability beneficiaries that elects other benefits instead of FECA at some point post-injury. Since those beneficiaries who elect FERS retirement would not be affected by the proposed revisions to FECA compensation at retirement age, the overall effects of the proposals on partial-disability beneficiaries should be considered in the larger context of retirement options. To do so, in our December 2012 report, we used data from the seven partial- disability case studies to simulate and compare FERS and FECA benefits and to highlight various retirement options these partial-disability beneficiaries may face. As shown in table 3, we found: The beneficiaries in case studies 2, 4, and 6 had potential FERS benefit packages that were higher than their FECA benefits under current policy and the proposed revision--they would likely not be affected by the proposed revision. The beneficiaries in case studies 1, 3, and 7 had potential FERS benefit packages that were lower than their FECA benefits under current policy and the proposed revision--they would likely face a reduction in FECA benefits in retirement under the proposed revision. The beneficiary in case study 5 had a potential FERS benefit package that was lower than his FECA benefits under current policy, but higher than his benefits under the proposed FECA reduction--he would likely face a reduction in FECA benefits in retirement under the proposed revision. Based on our prior work, we have concluded that the differences in retirement options that individual beneficiaries face stem from two key factors: (1) OWCP's determination of their earning capacities, and (2) their total years of federal service. Partial-disability beneficiaries with greater potential for earnings from work receive relatively lower FECA benefits to account for their relatively lower loss of wage earning capacity, all else equal. In table 2, beneficiaries with: low earning capacities post-injury (case studies 1, 3, and 5) had FECA benefits that were more favorable than FERS benefits; high earning capacities post-injury (case studies 2 and 4) had FECA benefits that were less favorable than FERS benefits; and mid-range earning capacities post-injury (case studies 6 and 7) had FECA benefits whose favorability depended on their total years of federal service. Fewer years of federal service resulted in a lower FERS annuity and lower Social Security benefits attributable to federal service, all else equal. We have also found that partial-disability beneficiaries who choose to remain on FECA past retirement age currently face lower FECA benefits in retirement as compared with total-disability beneficiaries, and would experience a reduction in benefits under the proposals. Partial-disability beneficiaries receive FECA benefits that are lower than those of otherwise identical total-disability beneficiaries to account for their potential for work earnings. As long as they work, their income is comprised of their earnings and their FECA benefits. However, once they choose to retire, partial-disability beneficiaries who choose to stay on FECA likely no longer have any work earnings and are not eligible to simultaneously receive their FERS annuity. Thus, we found that because of the way FECA benefits are currently calculated, such partial- disability beneficiaries may have less income in retirement than otherwise identical total-disability beneficiaries, and the proposals would reduce benefits in retirement without differentiating between partial and total- disability beneficiaries. The proposed reduction may serve as a long- term incentive for partial-disability beneficiaries to return to work,particularly because their initial FECA benefits are lower than those of total-disability beneficiaries. In conclusion, FECA continues to play a vital role in providing compensation to federal employees who are unable to work because of injuries sustained while performing their federal duties and FECA benefits generally serve as the exclusive remedy for being injured on the job. Our simulations of the potential effects of proposed changes to FECA benefit levels incorporated the kinds of approaches used in the literature on assessing benefit adequacy for workers' compensation programs, such as taking account of missed career growth. More specifically, we assessed the proposed changes by simulating the level of take-home pay or retirement benefits FECA beneficiaries would have received if they had not been injured, which provides a realistic basis for assessing how beneficiaries may be affected. However, we did not recommend any particular level of benefit adequacy. As policymakers assess proposed changes to FECA benefit levels, they will implicitly be making decisions about what constitutes an adequate level of benefits for FECA beneficiaries before and after they reach retirement age. While our analyses focused on how the median FECA beneficiary might be affected by proposed changes, it also highlighted how potential effects may vary for different subpopulations of beneficiaries, which can assist policymakers as they consider such changes to the FECA program. This concludes my statement and I would be happy to answer any questions. For further information regarding this testimony, please contact Andrew Sherrill at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include: Nagla'a El-Hodiri, Assistant Director; James Bennett, Jessica Botsford, Sherwin Chapman, Michael J. Collins, Melinda Cordero, Holly Dye, Michael Kniss, Gene Kuehneman, Kathy Leslie, James Rebbe, Jeff Tessin, Walter Vance, and Rebecca Woiwode. 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 2012, the FECA program provided more than $2.1 billion in wage-loss compensation to federal workers who sustained injuries or illnesses while performing federal duties. Total-disability beneficiaries with an eligible dependent are compensated at 75 percent of gross wages at the time of injury and those without are compensated at 66-2/3 percent. Benefits are adjusted for inflation and are not taxed nor subject to age restrictions. Some policymakers have raised questions about the level of FECA benefits, especially compared to federal retirement benefits. Proposals to revise FECA for future total- and partial- disability beneficiaries include: setting initial FECA benefits at a single rate (66-2/3 or 70 percent of applicable wages at time of injury), regardless of whether the beneficiary has eligible dependents; and converting FECA benefits to 50 percent of applicable wages at time of injury--adjusted for inflation--once beneficiaries reach full Social Security retirement age. This testimony presents results of GAO's four recent reports on FECA issues. It summarizes (1) potential effects of the proposals to compensate total-disability FECA beneficiaries at a single rate; (2) potential effects of the proposal to reduce FECA benefits to 50 percent of applicable wages at full Social Security retirement age for total-disability beneficiaries; and (3) how partial disability beneficiaries might fare under the proposed changes. To do this work, GAO conducted simulations comparing FECA benefits to income (take-home pay or retirement benefits) a beneficiary would have had absent an injury, and conducted seven case studies of partial disability beneficiaries. GAO's simulation found that under the current Federal Employees' Compensation Act (FECA) program, the median wage replacement rate--the percentage of take-home pay replaced by FECA--for total-disability beneficiaries was 88 percent for U.S. Postal Service (USPS) beneficiaries and 80 percent for non-USPS beneficiaries in 2010. GAO also found that proposals to set initial FECA benefits at a single compensation rate would reduce these replacement rates by 3 to 4 percentage points under the 70-percent option and 7 to 8 percentage points under the 66-2/3 percent option. Beneficiaries with dependents would receive reduced FECA benefits under both options. The decreases in wage replacement rates were due to the greater proportion of beneficiaries who had a dependent--over 70 percent of both USPS and non-USPS beneficiaries. In GAO's simulation comparing FECA benefits to retirement benefits, GAO found that under the current FECA program, the median FECA benefit package for total-disability retirement-age beneficiaries was 37 and 32 percent greater than the median 2010 retirement benefit package for USPS and non-USPS beneficiaries, respectively. This analysis focused on individuals covered under the Federal Employees Retirement System (FERS), which generally covers employees first hired in 1984 or later, and covered about 85 percent of the federal workforce in 2009. GAO also found that the proposal to reduce FECA benefits at the full Social Security retirement age would result in a median FECA package roughly equal to the median FERS retirement package in 2010. However, the median years of service for the FERS annuitants GAO analyzed was about 16 to 18 years, so these simulations did not capture a fully mature retirement system and likely understated the future FERS benefit level. Consequently, GAO also simulated a mature FERS system--intended to reflect future benefits of workers with 30-year careers--and found that the median FECA benefit package under the proposed change would be from 22 to 35 percent less than the median FERS retirement package. Partial-disability beneficiaries are fundamentally different from total-disability beneficiaries, as they receive reduced FECA benefits based on a determination of their earning capacity. GAO's seven case studies of partial-disability beneficiaries showed that how they might fare under the proposed FECA changes can vary considerably based on their individual circumstances, such as their earning capacity and actual levels of earnings. For example, among GAO's case studies, those beneficiaries with high earning capacities may elect to retire under FERS and would likely not be affected by the proposed FECA reduction at retirement age because their potential retirement benefits were substantially higher than their current or proposed reduced FECA benefit levels. In contrast, those beneficiaries with low earning capacities had potential retirement benefits that were lower than their current FECA benefits and the proposed FECA reduction at retirement age would reduce their FECA benefits.
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In June 2002, the Coast Guard awarded a contract to ICGS to begin the acquisition phase of the Deepwater program. Rather than using the traditional approach of replacing classes of ships or aircraft through a series of individual acquisitions, the Coast Guard chose to employ a "system of systems" acquisition strategy that would replace its aging assets of ships, aircraft, and communication capabilities with a single, integrated package of new or modernized assets and capabilities. The focus of the program is not just on new ships and aircraft, but rather on an integrated approach to modernizing existing or "legacy" assets while transitioning to newer, more capable assets, with improved command, control, communications and computers, intelligence, surveillance, and reconnaissance (C4ISR) capabilities. At full implementation, the Deepwater program will replace the Coast Guard's entire fleet of current deepwater surface and air assets, comprising three classes of new cutters and their associated small boats, a new fixed-wing manned aircraft fleet, a combination of new and upgraded helicopters, and both cutter-based and land-based unmanned air vehicles (UAVs). In addition, all of these assets will be linked with state-of-the-art C4ISR capabilities and computers and will be supported by an integrated logistics management system. ICGS, a business entity jointly owned by Northrop Grumman and Lockheed Martin, acts as the system integrator to develop and deliver the Deepwater program. They are the two first-tier subcontractors for the program and either provides Deepwater assets themselves or award second-tier subcontracts for the assets. The Coast Guard's contract with ICGS has a 5-year base period with five additional 5-year options. The Coast Guard is scheduled to decide on whether to extend ICGS's contract by June 2006, which is 1 year prior to the end of the first 5-year contract term. Although ICGS is responsible for designing, constructing, deploying, supporting, and integrating Deepwater assets, the Coast Guard maintains responsibility for oversight and overall management of the program. To help fulfill this responsibility, the Coast Guard uses several management tools to track progress in the program, such as monthly status reports called quad reports, a performance-based management tool called the Earned Value Management System (EVMS), and a schedule management system called IMS. The quad reports are monthly summaries of the work performed on the various deepwater assets and were developed to give managers a monthly progress report on the performance of the program in such areas as cost, schedule, and contract administration. EVMS is used to track cost and schedule for certain delivery orders that have been placed to manage the risk of the major assets and activities. IMS is a three-tiered, calendar-based schedule used to track the completion of tasks and milestones of the individual Deepwater delivery task orders. However, data reliability with IMS has been an area of concern for the Coast Guard, and it is currently working with a private contractor and ICGS to address these concerns. Currently, the Coast Guard only maintains the lowest and most detailed level of IMS with monthly updates. These updates reflect the status of active contracts of individual assets and feed into EVMS's monthly cost performance reports of those individual contracts, which allow program management to monitor the cost, schedule, and technical performance of ongoing work at these lowest and most detailed levels. In recent months, we have issued two reports that have raised concern about the Coast Guard's initial management of the Deepwater program and the potential for escalating costs. In March 2004, we reported that key components needed to manage the Deepwater program and oversee the system integrator's performance have not been effectively implemented. We recommended that the Secretary of Homeland Security direct the Commandant of the Coast Guard to take a number of actions to improve Deepwater program management and contractor oversight. In April 2004, we testified that the most significant challenge the Coast Guard faces as it moves forward in the Deepwater program is keeping the program on schedule and within planned budget estimates. We noted that the Coast Guard was at risk of having to expend funds to repair deteriorating legacy assets that otherwise had been planned for Deepwater modernization initiatives, which could potentially further delay the program and increase total program costs. We noted further that the Coast Guard's current estimate for completing the acquisition program within the 20-year schedule has risen to $17.2 billion, an increase of $2.2 billion over the original $15 billion estimate. The degree to which the Deepwater program is on track with regard to its original 2002 acquisition schedule is difficult to determine, because the Coast Guard has not maintained and updated the acquisition schedule. The original acquisition schedule included acquisition phases (such as concept technology and design, system development and demonstration, and fabrication), interim phase milestones (such as preliminary and critical design reviews, installation, and testing), and the critical paths integrating the delivery of individual components to particular assets. However, while the Coast Guard has what is called an integrated master schedule, it currently uses it only at the lowest and most detailed levels and have not updated it to demonstrate whether individual components and assets are being integrated and delivered on schedule and in the critical sequence. There are a number of reasons why tracking the current integrated schedule on a major government investment or acquisition is important, but two stand out. First, our work has shown that it is important to identify potential risks in major acquisitions as early as possible so problems can be avoided or minimized. The ability to achieve scheduled events is a key indicator of risk. Second, cost, schedule, and performance are fundamental to the Congress's oversight of major acquisitions. In fact, by law, DOD's major defense acquisition programs have to report cost, schedule, and performance updates to the Congress at least annually and whenever cost and schedule thresholds are breached. In practice, schedules on DOD's major defense acquisitions are continually monitored and reported to management on a quarterly basis. While Coast Guard officials indicated that the management tools they use are sufficient for tracking delivery dates throughout the acquisition, we found that these tools could not provide a ready and reliable picture of the current integrated Deepwater acquisition schedule. For example, IMS has had problems with data reliability and the monthly status reports, while assessing the progress of individual assets, do not translate those individual assessments into an overall integrated Deepwater acquisition schedule. In fact, the February 2004 status report noted that because there was no accurate overall integrated schedule for the command and control design phase, the linkages with the development of other assets were largely unknown. Although maintaining a current integrated schedule is a best practice for ensuring adequate contract oversight and management and is a requirement for DOD acquisitions, Coast Guard officials said they have not done so because of the numerous changes the Deepwater Program experiences every year and because of the cost, personnel, and time involved in crafting a revised master plan with the systems integrator on an annual basis. The officials said they have not planned to update the original acquisition schedule until just prior to deciding whether to extend the award of the next 5-year Deepwater contract in 2007. However, we have found that in acquisitions of similar scope--and in particular, acquisitions made by DOD--maintaining a current schedule is a fundamental practice that the department considers necessary. While the Coast Guard could not provide us with an updated integrated schedule, we developed the current acquisition status of a number of selected Deepwater assets from documents provided by the Coast Guard. Our analysis indicates that several Deepwater assets and capabilities have experienced delays and are at risk of being delivered later than anticipated in the original implementation plan. For example, the delivery of the first two maritime patrol aircraft is behind schedule by about 1 year, and the delivery and integration of the vertical-take-off-and-land unmanned air vehicle to the first national security cutter has been delayed 18 months. The $168 million appropriated in fiscal year 2004 for the Deepwater program above the President's request of $500 million will allow the Coast Guard to conduct a number of projects that had been delayed or would not have been funded in fiscal year 2004, but it will not fully return the program to its original 2002 acquisition schedule. Our analysis indicates there are several reasons for this result. First, even with the additional amount, the program still had a cumulative funding shortfall of $39 million through fiscal year 2004, as compared to the Coast Guard's planned funding amount. Second, because part of the additional $168 million was needed to start work delayed from fiscal year 2003, it did not provide enough funding for the delayed work and for all the work that the Coast Guard had originally planned for fiscal year 2004. As a result, some of this work will have to be delayed to fiscal year 2005. Third, the delivery of some assets has fallen so far behind schedule that it is impossible to ensure their delivery according to the original 2002 implementation schedule by simply providing more money. For example, according to the 2002 implementation schedule, nine maritime patrol aircraft were to be delivered by the end of 2005; according to the current contract, none will be delivered in 2005 and two will be delivered by the end of 2006. Similarly, the original schedule called for completing 18 123-foot patrol boat conversions by the end of 2005; according to the current contract, 8 will be completed by the end of 2005. Fourth, the acquisition of some assets has been delayed for reasons other than funding. For example, greater than anticipated hull corrosion in the 110 ft. patrol boats has delayed the conversion of those into 123 footers and delays in the availability of faster satellite service for legacy cutters has delayed the delivery of those upgraded legacy cutters. Finally, in keeping with appropriations conference committee directives for how the additional amount was to be spent, part of the additional funding went for design of the offshore patrol cutter, work that, under the original schedule, would not begin for another 6 to 8 years. This work may speed up acquisition of these assets, but they were not on the original schedule this early in the program. The Coast Guard is currently revising Deepwater's mission needs statement in response to increased homeland security requirements resulting from the terrorist attacks of September 11, 2001. According to the Coast Guard, in May 2004 it submitted the revised statement to the Department of Homeland Security's (DHS) Joint Requirements Council, which conditionally accepted it until the Deepwater contractor, ICGS, completes a new estimate of the costs needed to acquire the necessary functional capabilities resulting from the revised mission needs statement. The council further directed the Coast Guard to complete the new cost estimate in order to brief the DHS Investment Review Board in October 2004. Acting as an agent of the DHS, the board will approve any increases in the Deepwater total ownership cost associated with the revised mission needs statement and any growth in the Deepwater budget. Specifications for some specific Deepwater assets--most notably the National Security Cutter--will be changed in light of the Coast Guard's added homeland security responsibilities. Coast Guard officials said the main impact of the revision would be to close the gaps in Deepwater asset capabilities created by the expansion of Coast Guard mission requirement after September 11. Regarding DOD's assistance to the Coast Guard for Deepwater, the Navy budgeted $25 million for the Deepwater program in fiscal years 2002-04, mainly to help outfit the National Security Cutter. The Navy budgeted these funds to provide capabilities and equipment it regarded as important for the Coast Guard to have for potential national defense missions that would be carried out in conjunction with Navy operations. The 2002 Deepwater acquisition schedule showed not only the individual planned phases and interim milestones for designing, testing, and fabricating assets but also the integrated schedules of critical linkages between assets. The absence of an up-to-date integrated acquisition schedule for the Deepwater program is a concern, because it is a symptom of the larger issues we reported in March 2004 that are related to whether this complicated acquisition is being adequately managed and whether the government's interests are being properly safeguarded. Since the inception of the unique contracting approach to this project, we have pointed out that it poses risks, in that it would be expensive to alter and, because of the unique "systems integrator" approach, does not operate like a conventional acquisition. The recent disclosure that, just 3 years into the acquisition, costs have risen by $2.2 billion points to the need for a clear understanding of what assets are being acquired, when they are being acquired, and at what cost. This lack of such a current schedule lessens the Coast Guard's ability to monitor the contractor's performance and to take early action on potential risks before they become problems later in the program. The Coast Guard has so far maintained that it is not worth the time and cost involved to update the acquisition schedule until just before the award of the next 5-year Deepwater contract, but we disagree. We recognize that there are costs involved with keeping an acquisition schedule updated. However, for Department of Defense acquisitions of such scope, maintaining a current schedule is a fundamental and necessary practice. Deepwater remains a program in transition, in that the Coast Guard is currently revising the program's mission requirements to include increased homeland security requirements. The major modifications that may result to key assets make keeping the program on track that much harder. As evolving mission requirements are translated into decisions about what assets are needed and what capabilities they will need to have, it becomes even more imperative that Coast Guard officials update the acquisition schedule on a more timely basis, so that budget submissions by the Coast Guard can allow DHS and Congress to base decisions on accurate information. We recommend that the Secretary of Homeland Security direct the Commandant of the Coast Guard to update the original 2002 Deepwater acquisition schedule in time to support the fiscal year 2006 Deepwater budget submission to DHS and Congress and at least once a year thereafter to support each budget submission. The updated schedule should include the current status of asset acquisition phases (such as concept technology and design, system development and demonstration, and fabrication), interim phase milestones (such as preliminary and critical design reviews, installation, and testing), and the critical paths linking the delivery of individual components to particular assets. We provided a draft of this report to DHS and the Coast Guard for their review and comment. In written comments, which are reproduced in appendix II, the Coast Guard generally concurred with the findings and recommendations in the report. The Coast Guard also provided technical comments, which we incorporated as appropriate. The Coast Guard, however, did not concur with three areas of discussion. First, the Coast Guard said that our draft report did not accurately portray its current acquisition tools and disagreed with our determination that data within one of those tools, the IMS, was not reliable enough for use in our report. As we noted in the report, at the time of our review Coast Guard officials expressed concerns about the reliability of IMS data, such as out-dated data and less than adequate data input and adjustment, and told us that they had hired a consultant to address those concerns. For that reason and with Coast Guard and ICGS agreement on our methodology, we based our analysis on the same source documents the Coast Guard uses as inputs to IMS's lowest, most detailed level. The Coast Guard stated in its written comments that while not in the form of an acquisition schedule, IMS's lower level data are reliable. According to its written comments, the Coast Guard is making improvements in updating IMS at all levels. Second, the Coast Guard said that we did not highlight that delays in the delivery schedule have been caused by a lack of funding and the subsequent need to sustain legacy assets rather than a lack of acquisition schedule updates. The scope of our review was to determine the impact of the additional $168 million in fiscal year 2004 on returning Deepwater to its original 2002 schedule, not to determine effects of receiving appropriations that were less than requested in previous years. However, in explaining why the $168 million will not return the Deepwater to its original schedule, we did note that part of the $168 million was needed to start work delayed from fiscal year 2003, and that the acquisition of some assets had been delayed due to greater than anticipated hull corrosion in legacy 110-foot patrol boats causing the delay in converting them to 123- footers. Finally, we did not intend to imply that the lack of acquisition schedule updates caused delays in delivery schedule. However, we continue to believe that not updating an integrated schedule to show the acquisition linkages between critical assets is a management concern. We believe in the importance of updating acquisition schedules at least annually not only as a best practice for managing and overseeing a complex integrated acquisition such as Deepwater but also as a up-to-date source of information on which DHS and the Congress can base annual budget decisions. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from its issue date. At that time, we will send copies of this report to the Secretary of Homeland Security, the Commandant of the Coast Guard, appropriate congressional committees, and other interested parties. The report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (415) 904-2200 or by email at [email protected], or Steve Calvo, Assistant Director, at (206) 287-4839 or by email at [email protected]. Other key contributors to this report were Shawn Arbogast, Leo Barbour, David Best, Michele Fejfar, Paul Francis, Sam Hinojosa, David Hooper, Michele Mackin, and Stan Stenersen. the Coast Guard's status in revising Deepwater's mission to meet increased homeland security requirements and the amount of funding support the Department of Defense (DOD) has provided for the Deepwater program for fiscal years 2002-2004. Interviewed Coast Guard and contractor officials. Examined delivery task orders and associated statements of work for individual Deepwater assets to establish what work was actually started, when it began, and the period of performance for that work; and monthly status reports of Deepwater program managers assessing the performance of the work. Compared the actual start and end dates of work with what was planned in the original 2002 acquisition schedule. Compared the original plan's listing of the work scheduled to begin for each fiscal year with the work that was actually begun. Interviewed program officials regarding the reliability of data in the Deepwater integrated master schedule. Interviewed DOD officials and examined Navy budget documents to determine DOD funding support for Deepwater. The degree to which the Deepwater program is on track with regard to its original 2002 acquisition schedule is difficult to determine, because the Coast Guard has not kept the acquisition schedule updated. Several assets are experiencing delays and are at risk for being delivered later than originally planned. The additional $168 million appropriated in fiscal year 2004 will allow the Coast Guard to conduct a number of projects that had been delayed or would not have been funded in fiscal year 2004, but it will not fully return the program to its original 2002 acquisition schedule. Additional information on the Deepwater Program. The Coast Guard submitted a revised Mission Needs Statement to the Department of Homeland Security in May 2004. Navy budgeted $25 million in fiscal years 2002-04 for intermediate gun and combat systems for cutters. of over 90 cutters and 200 aircraft used for missions that generally occur beyond 50 miles from shore but may start at coasts and extend seaward to wherever the Coast Guard is required to take appropriate action. In June 2002, the Coast Guard awarded a 5-year base contract to Integrated Coast Guard Systems (ICGS), Inc., to begin the acquisition phase of the Deepwater program, with five additional 5-year options. The Coast Guard is scheduled to decide on whether to extend ICGS's contract by June 2006, 1 year prior to the end of the first 5-year contract term. The Coast Guard chose to employ a "system of systems" acquisition strategy that would replace its aging Deepwater assets with a single, integrated package of new or modernized assets. ICGS acts as the system integrator to develop and deliver an improved integrated system of ships, aircraft, unmanned air vehicles, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), and supporting logistics. Background (cont'd) ICGS is responsible for designing, constructing, deploying, supporting, and integrating Deepwater assets. The Coast Guard maintains responsibility for oversight and overall management of the program. The Coast Guard uses several management tools to track progress in the program, such as monthly status reports, Earned Value Management System (EVMS), and an integrated master schedule. However, because data reliability with the integrated master schedule has been an area of concern for the Coast Guard, they are currently working with a private contractor and ICGS to address these concerns. Background (cont'd) GAO recently reported concerns with the Coast Guard's initial management of the Deepwater program and the potential for escalating costs. Key components needed to manage the Deepwater program and oversee the system integrator's performance have not been effectively implemented. Contract Management: Coast Guard's Deepwater Program Needs Increased Attention to Management and Contractor Oversight, GAO-04-380 (Washington, D.C.: Mar. 9, 2004). The most significant challenge to the Coast Guard is keeping the Deepwater program on schedule and within planned budget estimates through a well-managed and adequately funded effort. The Coast Guard estimates that the project's cost is now $2.2 billion more than the initial estimate. Coast Guard: Key Management and Budget Challenges for Fiscal Year 2005 and Beyond, GAO-04-636T (Washington, D.C.: Apr. 7, 2004). acquisition schedule is difficult to determine, because the Coast Guard does not maintain and update the acquisition schedule. The Coast Guard cannot readily and reliably present the integrated acquisition status of the Deepwater program. The Coast Guard's reasons for not updating the schedule include: Updating more regularly is impractical and unnecessary because Deepwater experiences numerous program changes each year and keeping track of those changes would consume too much funding, time, and personnel. Monthly status reports, EVMS, and other management tools are adequate for tracking Deepwater's acquisition. The Coast Guard intends to update the schedule prior to deciding whether to extend the first 5-year option to the contractor in 2007. Status of Acquisition Schedule (cont'd) Tracking the current integrated schedule on a major government investments or acquisitions similar to the Deepwater program is important because identifying potential risks in major acquisitions as early as possible is important so problems can be avoided or minimized. The ability to achieve scheduled events is a key indicator of risk. cost, schedule, and performance are fundamental to the Congress's oversight of major acquisitions. By law, DOD's major defense acquisition programs have to report cost, schedule, and performance updates to the Congress at least annually and whenever cost and schedule thresholds are breached. 10 U.S.C. Sections 2430, 2432, 2433, and 2435, on major defense acquisition programs. In practice, schedules on major defense acquisitions are continually monitored and reported to DOD management on a quarterly basis. DOD Practice: Interim Defense Acquisition Guidebook (October 2002). GAO best practices reports: Best Practices: Better Matching of Needs and Resources will Lead to Better Weapon System Outcomes, GAO- 01-288 (Mar. 8, 2001); Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, but More Controls are Needed, GAO 04- 53 (Nov. 10, 2003); and Defense Acquisitions: Assessments of Major Weapons Programs, GAO-04-248 (Mar. 31, 2004). They only only track the schedules of individual assets at the lowest, most detailed level and not at the integrated level. The integrated master schedule has data reliability problems. The monthly status reports do not translate the progress of individual assets into an overall Deepwater acquisition schedule. A February 2004 status report noted that because there was no accurate overall integrated schedule for the command and control design, the linkages with the development of other assets were largely unknown. schedule, our analysis showed that a number of key Deepwater assets would be delivered later than originally scheduled. Status of Acquisition Schedules for Selected Assets (cont'd) Part of the additional $168 million in funding allowed the Coast Guard to start work delayed from fiscal year 2003 or to start work originally scheduled for fiscal year 2004. Atlantic area Pacific area Greater antilles section, San Juan, P.R. 2004 will not fully return Deepwater to its original 2002 acquisition schedule. Reason 1: A cumulative shortfall of $39 million still exists. Reason 2: The additional amount did not fund all work planned for fiscal year 2004; some will be delayed to fiscal year 2005 or beyond. Type of asset or work delayed to fiscal year 2005 or beyond C4ISR Modification of 270 Class Cutter ships 10,13 CAMS CC-2 Low Rate of Initial Production COMMSTA CC-2 Low Rate of Initial Production (CSTA-01,02,03,04,05,06) Production and Deployment for Major Modification of 110/123 Class Patrol Cutter Lot 5 (follow ships 13-20) Coast Guard Air Station (CGAS) Production and Deployment Aircraft Repair and Supply Center (AR&SC) Production and Deployment Aircraft Training Center (ATC) Production and Deployment Aviation Technical Training Center (ATTC) Production and Deployment Production and Deployment of MPA Low rate of initial production (aircraft 7-9) Impact of Additional Funding (cont'd) Reason 3: Some assets are so far behind schedule that it is impossible to return them to their original schedule. Nine maritime patrol aircraft were originally planned for delivery by the end of 2005; current plans show 2 to be delivered by the end of 2006. Eighteen conversions of 110-foot patrol boats to 123 feet were originally planned for delivery by the end of 2005; current plans show 8 to be completed by the end of 2005. than funding. Greater than anticipated hull corrosion in the 110-foot patrol boats has delayed their conversion to 123 feet and delivery several months. Legacy cutters are scheduled to receive a C4ISR upgrade of higher speed International Maritime Satellite service. However, the availability of the higher speed service has been delayed several times from early 2003 to the Coast Guard's current projection of June 2004. scheduled to begin for several years. In keeping with fiscal year 2004 appropriations conference committee directives for how the additional amount was to be spent, $20 million went to begin the design phase for the Offshore Patrol Cutter (OPC). The Coast Guard had planned to begin the design phase about 2010 for delivery of the first OPC in 2012; current estimate is that the acquisition schedule has been accelerated by several years. Incorporation of new homeland security requirements into the Deepwater mission needs statement is still under way. In May 2004, the DHS Joint Requirements Council conditionally accepted it and directed the Coast Guard to develop new total ownership cost estimates for submission to and approval by the DHS Investment Review Board in October 2004. Coast Guard officials said the revision's main impact will be an increase in number of assets. RAND concluded in an April 2004 study that the Coast Guard probably needs twice as many cutters and 50 percent more aircraft. In the interim, some requirements changes have been made to individual assets, mainly the National Security Cutter. Operating requirement for chemical-biological-radiological-nuclear defense capabilities was expanded to enable the cutter to operate in a contaminated environment, not just pass through it. Size of flight deck enlarged to accommodate Navy, Army, and Customs and Border Protection Agency models of the H-60 helicopter. Shipboard sensitive compartmented information facility added for collection and use of intelligence. used for Deepwater program. $12.6 million in fiscal years 2002-03 was for testing/evaluating an intermediate gun system for the National Security Cutter (and possibly other cutters). $12.5 million in fiscal year 2004 was for combat systems suites for the National Security Cutter. The Navy did not transfer the $25.1 million to the Coast Guard but will transfer the resulting equipment. Through a 1987 agreement, the Navy provides to the Coast Guard all Navy-owned, military readiness equipment and associated support materials that the Navy deems necessary to enable the Coast Guard to carry out assigned missions while operating with the Navy. Upon declaration of war, or when the President directs, the Coast Guard operates as a service of the Navy and is subject to the orders of the Secretary of the Navy. not worth the time and cost involved. Absence of an up-to-date integrated acquisition schedule for Deepwater is a concern, because it is a symptom of the larger issues related to whether this complicated acquisition is being adequately managed. The recent disclosure by the Coast Guard that Deepwater costs have risen by an estimated $2.2 billion points to the need for a clear understanding of what is being acquired, when it is being acquired, and at what cost. Maintaining a current integrated schedule for a DOD acquisition of such scope is a fundamental and necessary practice. Evolving mission requirements and the need to evaluate contractor performance for contract renewal heighten need for timely and accurate information so the Coast Guard and Congress can base decisions on accurate information. We recommend the Secretary of Homeland Security direct the Commandant of the Coast Guard to update the original 2002 Deepwater acquisition schedule in time to support the fiscal year 2006 Deepwater budget submission to the Department of Homeland Security and Congress and at least once a year thereafter to support each budget submission. The updated schedule should include the current status of asset acquisition phases (such as concept technology and design, system development and demonstration, and fabrication); interim phase milestones (such as preliminary and critical design reviews, installation, and testing); and the critical paths linking the delivery of individual components to particular assets.
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In 2002, the Coast Guard began its $17 billion, 20-year Integrated Deepwater System acquisition program to replace or modernize its cutters, aircraft, and communications equipment for missions generally beyond 50 miles from shore. During fiscal years 2002-03, Deepwater received about $125 million less than the Coast Guard had planned. In fiscal year 2004, Congress appropriated $668 million, $168 million more than the President's request. GAO has raised concern recently about the Coast Guard's initial management of Deepwater and the potential for escalating costs. GAO was asked to review the status of the program against the initial acquisition schedule and determine the impact of the additional $168 million in fiscal year 2004 funding on this schedule. The degree to which the Deepwater program is on track with its original 2002 integrated acquisition schedule is difficult to determine because the Coast Guard has not updated the schedule. Coast Guard officials said they have not updated it because of the numerous changes Deepwater experiences every year and the cost, personnel, and time involved. However, in similar acquisitions--those of the Department of Defense (DOD)--cost, schedule, and performance updates are fundamental to congressional oversight. DOD is required to update the schedule at least annually and whenever cost and schedule thresholds are breached. In practice, DOD continually monitors and reports schedules for management on a quarterly basis. Updating the acquisition schedule--including phases such as design and fabrication, interim phase milestones, and critical paths linking assets-- on a more timely basis is imperative so that annual Coast Guard budget submissions can allow Congress to base decisions on accurate information. GAO used available data to develop the current acquisition status for a number of selected Deepwater assets and found that they have experienced delays and are at risk of being delivered later than anticipated. The additional $168 million in fiscal year 2004, while allowing the Coast Guard to conduct a number of Deepwater projects that had been delayed or would not have been funded in fiscal year 2004, will not fully return the program to its original 2002 acquisition schedule. Reasons include: all work originally planned for fiscal year 2004 was not funded and some will have to be delayed to fiscal year 2005; delivery of some assets has fallen so far behind schedule that ensuring their original delivery dates is impossible; and nonfunding reasons have caused delays, such as greater than expected hull corrosion of patrol boats delaying length extension upgrades.
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The 1935 Social Security Act mandated coverage for most workers in commerce and industry, which at that time comprised about 60 percent of the workforce. State and local government employees were excluded because they had their own retirement systems and there was concern over the question of the federal government's right to impose a tax on state governments. Subsequently, the Congress extended mandatory Social Security coverage to most of the excluded groups, including state and local employees not covered by a public pension plan. The Congress also extended voluntary coverage to state and local employees covered by public pension plans. Since 1983, however, public employers have not been permitted to withdraw from the program once they are covered. SSA estimates that 96 percent of the workforce, including 70 percent of the state and local government workforce, is now covered by Social Security. Social Security provides retirement, disability, and survivor benefits to insured workers and their dependents. Insured workers are eligible for full retirement benefits at age 65 and reduced benefits at age 62. Social security retirement benefits are based on the worker's age and career earnings, are fully indexed for inflation after retirement, and replace a relatively higher proportion of the final year's wages for low earners. Social Security's primary source of revenue is the Old Age, Survivors, and Disability Insurance portion of the payroll tax paid by employers and employees. The payroll tax is 6.2 percent of earnings each for employers and employees, up to an established maximum. SSA estimates that 5 million state and local government employees, excluding students and election workers, are not covered by Social Security. SSA also estimates that annual wages for noncovered employees total about $132.5 billion. Seven states--California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas--account for more than 75 percent of the noncovered payroll. A 1995 survey of public pension plans found that police, firefighters, and teachers are more likely to occupy noncovered positions than other employees. specified benefit rate for each year of service and the member's final average salary over a specified time period, usually 3 years. For example, plans with a 2-percent rate replace 60 percent of a member's final average salary after 30 years of service. In addition to retirement benefits, a 1994 Department of Labor survey found that all members have a survivor annuity option, 91 percent have disability benefits, and 62 percent receive some cost-of-living increases after retirement. As part of our study, we examined nine state and local defined benefit plans covering over 2 million employees. For those plans, employer contributions ranged from 6 to 14.5 percent of payroll and employee contributions ranged from 6.4 to 9.3 percent of payroll. (See the appendix.) Extending mandatory Social Security coverage to states and localities with noncovered workers would reduce the trust funds' long-term financial shortfall, increase program participation, and simplify program administration. SSA estimates that mandatory coverage would reduce Social Security's financial shortfall by about 10 percent--from 2.19 percent of payroll (a present discounted value of $3.1 trillion) to 1.97 percent of payroll (a present discounted value of $2.9 trillion)--over a 75-year period. Figure 1 shows that mandatory coverage would also extend the program's solvency by about 2 years, from 2032 to 2034. As with most other elements of the reform proposals put forward by the 1994-1996 Social Security Advisory Council, such as raising the retirement age, extending mandatory coverage to newly hired state and local employees would resolve only a part of the trust funds' solvency problem. A combination of adjustments will be needed to extend the program's solvency over the entire 75-year period. Council stated that mandatory coverage is basically "an issue of fairness." The Advisory Council report stated that "an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where practically all contribute to Social Security, while a few benefit both directly and indirectly but are excused from contributing to the program." Mandatory coverage would also simplify program administration in the long run. SSA's Office of Research, Evaluation, and Statistics estimates that 95 percent of noncovered state and local employees become entitled to Social Security as either workers, spouses, or dependents. SSA's Office of the Chief Actuary estimates that 50 to 60 percent of noncovered employees will be fully insured by age 62 from covered employment. The Congress has established the government pension offset and windfall elimination provisions to reduce the unfair advantage that workers who are eligible for pension benefits based on noncovered employment might have when they apply for Social Security benefits. The earnings histories for workers with noncovered earnings may appear to qualify them for the higher earnings replacement rates that Social Security assigns to lower earners, when in fact they have substantial income from public pension plans. With some exceptions, the government pension offset and windfall elimination provisions require SSA to use revised formulas to calculate benefits for workers with noncovered employment. However, a separate GAO study for the Chairman of this Subcommittee indicates that SSA is often unable to determine whether applicants should be subject to the government pension offset or windfall elimination provisions. We estimate that failure to reduce benefits for federal, state, and local employees caused $160 million to $355 million in overpayments between 1978 and 1995. In response, SSA plans to perform additional computer matches with the Office of Personnel Management and the Internal Revenue Service (IRS) to get noncovered pension data in order to ensure that these provisions are applied. Mandatory coverage would reduce benefit adjustments by gradually reducing the number of employees in noncovered jobs. Eventually, all state and local employees, with the exception of a few categories of workers, such as students and election workers, would be in covered employment. Additionally, in 1995, SSA asked its Inspector General to undertake a review of state and local government employers' compliance with Social Security coverage provisions. In December 1996, SSA's Office of the Inspector General reported that Social Security provisions related to coverage of state and local employees are complex and difficult to administer. The report stated that few resources were devoted to training state and local officials and ensuring that administration and enforcement roles and responsibilities are clearly defined. The report concluded that there is a significant risk of sizeable noncompliance with state and local coverage provisions. In response, SSA and IRS, which is responsible for collecting Social Security payroll taxes, initiated an effort to educate employers and ensure compliance with legal requirements for withholding Social Security payroll taxes. If all newly hired public employees were to receive mandated Social Security coverage, they would have the income protection afforded by Social Security. Also, they and their employers would pay the combined Social Security payroll tax of 12.4 percent of payroll. Each state and locality with noncovered workers would decide how to respond to the increase in retirement costs and benefits. They could absorb the added cost and leave current pension plans unchanged or eliminate plans completely. From discussions with state and local representatives, however, we believe states and localities with noncovered workers would likely adjust their pension plans to reflect Social Security's costs and benefits. To illustrate the implications of mandatory coverage to employers and employees, we examined three possible responses: States and localities could maintain similar benefits for current and newly hired employees. This response would likely result in an increase in total retirement costs and some additional benefits for many newly hired employees. States and localities could examine other pension plans that are already coordinated with Social Security and provide newly hired employees with similar benefits. This response would also likely increase costs and benefits for newly hired employees. States and localities could maintain level retirement spending. This response could require a reduction in pension benefits. According to pension plan representatives, each of these responses to mandatory coverage would result in reduced contributions to current plans, which could affect long-term financing of the plans. States and localities with noncovered workers could opt to provide newly hired employees with Social Security and pension benefits that, in total, approximate the pension benefits of current employees. Studies indicate that such an option could increase retirement costs by 7 percent of new-employee payroll. Using SSA's data and its assumption that mandatory coverage would start January 1, 2000, a 7 percent of payroll increase in retirement costs for newly hired employees would mean additional costs to states and localities with noncovered workers of about $9.1 billion over the first 5 years. A 1980 study of the costs of providing Social Security coverage for noncovered workers provides support for the estimated 7 percent of payroll increase. The Universal Social Security Coverage Study Group developed options for mandatory coverage of employees at all levels of government and analyzed the fiscal effects of each option. The study group used two teams of actuaries to study over 40 pension plans. The study estimated that costs, including Social Security taxes and pension plan contributions, would need to increase an average of 2 to 7 percent of payroll to maintain level benefits for current and newly hired employees. The study assumed that most newly hired employees would have salary replacement percentages in their first year of retirement that would be comparable to those provided to current employees. For example, employees retiring before age 62 would receive a temporary supplemental pension benefit to more closely maintain the benefits of the current plan. Since Social Security benefits are fully indexed for inflation and many pension plans have limited or no cost-of-living protection, total lifetime benefits for many newly hired employees would be greater than those provided to current employees. Existing pension plan disability and survivor benefits were also adjusted to reflect Social Security disability and survivor benefits. example, a December 1997 study for a plan in Ohio indicated that providing retirement and other benefits for future employees that, when added to Social Security benefits, approximate benefits for current employees would require an increase in contributions of 6 to 7 percent of new-employee payroll. A 1997 study for a pension plan in Illinois indicated the increased payments necessary to maintain similar total benefits for current and future employees would be about 6.5 percent of new-employee payroll. The 1980 study stated that the causes of the cost increase cannot be ascribed directly to specific Social Security or pension plan provisions. The study also states, however, that certain Social Security and pension plan provisions are among the most important factors contributing to the cost increase. Social Security is fully indexed for cost-of-living increases, is completely portable, and provides substantial additional benefits for spouses and dependents. In addition, pension plans would need to provide special supplemental benefits for employees who retire before age 62, especially in police and firefighter plans. The study also found that the magnitude of the cost increase would depend on the pension plan's current benefits. Cost increases would be less for plans that already provide disability, survivor, and other benefits similar to those provided by Social Security because those plans would be able to eliminate duplicate benefits. About 70 percent of the state and local workforce is already covered by Social Security. If coverage is mandated, states and localities with noncovered employees could decide to provide newly hired employees with pension plan benefits similar to those provided to currently covered employees. The 1980 study examined this option and concluded that implementation would increase costs by 6 to 14 percent of payroll--or 3 to 11 percent of payroll after eliminating the Medicare tax. The study also found that most pension plans for covered employees did not provide supplemental retirement benefits for employees who retire before Social Security benefits are available. For most of the examined pension plans, the present value of lifetime benefits for employees covered by Social Security would be greater than the value of benefits for current noncovered employees. Our analysis of 1995 Public Pension Coordinating Council data also indicates that retirement costs for states and localities covered by Social Security are higher than the costs for noncovered states and localities. For the pension plans that responded to the survey, the average employee cost rate was about 9 percent of pay in covered plans, including Social Security taxes, and 8 percent of pay in noncovered plans. The average employer cost rate, excluding the cost of unfunded liabilities, was about 12 percent of payroll for employers in covered plans, including Social Security taxes, and 8 percent of payroll for employers in noncovered plans. These data also indicate that many employees in covered and noncovered plans, especially police and firefighters, retire before age 65, when covered employees would be eligible for full Social Security benefits. Our analysis indicates that covered employees who retire before age 65 initially have a lower salary replacement rate than noncovered employees. The average salary replacement rate with 30 years of service was 53 percent for members of Social Security covered plans and 64.7 percent for members of noncovered plans. At age 65, however, Social Security covered employees have a higher total benefit than noncovered employees. According to the Department of Labor's 1994 survey, for example, an employee age 65 with 30 years of service, final earnings of $35,000, and Social Security coverage had 87 percent of earnings replaced--51 percent by a pension plan and 36 percent by Social Security. The same employee with no Social Security coverage had 63 percent of earnings replaced by a pension plan. We did not compare the expected value of total lifetime benefits for covered and noncovered employees because amounts would vary depending on the benefits offered by each plan. original plan and the lower costs and benefits of the revised plan. Subsequently, however, newly hired general employees were limited to the reduced benefits. Several employee, employer, and plan representatives stated that spending increases necessary to maintain level retirement income and other benefits for current and future members would be difficult to achieve. They indicate that states and localities might decide to maintain current spending levels, which could result in reduced benefits under state and local pension plans for many employees. A June 1997 actuarial evaluation of an Ohio pension plan examined the impact on benefits of mandating Social Security coverage for all employees, assuming no increase in total retirement costs. The study concluded that level spending could be maintained if (1) salary replacement rates for employees retiring with 30 years of service were reduced from 60.3 percent to 44.1 percent, (2) current retiree health benefits were eliminated for both current and future employees, and (3) the funding period for the plan's unfunded accrued liability were extended from 27 years to 40 years. Most states and localities use a reserve funding approach to finance their pension plans. In reserve funding, employers--and frequently employees--make systematic contributions toward funding the benefits earned by active employees. These contributions, together with investment income, are intended to accumulate sufficient assets to cover promised benefits by the time employees retire. However, many public pension plans have unfunded liabilities. The nine plans that we examined, for example, have unfunded accrued liabilities ranging from less than 1 percent to over 30 percent of total liabilities. Unfunded liabilities occur for a number of reasons. For example, public plans generally use actuarial methods and assumptions to calculate required contribution rates. Unfunded liabilities can occur if a plan's actuarial assumptions do not accurately predict reality. Additionally, retroactive increases in plan benefits can create unfunded liabilities. Unlike private pension plans, the unfunded liabilities of public pension plans are not regulated by the federal government. States or localities determine how and when unfunded liabilities will be financed. Mandatory coverage and the resulting changes to plan benefits for newly hired employees are likely to result in reduced contributions to the current pension plan. The impact of reduced contributions on plan finances would depend on the actuarial method and assumptions used by each plan, the adequacy of current plan funding, and other factors. For example, plan representatives are concerned that efforts to provide adequate retirement income benefits for newly hired employees would affect employers' willingness or ability to continue amortizing their current plans' unfunded accrued liabilities. Mandatory coverage presents several legal and administrative issues, and states and localities could require several years to design, legislate, and implement changes to current pension plans. Mandating Social Security coverage for state and local employees could elicit a constitutional challenge. We believe that mandatory coverage is likely to be upheld under current Supreme Court decisions. Several employer, employee, and plan representatives with whom we spoke stated that they believe mandatory Social Security coverage would be unconstitutional and should be challenged in court. However, recent Supreme Court cases have affirmed the authority of the federal government to enact taxes that affect the states and to impose federal requirements governing the states' relations with their employees. A plan representative suggested that the Court might now come to a different conclusion. He pointed out that a case upholding federal authority to apply minimum wage and overtime requirements to the states was a 5 to 4 decision and that until then, the Court had clearly said that applying such requirements to the states was unconstitutional. States and localities also point to several recent decisions of the Court that they see as sympathetic to the concept of state sovereignty. However, the facts of these cases are generally distinguishable from the situation that would be presented by mandatory Social Security coverage. Unless the Court were to reverse itself, which it seldom does, mandatory Social Security coverage of state and local employees is likely to be upheld. Current decisions indicate that mandating such coverage is within the authority of the federal government. The federal government required approximately 3 years to enact legislation to implement a new federal employee pension plan after Social Security coverage was mandated for federal employees in 1983. According to the 1980 Universal Social Security Coverage Study Group, transition problems for state and local employers would be different from those faced by the federal government. For example, benefit provisions vary among the thousands of public employee retirement plans, as do the characteristics of the employees covered by those plans. Additionally, state governments and many local governments have laws regulating pensions. The study group estimated that 4 years would be required to redesign pension formulas, legislate changes, adjust budgets, and disseminate information to employers and employees. Our discussions with employer, employee, and pension plan representatives also indicate that up to 4 years would be needed to implement a mandatory coverage decision. Additionally, constitutional provisions or statutes in some states may prevent employers from reducing benefits for employees once they are hired. These states may need to immediately enact legislation to draw a line between current and future employees until decisions are made concerning the pension benefits for new employees who would be covered by Social Security. According to the National Conference of State Legislators, legislators in seven states, including Texas and Nevada, meet only biennially. Therefore, the initial legislation could require 2 years in those states. In deciding whether to extend mandatory Social Security coverage to all newly hired state and local employees, the Congress will need to weigh several factors. First, the Social Security program would benefit from mandatory coverage. The long-term actuarial deficit would be reduced, and the trust funds' solvency would be extended for about 2 years. However, there are other considerations besides this relatively small contribution to the program's solvency. Mandatory coverage would also increase participation in an important national program and simplify program administration. approximate the benefits provided to current workers. At the same time, Social Security would provide newly hired employees with benefits that are not available, or are available to a lesser extent, under current state and local pension plans. In addition, mandatory coverage would present legal and administrative issues. States and localities might attempt to halt mandatory Social Security coverage in court, although such a challenge is unlikely to be upheld. Finally, states and localities could require up to 4 years to implement mandatory coverage. Mr. Chairman, this concludes my prepared statement. At this time, I will be happy to answer any questions you or the other Subcommittee Members may have. SSA estimates that about 4 million of the approximately 5 million state and local employees not covered by Social Security are in the seven states with the largest number of noncovered workers. (See table I.1.) Number of noncovered employees (in thousands) The nine public pension plans included in our study have about 2 million members. For the most part, members of these plans are not covered by Social Security. (See table I.2.) The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO discussed extending mandatory Social Security coverage to all newly hired state and local government employees, focusing on: (1) the implications of mandating such coverage for the Social Security program, public employers, newly hired employees, and the affected pension plans; and (2) potential legal and administrative issues associated with implementing mandatory coverage. GAO noted that: (1) mandating coverage for all newly hired public employees would reduce Social Security's long-term financial shortfall by about 10 percent, increase participation in an important national program, and simplify program administration; (2) the impact on public employers, employees, and pension plans would depend on how states and localities with noncovered employees would react to these new coverage provisions; (3) one often-discussed option would be for public employers to modify their pension plans in response to mandatory Social Security coverage; (4) costs would likely increase for those states and localities that wanted to keep their enhanced benefits for newly hired employees; (5) alternatively, states and localities that wanted to maintain level spending for retirement would likely need to reduce some pension benefits; (6) regardless, mandating coverage for public employees would present legal and administrative issues that would need to be resolved; (7) in deciding whether to extend mandatory Social Security coverage to all newly hired state and local employees, Congress would need to weigh several factors: (a) the Social Security program would benefit from mandatory coverage; (b) the long-term actuarial deficit would be reduced; and (c) the trust funds' solvency would be extended for about 2 years; (8) states and localities with noncovered workers would likely need to increase total retirement spending to provide future workers with pension benefits that, when combined with Social Security benefits, approximate the benefits provided to current workers; (9) at the same time, Social Security would provide newly hired employees with benefits that are not available, or are available to a lesser extent, under current state and local pension plans; (10) states and localities might attempt to halt mandatory Social Security coverage in court, although such a challenge is unlikely to be upheld; and (11) states and localities could require up to 4 years to implement mandatory coverage.
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The Great Lakes Basin is a large area that extends well beyond the five lakes proper to include their watersheds, tributaries, connecting channels, and a portion of the St. Lawrence River. The basin encompasses nearly all of the state of Michigan and parts of Illinois, Indiana, Minnesota, New York, Ohio, Pennsylvania, Wisconsin, and the Canadian province of Ontario. The lakes form the largest freshwater system on earth, accounting for 20 percent of the world's fresh surface water and over 95 percent of the U.S. fresh surface water supply for the contiguous 48 states. Millions of people in the United States and Canada rely on the five Great Lakes--Superior, Michigan, Erie, Huron, and Ontario--as a principal source of their drinking water, recreation, and economic livelihood. Over time, industrial, agricultural, and residential development on lands adjacent to the lakes have seriously degraded the lakes' water quality, posing threats to human health and the environment, and forcing restrictions on activities, such as swimming and fish consumption. To protect the Great Lakes Basin and to address water quality problems, the governments of the United States and Canada entered into the bilateral Great Lakes Water Quality Agreement in 1972. In the agreement, the United States and Canada agreed to restore and maintain the chemical, physical, and biological integrity of the Great Lakes Basin. A new agreement with the same name was reached in 1978, and amended in 1983 and 1987. The agreement prescribes prevention and cleanup measures to improve environmental conditions in the Great Lakes. The agreement obligates the International Joint Commission (IJC), an international body, to assist and to report on the implementation of the agreement. The Clean Water Act directs EPA to lead efforts to meet the goals of the Great Lakes Water Quality Agreement and establishes GLNPO within EPA, charging it with, among other things, cooperating with federal, state, tribal, and international agencies to develop action plans to carry out the U.S. responsibilities under the agreement. GLNPO is further responsible for coordinating the agency's actions both in headquarters and in the regions to improve Great Lakes' water quality. In addition to GLNPO, numerous federal, state, binational, and nonprofit organizations conduct activities that focus on improving the overall Great Lakes Basin environment or some specific environmental issue within the basin. About 200 programs--148 federal and 51 state--fund restoration activities within the Great Lakes Basin. Most of these programs, however, involve the localized application of national or state environmental initiatives and do not specifically focus on basin concerns. Officials from 11 federal agencies identified 115 of these broadly scoped federal programs, and officials from seven of the eight Great Lakes states identified 34 similar state programs. EPA administers the majority of the federal programs that provide a broad range of environmental activities involving research, cleanup, restoration, and pollution prevention. For example, EPA's nationwide Superfund program funds cleanup activities at contaminated areas throughout the basin. While these broadly scoped federal and state programs contribute to basin restoration, program officials do not track or try to isolate the portion of funding going to specific areas like the basin, making it difficult to determine their contribution to total Great Lakes spending. However, basin-specific information was available on some of these programs. Specifically, basin related expenditures for 53 of the 115 broadly scoped federal programs totaled about $1.8 billion in fiscal years 1992 through 2001. Expenditures for 14 broadly scoped state funded programs totaled $461.3 million during approximately the same time period. Several federal and state programs were specifically designed to focus on environmental conditions across the Great Lakes Basin. Officials from seven federal agencies identified 33 Great Lakes-specific programs that had expenditures of $387 million in fiscal years 1992 through 2001. Most of these programs funded a variety of activities, such as research, cleanup, or pollution prevention. An additional $358 million was expended for legislatively directed Corps of Engineers projects in the basin, such as a $93.8 million project to restore Chicago's shoreline. Officials from seven states reported 17 Great Lakes specific programs that expended about $956 million in 1992 through 2001, with Michigan's programs accounting for 96 percent of this amount. State programs focused on unique state needs, such as Ohio's program to control shoreline erosion along Lake Erie, and Michigan's program to provide bond funding for environmental activities. Besides federal and state government agencies, other organizations, such as foundations, fund a variety of restoration activities in the Great Lakes Basin by approving grants to nonprofit and other organizations. Other governmental and nongovernmental organizations fund restoration activities. For example, individual municipalities, township governments, counties, and conservation districts are involved in various restoration activities. Restoration of the Great Lakes Basin is a major endeavor involving many environmental programs and organizations. The magnitude of the area comprising the basin and the numerous environmental programs operating within it require the development of one overarching strategy to address and manage the complex undertaking of restoring the basin's environmental health. The Great Lakes region cannot hope to successfully receive support as a national priority without a comprehensive, overarching plan for restoring the Great Lakes. In lieu of such a plan, organizations at the binational, federal, and state levels have developed their own strategies for the Great Lakes, which have inadvertently made the coordination of various programs operating in the basin more challenging. The Great Lakes Basin needs a comprehensive strategy or plan similar to those developed for other large ecosystem restoration efforts, such as the ones for the South Florida ecosystem and the Chesapeake Bay. In South Florida, federal, state, local and tribal organizations joined forces to participate on a centralized task force formalized in the Water Resource Development Act of 1996. The strategic plan developed for the South Florida ecosystem by the task force made substantial progress in guiding the restoration activities. The plan identifies the resources needed to achieve restoration and assigns accountability for specific actions for the extensive restoration effort estimated to cost $14.8 billion. The Chesapeake Bay watershed also has an overarching restoration strategy stemming from a 1983 agreement signed by the states of Maryland, Virginia, and Pennsylvania; the District of Columbia; the Chesapeake Bay Commission; and EPA. This agreement was the basis for a program to protect and restore this ecosystem. The implementation of this strategy has resulted in improvements in habitat restoration and aquatic life, such as increased forested buffer zone and shad population. Several organizations have developed strategies for the basin at the binational, federal, or state levels that address either the entire basin or the specific problems in the Great Lakes. EPA's Great Lakes Strategy 2002, developed by a committee of federal and state officials, is the most recent of these strategies. While this strategy identified restoration objectives and planned actions by various federal and state agencies, it is largely a description of existing program activity relating to basin restoration. State officials told us that the states had already planned the actions described in it, but that these actions were contingent on funding for specific environmental programs. The strategy included a statement that it should not be construed as a commitment for additional funding or resources, and it did not provide a basis for prioritizing activities. In addition, we identified other strategies that addressed particular contaminants, restoration of individual lakes, or cleanup of contaminated areas. Ad hoc coordination takes place among federal agencies, states, and other environmental organizations in developing these strategies or when programmatic activity calls for coordination. Other Great Lakes strategies address unique environmental problems or specific geographical areas. For example, a strategy for each lake addresses the open lake waters through Lakewide Management Plans (LaMP), which EPA is responsible for developing. Toward this end, EPA formed working groups for each lake to identify and address restoration activities. For example, the LaMP for Lake Michigan, issued in 2002, includes a summary of the lake's ecosystem status and addresses progress in achieving the goals described in the previous plan, with examples of significant activities completed and other relevant topics. However, EPA has not used the LaMPs to assess the overall health of the ecosystem. The Binational Executive Committee for the United States and Canada issued its Great Lakes Binational Toxics Strategy in 1997 that established a collaborative process by which EPA and Environment Canada, in consultation with other federal departments and agencies, states, the province of Ontario, and tribes, work toward the goal of the virtual elimination of persistent toxic substances in the Great Lakes. The strategy was designed to address particular substances that bioaccumulate in fish or animals and pose a human health risk. Michigan developed a strategy for environmental cleanup called the Clean Michigan Initiative. This initiative provides funding for a variety of environmental, parks, and redevelopment programs. It includes nine components, including Brownfields redevelopment and environmental cleanups, nonpoint source pollution control, clean water, cleanup of contaminated sediments, and pollution prevention. The initiative is funded by a $675 million general obligation bond and as of early 2003; most of the funds had not been distributed. Although there are many strategies and coordination efforts ongoing, no one organization coordinates restoration efforts. We found that extensive strategizing, planning, and coordinating have not resulted in significant restoration. Thus, the ecosystem remains compromised and contaminated sediments in the lakes produce health problems, as reported by the IJC. In addition to the absence of a coordinating agency, federal and state officials cited a lack of funding commitments as a principal barrier impeding restoration progress. Inadequate funding has also contributed to the failure to restore and protect the Great Lakes, according to the IJC biennial report on Great Lakes water quality issued in July 2000. The IJC restated this position in a 2002 report, concluding that any progress to restore the Great Lakes would continue at a slow incremental pace without increased funding. In its 1993 biennial report, the IJC concluded that remediation of contaminated areas could not be accomplished unless government officials came to grips with the magnitude of cleanup costs and started the process of securing the necessary resources. Despite this warning, however, as we reported in 2002, EPA reduced the funding available for ensuring the cleanup of contaminated areas under the assumption that the states would fill the funding void. States, however, did not increase their funding, and restoration progress slowed or stopped altogether. Officials for 24 of 33 federal programs and for 3 of 17 state programs reported insufficient funding for federal and state Great Lakes specific programs. Ultimate responsibility for coordinating Great Lakes restoration programs rests with GLNPO; however, GLNPO has not fully exercised this authority. Other organizations or committees have formed to assume coordination and strategy development roles. The Clean Water Act provides GLNPO with the authority to fulfill the U.S. responsibilities under the GLWQA. Specifically, the act directs EPA to coordinate the actions of EPA's headquarters and regional offices aimed at improving Great Lakes water quality. It also provides GLNPO authority to coordinate EPA's actions with the actions of other federal agencies and state and local authorities for obtaining input in developing water quality strategies and obtaining support in achieving the objectives of the GLWQA. The act also provides that the EPA Administrator shall ensure that GLNPO enters into agreements with the various organizational elements of the agency engaged in Great Lakes activities and with appropriate state agencies. The agreements should specifically delineate the duties and responsibilities, time periods for carrying out duties, and resources committed to these duties. GLNPO officials stated that they do not enter into formal agreements with other EPA offices, but rather fulfill their responsibilities under the act by having federal agencies and state officials agree to the restoration activities contained in the Great Lakes Strategy 2002. However, the strategy does not represent formal agreements to conduct specific duties and responsibilities with committed resources. EPA's Office of Inspector General reported the absence of these agreements in September 1999. The report stated that GLNPO did not have agreements as required by the act and recommended that such agreements be made to improve working relationships and coordination. To improve coordination of Great Lakes activities and ensure that federal dollars are effectively spent, we recommended that the Administrator, EPA, ensure that GLNPO fulfills its responsibility for coordinating programs within the Great Lakes Basin; charge GLNPO with developing, in consultation with the governors of the Great Lakes states, federal agencies, and other organizations, an overarching strategy that, clearly defines the roles and responsibilities for coordinating and prioritizing funding for projects; and submit a time-phased funding requirement proposal to the Congress necessary to implement the strategy. The Great Lakes Water Quality Agreement, as amended in 1987, calls for establishing a monitoring system to measure restoration progress and assess the degree that the United States and Canada are complying with the goals and objectives of the agreement. However, implementation of this provision has not progressed to the point that overall restoration progress can be measured or determined based on quantitative information. Recent assessments of overall progress, which rely on a mix of quantitative data and subjective judgments, do not provide an adequate basis for making an overall assessment. The current assessment process has emerged from a series of biennial State of the Lakes Ecosystem Conferences (SOLEC) initiated in 1994 for developing indicators agreed upon by conference participants. Prior to the 1987 amendments to the GLWQA, the 1978 agreement between the two countries also contained a requirement for surveillance and monitoring and for the development of a Great Lakes International Surveillance Plan. The IJC Water Quality Board was involved in managing and developing the program until the 1987 amendments placed this responsibility on the United States and Canada. This change resulted in a significant reduction in the two countries' support for surveillance and monitoring. In fact, the organizational structure to implement the surveillance plan was abandoned in 1990, leaving only one initiative in place--the International Atmospheric Deposition Network (IADN), a network of 15 air-monitoring stations located throughout the basin. With the surveillance and monitoring efforts languishing, IJC established the Indicators for Evaluation Task Force in 1993 to identify the appropriate framework to evaluate progress in the Great Lakes. In 1996, the task force proposed that nine desired measurements and outcomes be used to develop indicators for measuring progress in the Great Lakes. Shortly before the task force began its work, the United States and Canada had agreed to hold conferences every 2 years to assess the environmental conditions in the Great Lakes in order to develop binational reports on the environmental conditions to measure progress under the agreement. Besides assessing environmental conditions the conferences were focused on achieving three other objectives, including providing a forum for communication and networking among stakeholders. Conference participants included U.S. and Canadian representatives from federal, state, provincial, and tribal agencies, as well as other organizations with environmental restoration or pollution prevention interests in the Great Lakes Basin. The 1994 SOLEC conference culminated in a "State of the Great Lakes 1995" report, which provided an overview of the Great Lakes ecosystem at the end of 1994 and concluded that overall the aquatic community health was mixed or improving. The same assessment was echoed in the 1997 state of the lakes report. Meanwhile the IJC agreed that the nine desired outcome areas recommended by the task force would help assess overall progress. It recommended that SOLEC, during the conference in 2000, establish environmental indicators that would allow the IJC to evaluate what had been accomplished and what needed to be done for three of the nine indicators--the public's ability to eat the fish, drink the water, and swim in the water without any restrictions. However, the indicators developed through the SOLEC process and the accomplishments reported by federal and state program managers do not provide an adequate basis for making an overall assessment for Great Lakes restoration progress. The SOLEC process is ongoing and the indicators still being developed are not generally supported by sufficient underlying data for making progress assessments. The number of indicators considered during the SOLEC conferences has been pared down from more than 850 indicators in 1998 to 80 indicators in 2000, although data were available for only 33 of them. After the SOLEC 2000 conference, IJC staff assessed the indicators supported by data that measured the desired outcomes of swimmability, drinkability, and the edibility of fish in the Great Lakes. Overall, the IJC commended SOLEC's quick response that brought together information regarding the outcomes and SOLEC's ongoing efforts. The IJC, however, recognized that sufficient data were not being collected throughout the Great Lakes Basin and that the methods of collection, the data collection time frames, the lack of uniform protocols, and the incompatible nature of some data jeopardized their use as indicators. Specifically, for the desired outcome of swimmability, the IJC concurred that it was not always safe to swim at certain beaches, but noted that progress for this desired outcome was limited because beaches were sampled by local jurisdictions without uniform sampling or reporting methods. At the 2002 SOLEC conference, the number of indicators assessed by conference participants increased from 33 to 45. The IJC expressed concern that there are too many indicators, insufficient supporting backup data, and a lack of commitment and funding from EPA to implement and make operational the agreed upon SOLEC baseline data collection and monitoring techniques. The IJC recommended in its last biennial report in September 2002 that any new indicators should be developed only where resources are sufficient to access scientifically valid and reliable information. The information from the 2002 SOLEC conference culminated in the "State of the Great Lakes 2003" report, which concluded that the chemical, physical, and biological integrity of the basin is mixed based on assessments of 43 indicators. This conclusion was based on five positive signs of recovery, such as persistent toxic substances are continuing to decline, and seven negative signs, such as phosphorous levels are increasing in Lake Erie. The ultimate successful development and assessment of indicators for the Great Lakes through the SOLEC process are uncertain because insufficient resources have been committed to the process, no plan provides completion dates for indicator development and implementation, and no entity is coordinating the data collection. Even though the SOLEC process has successfully engaged a wide range of binational parties in developing indicators, the resources devoted to this process are largely provided on a volunteer basis without firm commitments to continue in the future. GLNPO officials described the SOLEC process as a professional, collaborative process dependent on the voluntary participation of officials from federal and state agencies, academic institutions, and other organizations attending SOLEC and developing information on specific indicators. Because SOLEC is a voluntary process, the indicator data resides in a diverse number of sources with limited control by SOLEC organizers. GLNPO officials stated that EPA does not have either the authority or the responsibility to direct the data collection activities of federal, state, and local agencies as they relate to surveillance and monitoring of technical data elements that are needed to develop, implement, and assess Great Lakes environmental indicators. Efforts are underway for the various federal and state agencies to take ownership for collecting and reporting data outputs from their respective areas of responsibility and for SOLEC to be sustained and implemented; each indicator must have a sponsor. However, any breakdown in submission of this information would leave a gap in the SOLEC indicator process. EPA supports the development of environmental indicators as evidenced by the fact that, since 1994, GLNPO has provided about $100,000 annually to sponsor the SOLEC conferences. Additionally, GLNPO spends over $4 million per year to collect surveillance data for its open-lake water quality monitoring program, which also provides supporting data for some of the indicators addressed by SOLEC. A significant portion of these funds, however, supports the operation of GLNPO's research vessel, the Lake Guardian, an offshore supply vessel converted for use as a research vessel. GLNPO also supports activities that are linked or otherwise feed information into the SOLEC process, including the following: collecting information on plankton and benthic communities in the Great Lakes for open water indicator development; sampling various chemicals in the open-lake waters, such as phosphorus for the total phosphorus indicator; monitoring fish contaminants in the open waters, directly supporting the indicator for contaminants in whole fish and a separate monitoring effort for contaminants in popular sport fish species that supports the indicator for chemical contaminants in edible fish tissue; and operating 15 air-monitoring stations with Environment Canada comprising the IADN that provides information for establishing trends in concentrations of certain chemicals and loadings of chemicals into the lakes. EPA uses information from the network to take actions to control the chemicals and track progress toward environmental goals. To better coordinate monitoring activities GLNPO and Environment Canada began developing a web-based inventory of monitoring activities in the Great Lakes Basin. The first workshop on developing this system was held in January 2002. Once development of this system is complete, organizations conducting monitoring activities will be requested to provide descriptive information about these monitoring activities and contact points for obtaining specific monitoring data. We are currently conducting a review for 20 members of Congress serving on the Great Lakes Task Force that further examines monitoring activities in the Great Lakes Basin. In this review we hope to identify some of the major challenges to developing a Great Lakes Basin monitoring system. Program officials frequently cite output data as measures of success rather than actual program accomplishments in improving environmental conditions in the basin. As a rule, program output data describe activities, such as projects funded, and are of limited value in determining environmental progress. For example, in reporting the accomplishments for Michigan's Great Lakes Protection Fund, officials noted that the program had funded 125 research projects over an 11-year period and publicized its project results at an annual forum and on a Web site. Similarly, the Lake Ontario Atlantic Salmon Reintroduction Program administered by the Department of Interior's Fish and Wildlife Service listed under its accomplishments the completion of a pilot study and technical assistance provided to a Native American tribe. Of the 50 federal and state programs created specifically to address conditions in the basin, 27 reported accomplishments in terms of outputs, such as reports or studies prepared or presentations made to groups. Because research and capacity building programs largely support other activities, it is particularly difficult to relate reported program accomplishments to outcomes. The federal and state environmental program officials responding to our evaluation generally provided output data or, as reported for 15 programs, reported that the accomplishments had not been measured for the programs. Only eight of the federal or state Great Lakes-specific programs reported outcome information, much of which generally described how effective the programs' activity or action had been in improving environmental conditions. For example, EPA's Region II program for reducing toxic chemical inputs into the Niagara River, which connects Lake Erie to Lake Ontario, reported reductions in priority toxics from 1986 through 2002 from ambient water quality monitoring. Other significant outcomes reported as accomplishments for the Great Lakes included (1) reducing phosphorus loadings by waste treatment plants and limiting phosphorus use in household detergents; (2) prohibiting the release of some toxicants into the Great Lakes, and reducing to an acceptable level the amount of some other toxicants that could be input; (3) effectively reducing the sea lamprey population in several invasive species infested watersheds; and (4) restocking the fish-depleted populations in some watersheds. To fulfill the need for a monitoring system called for in the GLWQA and to ensure that the limited funds available are optimally spent, we recommended that the Administrator, EPA, in coordination with Canadian officials and as part of an overarching Great Lakes strategy, (1) develop environmental indicators and a monitoring system for the Great Lakes Basin that can be used to measure overall restoration progress and (2) require that these indicators be used to evaluate, prioritize, and make funding decisions on the merits of alternative restoration projects. Mr. Chairman, this completes my prepared statement. I would be happy to answer any questions that 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 were Willie Bailey, Greg Carroll, Karen Keegan, Jonathan McMurray, and John Wanska. 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 five Great Lakes, which comprise the largest system of freshwater in the world, are threatened on many environmental fronts. To address the extent of progress made in restoring the Great Lakes Basin, which includes the lakes and surrounding area, GAO (1) identified the federal and state environmental programs operating in the basin and funding devoted to them, (2) evaluated the restoration strategies used and how they are coordinated, and (3) assessed overall environmental progress made in the basin restoration effort. There are 148 federal and 51 state programs funding environmental restoration activities in the Great Lakes Basin. Most of these programs are nationwide or statewide programs that do not specifically focus on the Great Lakes. However, GAO identified 33 federal Great Lakes specific programs, and 17 additional unique Great Lakes specific programs funded by states. Although Great Lakes funding is not routinely tracked for many of these programs, we identified a total of about $3.6 billion in basin-specific projects for fiscal years 1992 through 2001. Several disparate Great Lakes environmental strategies are being used at the binational, federal, and state levels. Currently, these strategies are not coordinated in a way that ensures effective use of limited resources. Without such coordination it is difficult to determine the overall progress of restoration efforts. The Water Quality Act of 1987 charged EPA's Great Lakes National Program Office with the responsibility for coordinating federal actions for improving Great Lakes' water quality; however, the office has not fully exercised this authority to this point. With available information, current environmental indicators do not allow a comprehensive assessment of restoration progress in the Great Lakes. Current indicators rely on limited quantitative data and subjective judgments to determine whether conditions are improving, such as whether fish are safe to eat. The ultimate success of an ongoing binational effort to develop a set of overall indicators for the Great Lakes is uncertain because it relies on the resources voluntarily provided by several organizations. Further, no date for completing a final list of indicators has been established.
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The four major federal land management agencies administer approximately 628 million acres, or about 28 percent of the land area in the United States. These public lands are mostly in Alaska and the 11 western states: Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming. Alaska is not currently participating in the FLTFA program because of its priority to settle Alaska Native land claims. BLM is authorized to sell or exchange land identified in its land use plans; the other three land management agencies have limited or no sales authority. Once BLM has sold land, FLTFA directs BLM to deposit the revenue generated from these sales into a special U.S. Treasury account created by FLTFA. However, the act limits the revenue deposited into this account to that generated from sales or exchanges of public lands identified for disposal in a land use plan in effect as of July 25, 2000--the date of FLTFA's enactment. Money in the new account is available to BLM and the other three agencies to purchase inholdings, and in some cases, land adjacent to federally designated areas that contain exceptional resources. The federal land management agencies have two methods for identifying land to acquire under FLTFA. First, the agencies can nominate parcels through a process laid out in state-level implementation agreements that were developed under the direction of a national memorandum of understanding (MOU). Second, the Secretaries can directly use a portion of FLTFA revenue to acquire specific parcels of land at their own discretion. The national MOU laid out the expectation that most acquisitions would occur through the state-level process. FLTFA places several restrictions on using funds from the new U.S. Treasury account. Among other things, FLTFA requires that (1) no more than 20 percent of the revenue can be used for BLM's administrative and other activities necessary to carry out the land disposal program; (2) of the amount not spent on administrative expenses, at least 80 percent must be expended in the state in which the funds were generated; and (3) at least 80 percent of FLTFA revenue required to be spent on land acquisitions within a state must be used to acquire inholdings (as opposed to adjacent land) within that state. In addition, the national MOU sets the allocation of funds from the FLTFA account for each agency--60 percent for BLM, 20 percent for the Forest Service, and 10 percent each for the Fish and Wildlife Service and the Park Service, but the Secretaries may vary from these allocations by mutual agreement. At the time of our review, BLM had raised $95.7 million in revenue, mostly from selling 16,659 acres. As of May 2007, about 92 percent of the revenue raised, or $88 million, came from land sales in Nevada. Revenue grew slowly during the first years of the program and peaked in fiscal year 2006, when a total of $71.1 million was generated. BLM's Nevada offices accounted for the lion's share of the sales because (1) demand for land to develop had been high in rapidly expanding population centers such as Las Vegas, (2) BLM had a high percentage of land in proximity to these centers, and (3) BLM had experience selling land under another federal land sales program authorized for southern Nevada. During the period we reviewed, BLM offices covering three other states--New Mexico, Oregon, and Washington--had raised over $1 million each, and the remaining seven BLM state offices--Arizona, California, Colorado, Idaho, Montana, Utah, and Wyoming--had each raised less than $1 million. Most BLM field offices had not generated revenue under FLTFA. As of August 2009, BLM reported raising a total of $113.4 million in revenue for the FLTFA account from the sale of about 29,400 acres. According to these revised BLM data, Nevada still accounted for the majority of FLTFA sales revenues--about $88 million, or 78 percent of the total revenue. BLM faces several challenges to raising revenue through future FLTFA sales, according to officials in the 10 BLM state offices and 18 BLM field offices we interviewed for our 2008 report. Many of these challenges are likely to continue if FLTFA is reauthorized. The following lists, in order of most frequently cited, the challenges officials identified and provides examples: The availability of knowledgeable realty staff to conduct the sales. BLM staff said realty staff must address higher priority work before land sales. For example, Colorado BLM staff said that processing rights-of-way for energy pipelines takes a huge amount of realty staff time, 100 percent in some field offices, and poses one of the top challenges to carrying out FLTFA sales in Colorado. In Idaho, staff also cited the lack of realty staffing, which was down 40 percent from 10 years ago. Time, cost, and complexity of the sales process. Much preparation must be completed before a property can be sold. For example, several offices cited the cost and length of the process to ensure that a sale complies with environmental laws and regulations. In addition, obtaining clearances from experts on cultural and natural resources on a proposed sale can be time-consuming. External factors. BLM officials cited such factors such as public opposition to a sale, market conditions, or lack of political support as challenges. For example, Colorado BLM officials said that they have faced strong local opposition to sales, and the El Centro Field Office staff in California cited the lack of demand for the land from buyers as a challenge. Program and legal restrictions. The Arizona State Office staff and the Elko, Nevada Field Office staff cited the sunset date of FLTFA, less than 3 years away at the time of our review, as a challenge to the disposal of land under FLTFA because the sunset date might not allow enough time to complete many more sales. Other offices said the MOU provision requiring a portion of the land sale proceeds to be used by the three other agencies reduces BLM's incentive to conduct land sales because BLM keeps only 60 percent of the revenue. Another challenge, especially in Nevada, has been the enactment of land bills for Lincoln and White Pine counties. In total, BLM staff estimated that, once mandated land use plan amendments were completed, these two acts would result in the removal of about 148,000 acres from FLTFA eligibility. Land use planning. Some offices cited problems with the land use plans. For example, the Idaho Falls District Office staff said that specific land for sale is hard to identify in old land use plans. Nevada's Elko Field Office staff said that some lands that could be offered for sale were not available because they were not designated in the land use plan at the time of FLTFA's enactment. We identified two additional issues hampering land sales activity under FLTFA. First, while BLM had identified land for sale in its land use plans, it had not made the sale of this land a priority during the first 7 years of the program. Furthermore, BLM had not set goals for sales or developed a sales implementation strategy. Second, some of the additional land BLM had identified for sale since FLTFA was enacted would not generate revenue for acquisitions because the act only allows the deposit of revenue from the sale of lands identified for disposal on or before the date of the act. At the time of our review, BLM had reported that the four land management agencies had spent $13.3 million of the $95.7 million in the FLTFA account. More specifically: The four agencies spent $10.1 million to acquire nine parcels totaling 3,381 acres in seven states--Arizona, California, Idaho, Montana, New Mexico, Oregon, and Wyoming. BLM spent $3.2 million for administrative expenses between 2000 and 2007 to conduct FLTFA-eligible sales, primarily in Nevada. The agencies acquired these lands between August 2007 and January 2008--more than 7 years after FLTFA was enacted. These acquisitions were initiated using the Secretaries' discretion, and most had been identified but not funded for purchase under another land acquisition program. As of October 2007, no land had been purchased through the state-level interagency nomination process that was established by the national MOU and state agreements. Acquisitions had not yet occurred under the state-level process because it took 6 years to complete the interagency agreements needed to implement the program and because relatively little revenue was available for acquisitions outside of Nevada, owing to FLTFA requirements. As of November 2009, BLM reported the following: The Secretaries had approved $66.8 million for the acquisition of 39 parcels since FLTFA's enactment in 2000. Of the $66.8 million, agencies spent a total of about $43.8 million to acquire 28 parcels totaling 16,738 acres and the remainder of the approved acquisitions was being processed. $48.6 million of the $66.8 million in acquisitions for 22 parcels had been nominated through the state-level interagency process rather than through Secretarial discretion. Of the $48.6 million nominated through the state- level process, the agencies have acquired 12 parcels with $24.6 million in FLTFA funding. $5.1 million has been spent on FLTFA administrative expenses to conduct land sales overall. BLM state and field officials we interviewed for our 2008 report cited several challenges to completing additional acquisitions under FLTFA. Many of these challenges are likely to continue if FLTFA is reauthorized. The following lists, in order of most frequently cited, the challenges officials identified, and provides examples of these challenges. Time, cost, and complexity of the land acquisition process. To complete an acquisition under FLTFA, four agencies must work together to identify, nominate, and rank proposed acquisitions, which must then be approved by the two Secretaries. Officials at two field offices estimated the acquisition process took about 2-1/2 to 3 years. BLM officials from the Wyoming State Office and the Las Cruces, New Mexico, Field Office said that, with this length of time, BLM must either identify a very committed seller willing to wait to complete an acquisition or obtain the assistance of a third party in completing an acquisition. In terms of cost, some offices noted that they did not have the funding required to complete all of the work involved to prepare land acquisitions. In terms of complexity, a Utah State Office official said BLM has more control over the process for submitting land acquisitions under the Land and Water Conservation Fund than FLTFA because FLTFA requires four agencies in two departments to coordinate their efforts. Identifying a willing seller. Identification of a willing seller can be problematic because, among other things, the seller might have higher expectations of the property's value. For example, an Ely, Nevada, Field Office official explained that, because of the then-high real estate values, sellers believed they could obtain higher prices from developers than from the federal government. Furthermore, an Idaho State Office official said that it is difficult to find a seller willing to accept the appraised price and wait for the government to complete the purchase. Even when land acquisition nominations are approved, they may not result in a purchase. For example, in 2004, under FLTFA, two approved acquisitions for inholdings within a national forest in Nevada were terminated. In one case, property values rose sharply during the nomination process and, in an effort to retain some of his land, the seller decided to reduce the acres for sale but maintain the price expectation. Furthermore, the seller decided not to grant the Forest Service access through the parcel he was retaining, thus eliminating the opportunity to secure access to an inaccessible area of the national forest. In the other case, during the course of the secretarial approval process, the landowner sold portions of the land included in the original transaction to another party, reducing the land available for the Forest Service to purchase. According to Forest Service officials, in both cases the purchase of the remaining parcels would not fulfill the original purpose of the acquisitions owing to reductions in resource benefits. Therefore, the Forest Service terminated both projects. Availability of knowledgeable staff to conduct acquisitions. BLM officials reported that they lacked knowledgeable realty staff to conduct land acquisitions, as well as other BLM or department staff to conduct appraisals, surveys, and resource studies. Staff were occupied working on higher priority activities, particularly in the energy area. Lack of funding to purchase land. BLM officials in some states said they lack adequate funds to acquire land under FLTFA. For example, according to a field office official in Burns, Oregon, just one acquisition in a nearby conservation area would have nearly drained that state's FLTFA account. Restrictions imposed by laws and regulations. BLM officials said that legal and other restrictions pose a challenge to acquiring land. For example, officials in the BLM Arizona State Office and the Grand Junction, Colorado, Field Office said that some federally designated areas in their jurisdictions were established after the date of FLTFA's enactment, making the land within them ineligible for acquisition under the act. In terms of regulations, BLM Carson City, Nevada, Field Office officials told us that the requirements they must follow regarding the processing of title, survey, and hazardous materials issues posed a challenge to conducting acquisitions. Public opposition to land acquisitions. According to BLM officials from the Elko and Ely Field Offices in Nevada, the public did not support the federal government's acquisition of federal land in their areas, arguing that the government already owned a high percentage of land and that such acquisitions resulted in the removal of land from the local tax base. We also found that the act's restriction on the use of revenues outside of the state in which they were raised continues to limit acquisitions. Specifically, little revenue was, and still is available for acquisitions outside of Nevada. Furthermore, progress in acquiring priority land had been hampered by the agencies' weak performance in identifying inholdings and setting priorities for acquiring them, as required by the act. Finally, the agencies had yet to develop effective procedures to fully comply with the act and national MOU. Specifically, the agencies--and primarily BLM, as the manager of the FLTFA account--had not established a procedure to track the act's requirement that at least 80 percent of funds allocated toward the purchase of land within each state must be used to purchase inholdings and that up to 20 percent may be used to purchase adjacent land. And with respect to the national MOU, BLM had not established a procedure to track agreed-upon fund allocations--60 percent for BLM, 20 percent for the Forest Service, and 10 percent each for the Fish and Wildlife Service and the Park Service. In 2008, we concluded that 7 years after FLTFA had been enacted, BLM had not taken full advantage of the opportunity the act offered. We recognized that a number of challenges prevented BLM from completing many sales in most states, which limited the number of possible acquisitions. Many of the challenges that BLM cited are likely faced in many public land sales because FLTFA did not change the land sales process. However, we believed that BLM's failure to set goals for FLTFA sales and develop a sales implementation strategy limited the agency's ability to raise revenue for acquisitions. Without goals and a strategy to achieve them, BLM field offices did not have direction for FLTFA sales. Moreover, the lack of goals made it difficult to determine the extent of BLM's progress in disposing of unneeded lands to raise funds for acquisitions. As with sales, progress in acquiring priority land had been hampered by weak agency performance in developing an effective mechanism to identify potential land acquisitions and set priorities for inholdings and adjacent land with exceptional resources, which FLTFA requires. Moreover, because the agencies had not tracked the amounts spent on inholdings and agency allocations, they could not ensure compliance with the act or full implementation of the MOU. Our report contained two matters for congressional consideration and five recommendations for executive action. We said that if Congress decided to reauthorize FLTFA in 2010, it might wish to consider revising the following two provisions to better achieve the goals of the act: FLTFA's limitation of eligible land sales to those lands identified in land use plans in effect as of July 25, 2000. This provision excludes more recently identified land available for disposal, thereby reducing opportunities for raising additional revenue for land acquisition. The requirement that agencies spend the majority of funds raised from eligible sales for acquisitions in the same state. This provision makes it difficult for agencies to acquire more desirable land in states that have generated little revenue. Our report also contained five recommendations for executive action to improve FLTFA implementation. BLM has taken several actions to implement our recommendations. Table 1 shows the recommendations from our 2008 report and the actions the agencies reported as of November 2009. Table 1. GAO Recommendations to Improve FLTFA Implementation and Agency Actions, as of November 2009 August 2008. BLM established FLTFA land sale goals for fiscal years 2009 and 2010 of $25 million each, according to agency officials. To set these goals, a BLM headquarters official contacted each of the BLM state offices to determine the amount of eligible land sales that could be conducted in the final 2 years of FLTFA. Fall 2009. BLM revised its land sales goal for fiscal year 2010 to $20 million. August 2008. BLM developed a sales incentive program that provides seed money for planning and carrying out FLTFA-eligible land sales. Specifically, the program makes available up to $300,000 to eligible state and field offices for activities necessary to identify and pre-screen properties for possible sale under FLTFA. At a minimum, offices are to prepare a list of specific tracts for sale, with legal descriptions and a copy of the respective land use plan that supports the potential sale. As of November 2009, six states--Arizona, California, Colorado, Idaho, Montana, and New Mexico--had agreed to participate in the program, according to BLM officials. May 2008. USDA stated that its Land Acquisition Prioritization System, generally used for land acquisitions under the Land and Water Conservation Fund, also satisfies the land acquisition prioritization requirements under FLTFA. USDA further stated that Forest Service would continue working with BLM to identify and set priorities for acquiring inholdings and that the Forest Service would coordinate with BLM to formalize the use of a single process to set priorities for land acquisitions. November 2009. The Forest Service FLTFA program lead said that Forest Service has coordinated with BLM to formalize the use of a single process to set priorities for land acquisitions. She said that the agencies meet regularly to discuss FLTFA nominations. April 2008. Interior agreed to continue to improve the procedures to identify and set priorities for acquiring inholdings. November 2009. BLM officials said that the current Land and Water Conservation Fund system works well for FLTFA acquisitions and no changes have been made to this system. BLM has, however, intensified its efforts to educate state-level FLTFA implementation teams on the FLTFA land acquisition process. For example, the FLTFA lead said he has attended numerous state-level interagency team meetings to educate team members about the availability and use of FLTFA funds. November 2009. BLM officials reported that BLM gathers and maintains data on each transaction and tracks whether the parcel is an inholding or adjacent land. Officials also reported that BLM is directing field staff to note in BLM's automated land status tracking system (LR2000) whether a parcel is an inholding or adjacent land. May 2008. USDA stated that BLM is responsible under FLTFA for tracking the sales, proceeds, and disbursement of funds and that USDA will continue to assist BLM in tracking these funds. November 2009. The Forest Service FLTFA program lead reiterated USDA's May 2008 statement that BLM is responsible for tracking the use of FLTFA funding. She said that the Forest Service is merely a recipient of FLTFA funding. She added that the national MOU allocations are only targets and that they do not necessarily represent a limit on how much funding an agency can receive. November 2009. The BLM FLTFA program lead reported that BLM is gathering data on each FLTFA transaction by agency and will prepare a final report in compliance with the MOU at FLTFA's sunset if not reauthorized. He added that the allocations established in the MOU are goals only, and that, while the agencies will try to adhere to them, they ultimately will not be held to those allocations. As of November 2009, BLM reports that of the $66.8 million approved by the Secretaries, 60 percent is for BLM, 30 percent is for the Forest Service, 5.5 percent is for the Park Service, and 4.5 percent is for the Fish and Wildlife Service. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Robin M. Nazzaro at (202) 512-3841. Individuals making key contributions to this testimony were Andrea Wamstad Brown, Assistant Director; Rich Johnson; Mark Keenan; Paul Kinney; Emily Larson; John Scott; Rebecca Shea and Carol Herrnstadt Shulman. 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 U.S. Department of the Interior's Bureau of Land Management (BLM), Fish and Wildlife Service, and National Park Service, and the U.S. Department of Agriculture's Forest Service manage about 628 million acres of public land, mostly in 11 western states and Alaska. Under the Federal Land Transaction Facilitation Act (FLTFA) of 2000, revenue raised from selling BLM lands is available to the agencies, primarily to acquire nonfederal land within the boundaries of land they already own--known as inholdings. These inholdings can create significant land management problems. To acquire land, the agencies can nominate parcels under state-level interagency agreements or the Secretaries can use their discretion to initiate acquisitions. FLTFA expires in July 2010. This testimony discusses GAO's 2008 report: Federal Land Management: Federal Land Transaction Facilitation Act Restrictions and Management Weaknesses Limit Future Sales and Acquisitions (GAO-08-196). Specifically, the testimony discusses (1) FLTFA revenue generated, (2) challenges to future sales, (3) FLTFA expenditures, (4) challenges to future acquisitions, and (5) agencies' implementation of GAO's recommendations. Among other things, GAO examined the act, agency guidance, and FLTFA sale and acquisition data, interviewed agency officials, and obtained some updated information. (1) BLM raised most FLTFA revenue from land sales in Nevada. As of August 2009, BLM reported raising a total of $113.4 million from sale of about 29,400 acres. Since FLTFA was enacted in 2000 through August 2009, about 78 percent of the revenue raised, or about $88 million, has come from land transactions in Nevada. (2) BLM faces challenges to future sales under FLTFA. In particular, BLM state and field officials most frequently cited the limited availability of knowledgeable realty staff to conduct sales. We identified two additional issues hampering land sales activity under FLTFA. First, while BLM had identified land for sale in its land use plans, it had not made these sales a priority during the first 7 years of the FLTFA program. Furthermore, BLM had not set goals for sales or developed a sales implementation strategy. Second, some of the additional land BLM had identified for sale since the act would not generate revenue for acquisitions because the act only allows the deposit of revenue from the sale of lands identified for disposal on or before the date of the act. (3) Agencies had purchased few parcels with FLTFA revenue. In 2008, we reported that between August 2007--7 years after FLTFA was enacted--and January 2008, the four land management agencies had spent $13.3 million of the $95.7 million in revenue raised under FLTFA: $10.1 million using the Secretaries' discretion to acquire nine parcels of land and $3.2 million for administrative expenses to prepare land for FLTFA sales. More recently, as of November 2009, BLM reported spending a total of $43.8 million to acquire 28 parcels, including $24.6 million for 12 parcels through the state-level interagency process. (4) Agencies face challenges to completing additional acquisitions. BLM state and field officials GAO interviewed most commonly cited the time, cost, and complexity of the land acquisition process as a challenge to completing land acquisitions. Furthermore, the act's requirement to spend the majority of funds in the state in which revenue was generated has had the effect of making little revenue available for acquisitions outside of Nevada. The agencies also had not established procedures to track the implementation of the act's requirement that at least 80 percent of FLTFA revenue raised in each state be used to acquire inholdings in that state or to track the extent to which BLM is complying with agreed-upon fund allocations among the four participating agencies. (5) BLM has taken steps to implement GAO's recommendations. Specifically, BLM established FLTFA sale goals for fiscal years 2009 and 2010 and established a sales incentive program providing seed funds to state and field offices to identify and pre-screen properties for possible sale under FLTFA. As of November 2009, six states have agreed to participate in the program.
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Over the past decade, NASA has experienced significant problems with several of its projects, which GAO and others have reported on (see table 1 for some examples of such problems). In addition, in 2002 we reported on several sources of failures in NASA programs, including underestimating complexity and technology maturity, and inadequate review and systems engineering processes. Further, we reported that the sources of these problems were not new and that NASA failed to consistently apply lessons previously learned. The failures identified in our 2002 report were in part the result of the "faster, better, cheaper" approach to managing its major acquisitions, which NASA adopted in the 1990s. These problems, along with others, highlighted the need for the agency to reevaluate its approach to cost and schedule estimating, risk assessments, technology development, project reviews, and systems engineering. In 1998, NASA adopted a new program and project management policy, which was revised in 2002. The policy provided significant flexibility, including allowing tailoring and projects to opt out of requirements at the discretion of the project manager. In March 2005--following a series of internal and external assessments of NASA that showed that the agency faced significant problems with project management--NASA again revised its program and project management policy, which includes policy requirements for the development of flight systems and ground support projects. According to NASA officials, further changes to the policy are anticipated in light of new agency leadership. The March 2005 policy document, NASA Procedural Requirement (NPR) 7120.5C, differs from previous versions of the policy in that it delineates requirements based on four NASA investment areas: Basic and Applied Research, Advanced Technology Development, Flight Systems and Ground Support, and Institutional Infrastructure. The policy also reinstitutes a life cycle phased approach to product development and institutes a project categorization scheme, based on project cost and priority, which denotes the oversight authorities and the level of detail that is needed to support project planning documents. See figure 2 below. NASA has also attempted to address some of its cost-estimating weaknesses by instituting a cost analysis data requirement (CADRe) and establishing thresholds for the use of earned value management (EVM). Another major change to the policy is the establishment of the Independent Technical Authority (ITA). According to the policy, the purpose of ITA is to establish sound technical requirements and decisions for safe and reliable system operations separate from the project management and reporting chain. Finally, agency officials told us that while the requirements in previous versions of the policy were easy to tailor, projects now must document compliance with the requirements in a "compliance matrix" and must request and have approved any deviations and/or waivers to requirements. Although NPR 7120.5C contains some mandatory requirements with regard to systems engineering, according to agency officials, NASA has never had an agencywide systems engineering policy to inform the development of flight systems and ground support projects. Since 1995, in the absence of a policy on systems engineering, project managers and systems engineers have relied on information contained in NASA's Systems Engineering Handbook to guide their systems engineering approach on projects. Project managers and systems engineers, however, are not required to follow the handbook. Recognizing the need for a more structured and rigorous approach to systems engineering agencywide, NASA's Office of the Chief Engineer is currently leading the effort to develop a systems engineering policy. The policy is in draft form. Over the last several years, we have undertaken a body of work on how leading developers in industry and government use a knowledge-based approach to deliver high quality products on time and within budget. A knowledge-based approach to product development efforts enables developers to be reasonably certain, at critical junctures or "knowledge points" in the acquisition life cycle, that their products are more likely to meet established cost, schedule, and performance baselines and, therefore provides them with information needed to make sound investment decisions. See figure 3 for a depiction of a knowledge-based acquisition life cycle. Knowledge point 1 (KP1): Resources and needs match. Knowledge point 1 occurs when a sound business case is made for the product-- that is, a match is made between the customer's requirements and the product developer's available resources in terms of knowledge, time, workforce, and money. To determine available resources, successful developers rely on current and valid information from predecessor projects, new technologies that have demonstrated a high level of maturity, system engineering data, and experienced people. Successful developers also communicate extensively with customers to match their wants and needs with available resources and with the developers ability to manufacture an appropriate product. Knowledge point 2 (KP2): Product design is stable. Knowledge point 2 occurs when a developer determines that a product's design is stable--that is, it will meet customer requirements and cost and schedule targets. A best practice is to achieve design stability at the product's critical design review (CDR), usually held midway through development. Completion of at least 90 percent of engineering drawings at the CDR provides tangible evidence to decision makers that the design is stable. Knowledge point 3 (KP3): Production processes are mature. This level of knowledge is achieved when it has been demonstrated that the product can be manufactured within cost, schedule, and quality targets. A best practice is to ensure that all key manufacturing processes are in statistical control-- that is, they are repeatable, sustainable, and capable of consistently producing parts within the product's quality tolerances and standards--at the start of production. It is important that the product's reliability be demonstrated before production begins, as investments can increase significantly if defective parts need to be repaired or reworked. If the knowledge attained at each juncture does not confirm the business case on which the initial investment was originally justified, the project should not go forward and additional resources should not be committed. Product development efforts that do not follow a knowledge-based approach can be frequently characterized by poor cost, schedule, and performance outcomes. NASA's revised acquisition policy for developing flight and ground support systems incorporates some of the elements of a knowledge-based acquisition approach. However, it lacks specific key criteria and decision reviews necessary to fully support such an approach. NASA's policy defines a phased life cycle approach and requires a major decision review to move from project formulation to implementation. The policy requirements for this review address many of the key elements necessary to match needs to resources, such as requirements to establish project baselines. However, the policy does not require that projects demonstrate technologies at high levels of maturity before launching a project and investing a large amount of resources. In addition, NASA's policy does not require any further major decision reviews following the formulation phase of the project. Major decision reviews in the implementation phase based on specific evaluation criteria at the final design and fabrication, assembly, and testing milestones--critical decision points in any product development--could help NASA ensure that sufficient knowledge has been gained to warrant moving forward in the development process. The life cycle for all NASA projects is divided into two major phases-- formulation and implementation. Because flight systems and ground support projects are particularly complex and have long life cycles, NASA has further divided the formulation and implementation phases for these projects to allow managers to assess management and engineering progress (see fig. 4). Flight systems and ground support projects must successfully complete two major decision reviews: a Preliminary-Non Advocate Review (Pre-NAR) between Phases A and B and a Non-Advocate Review (NAR) between Phases B and C. At these reviews, the Governing Program Management Committee (GPMC) evaluates the cost, schedule, safety, and technical content of the project to ensure that the project is meeting commitments specified in key management documents. Following each of these reviews, the GPMC recommends to the appropriate decision authority whether the project should be authorized to proceed. As with KP1 in a knowledge-based acquisition life cycle, the NAR marks the official project approval point in the life cycle. After approval at the NAR, projects are included as part of implementation reviews of their parent program. These implementation reviews are conducted biennially and are not tied to any design or production milestones. After entering the implementation phase, the GPMC is notified if cost or schedule performance exceeds the baselines established at the NAR by 10 percent or when key performance criteria are not met. Exceeding the NAR baselines can result in the GPMC conducting a termination review to determine whether or not to continue the project. To help ensure project requirements do not outstrip resources, leading developers obtain the right knowledge about a new product's technology, design, and production at the right time. NASA's policy emphasizes many elements needed at the NAR (or KP1) to match needs to resources, such as validating requirements, developing realistic cost and schedule estimates and human capital plans, and establishing a preliminary design. The policy does not, however, require projects to demonstrate technologies at high levels of maturity before launching a project. Table 2 compares KP1 criteria and NASA's policy criteria. While NASA requires projects to develop plans that describe how technologies will be matured and to provide alternative development strategies for technologies that do not mature as expected, it does not establish a minimum threshold for technology maturity. Consequently, projects can enter the implementation phase with immature technologies and embark on a risky path of having to build technology, design, and production knowledge concurrently. Our best practices work has shown that maturing technologies during the preliminary design phase and before entering product development is a key element of matching needs to resources and that there is a direct relationship between the maturity of technologies and the risk of cost and schedule growth. Allowing technology development to carry over into the product development phase increases the risk that significant problems will be discovered late in development. Addressing such problems at this stage may require extensive retrofitting and redesign as well as retesting, which can jeopardize performance and result in more time and money to fix. This approach also makes it more difficult for projects to demonstrate the same level of design stability in later phases of implementation since technology and design activities will be done concurrently. Technology readiness levels (TRL)--a concept developed by NASA--can be used to gauge the maturity of individual technologies. The higher the TRL, the more the technology has been proven and the lower the risk of performance problems and cost and schedule overruns (see fig. 5). TRL 7--demonstrating a technology as a fully integrated prototype in an operational environment--is the level of maturity preferred by product developers to minimize risks when entering product development. Successful developers will not commit to undertaking product development, and more importantly investing resources, unless they have high confidence that they have achieved a match between what the customer wants and what the project can deliver. Technologies that are not mature continue to be developed in an environment that is focused solely on technology development. Once matured, these technologies can be transitioned to projects. This puts developers in a better position to succeed because they can focus on integrating the technologies and testing and proving the product design. Our prior work has shown that successful developers establish specific criteria to ensure that requisite knowledge has been attained before moving forward from final design into the latter stages of development. Before making significant increases in investments to fabricate, assemble, and test the product, these developers conduct a decision review to determine if the design is stable and performs as expected and the project is ready to enter the next phase. To make this determination and reach KP2, successful developers use specific, knowledge-based standards and criteria. (See app. II for more information on the specific knowledge-based standards and criteria successful developers use to judge readiness to proceed beyond detailed design activities.) Successful developers also demand proof that manufacturing processes are in control and product reliability goals are attained before committing to production. To determine whether they have achieved this knowledge point, KP3, successful developers conduct another mandatory decision review in which they use specific, knowledge-based standards and criteria to determine if the product can be produced within cost, schedule, and quality targets. (See app. II for more information on specific knowledge- based standards and criteria used by successful developers to judge readiness to enter into production.) Contrary to these best practices, the NAR at the end of the preliminary design phase--KP1--is the last major decision review in the NASA project life cycle. (See fig. 6.) Although NPR 7120.5C requires that projects document in the project plan a continuum of technical and management reviews, such as a PDR and CDR, it does not require any specific reviews. In addition, NASA's March 2005 policy does not require a NAR-type decision review to ensure a project has obtained the knowledge needed to proceed beyond the final design phase into the fabrication, assembly, and test phase, which serves as both the demonstration and production phase of the NASA life cycle. According to NASA officials, projects conduct a CDR at the end of the final design phase to ensure adequate information is available about product design and producibility before entering the fabrication, assembly, and test phase. The CDR, however, is a technical review--not a major decision review like the NAR. Furthermore, the policy does not establish criteria as to what constitutes successful completion of a CDR. NASA's policy also does not require a major decision review before beginning manufacturing. (See fig. 6 above.) Therefore, the transition from final design to fabrication, assembly, and test often marks a de facto production decision. According to NASA officials, the agency rarely enters a formal production phase due to the small quantities of space systems that they build. However, due to the high cost of failure associated with NASA projects and the costs and risks involved in repairing a system in-orbit, a major decision review at production that assesses product reliability is essential even for these limited production systems. In addition, although NASA's production quantities are typically low, in some instances NASA does produce larger quantities of a system or subsystem, such as the external tanks for the Space Shuttle. Furthermore, NASA's plans indicate that the agency may be increasing production for elements of their future systems. For example, NASA's Exploration Systems Architecture Study indicates that NASA plans to build several new crew exploration vehicles, with disposable elements, such as the lunar lander, solid rocket boosters, and space shuttle main engines that will require higher numbers of production runs. Rather than establish specific criteria by which all projects are judged, NASA's policy requires that projects manage to baselines and plans established in key management documents and approved at the project NAR. The baselines and plans serve as their primary tools for measuring project progress and as the primary basis for judgment at project reviews. While the plans may include some information that addresses knowledge-based criteria for design and production, the instructions for preparing them leaves the establishment of thresholds and success criteria to the discretion of the project manager. For example, NASA policy requires that projects include, as part of the project plan, a Verification and Validation Sub Plan that describes the project's approach to verifying and validating hardware and software as part of the project plan. The policy, however, includes no instruction as to what constitutes a sufficient approach to testing. In other words, there are no requirements concerning the fidelity of test articles or the realism of the test environment. Similarly, NASA's policy requires that projects include, as part of the project plan, a Systems Engineering Sub Plan that describes the project's approach to systems engineering and the technical standards that are applicable, including metrics that verify the processes. The policy, however, does not identify the types of metrics appropriate to verify the process or establish any threshold criteria. The absence of major decision reviews, along with specific criteria in the fabrication, assembly, and test phase, could result in concurrent design and manufacturing activities, a practice our past work has found increases risk in acquisition programs. Furthermore, lacking a major decision review to ensure that projects have gained the appropriate levels of knowledge at KP2 and KP3, NASA decision makers cannot be provided a high level of certainty that the project will meet cost, schedule, and performance requirements and have no assurance that the provisions of the key management documents required by NPR 7120.5C are being executed after the NAR. NASA centers have varying approaches to implementing project management policies and systems engineering guidance for flight systems and ground support projects. Some centers use criteria at key decision points that are similar to the criteria required to ensure a knowledge-based approach is followed, while others lack such criteria. As a result, each center reports a different level and type of knowledge about a project at key decision points. Centers also rely on project managers and systems engineers to employ good project management and systems engineering practices. However, given the loss of experienced project managers and the decline of in-house systems engineering and technical capabilities agencywide, that reliance could be problematic. These situations make it difficult for NASA decision makers to evaluate center projects on a common foundation of knowledge and make sound investment decisions and tradeoffs based on those evaluations. A standardized, knowledge- based approach would prepare NASA to face competing budgetary priorities and make difficult decisions regarding the investment in and termination of projects. While NASA centers are given discretion about how they implement agencywide policies, they are expected to have procedures and guidelines in place for implementing those policies. Some centers have developed center-specific policies and criteria for implementing NASA's project management policies and system engineering guidance, while others have not. Centers also rely on project managers and systems engineers to implement the requirements of NPR 7120.5C and to use NASA's Systems Engineering Handbook as guidance for good systems engineering practices. Some NASA centers have also developed criteria in their policies that are similar to the criteria used to ensure a knowledge-based approach is followed; other centers lack such criteria. Because of their varying policies and criteria, each center requires a different level of knowledge at the same point in a project's development cycle. For example, GSFC requires its projects to mature technologies to TRL 6 by the preliminary design review--before entering the implementation phase. On the other hand, JPL, MSFC, and JSC policies do not require projects to mature technology to a particular level before entering implementation, leaving the determination of needed technology maturity up to the project manager. Requirements for assessing design maturity also vary across the centers. While most of the center policies require a CDR to enter "Phase D-- Fabrication, Assembly, and Test"--the criteria used to assess projects at this point vary. For example, both GSFC and MSFC require projects to have completed a percentage of design drawings at this review. MSFC requires that 90 percent of design drawings to be complete by CDR, which is consistent with best practices. While GSFC establishes a minimum threshold of drawings to be complete by CDR--greater than 80 percent-- neither JSC nor JPL establish a minimum percentage drawing requirement. Instead, JSC requires the design be complete and drawings ready to begin production, and JPL requires that the design be mature and provide confidence in the integrity of the flight system design. Almost none of the center policies include a requirement to assess the maturity of production processes. According to NASA officials, due to the low quantities of systems generally produced by the agency, most of the center policies do not require a review before beginning manufacturing. Only JSC requires a Production Readiness Review to ensure that production plans, facilities, and personnel are in place and ready to begin production. However, the criteria do not specify quantifiable thresholds to measure production readiness at the review. JPL, MSFC, and GSFC do not have policies that outline requirements for such a review. In addition to individual policy requirements, centers may rely on project managers and systems engineers to employ good project management and systems engineering practices. For example, an experienced project manager at JPL told us that although JPL policy does not require a particular TRL at PDR to enter implementation, he required that all technologies for his project be around a TRL 6 in order to separate technology development from systems development. Reliance on project managers to implement good practices, however, could be problematic given the diminishing number of experienced project managers available to lead projects and the decline of in-house systems engineering and technical capabilities agencywide caused by increasing retirements and outsourcing. In a knowledge-based process, the achievement of each successive knowledge point builds on the preceding one, giving decision makers the information they need, when they need it, to make decisions about whether to invest significant additional funds to move forward with product development. Our work has shown that successful product development efforts are marked by adherence to a disciplined process that establishes and uses common and consistent criteria for decision making at these key points. With varying project management and systems engineering criteria, NASA centers' technical reviews, such as PDR, provide different levels of knowledge to support NASA's major decision reviews, such as the NAR, which NASA uses to support its major investment decisions for flight systems and ground support projects. In the near future, NASA will need to determine the resources necessary to develop the systems and supporting technologies to achieve the President's Vision for Space Exploration and structure its investment strategy accordingly. Initial implementation of the Vision as explained in NASA's Exploration Systems Architecture Study calls for completing the International Space Station, developing a new crew exploration vehicle, and returning to the moon no later than 2020. NASA estimates that it will cost approximately $104 billion over the next 13 years to accomplish these initial goals. These priorities, along with NASA's other missions, will be competing within NASA for funding. It will likely be difficult for NASA managers to agree on which projects to invest in and which projects to terminate. The NASA Administrator has acknowledged that NASA faces difficult choices about its missions in the future--for example, between human space flight, science, and aeronautics missions. Using consistent criteria to evaluate all NASA projects would help ensure that the same level and type of knowledge is available about individual projects at key decision points. Analogous information about all flight systems and ground support projects would allow decision makers to make apples-to-apples comparisons across projects and make investment decisions, and trade-offs, based upon these comparisons. Further, policies with consistent criteria can provide inexperienced project managers and systems engineers with the necessary guidance to implement good project management and systems engineering practices and ensure that the right knowledge is available for decision makers. NASA officials within the Chief Engineer's Office acknowledged the need for more consistency in criteria across the various NASA centers in order to successfully achieve NASA's Vision for Space Exploration. Some NASA centers, however, are resistant to standardized criteria because they feel it could be overly prescriptive. These centers indicated that because of the unique nature of the work done at each of the 10 NASA centers, it would be unrealistic to hold every project to the same criteria. Nonetheless, our work has shown that the process used by successful product developers to develop leading-edge technology and products does not differ based upon the type of product being developed. Further, these developers adhere to a disciplined process that establishes and uses common and consistent criteria for decision making--regardless of the type of product or technology being developed. Using consistent criteria can allow NASA decision makers to assess the likely return on competing investment priorities and to reevaluate alternatives and make investment decisions across projects to increase the likelihood of attaining the strategic goals of the agency. Several of NASA's major acquisitions have been marked by cost, schedule, and performance problems. Yet the challenges NASA faces in the future are likely to far exceed those it has faced in the past. The complex technical requirements associated with fulfilling the President's Vision, the fiscal constraints under which NASA will be required to operate, the diminished number of experienced project managers and systems engineers, and the potential for increased production make following a knowledge-based approach for flight systems and ground support projects all the more critical. While NASA has made improvements to its policies governing project management, the lack of major decision reviews beyond the initial project approval gate leaves decision makers with little knowledge about the progress of the agency's projects. Further, without a standard set of criteria to measure projects at crucial phases in the development life cycle, NASA cannot be assured that its decisions will result in the best possible return on its investments. Since NASA is currently in the process of revising its program and project management policies and developing an agencywide systems engineering policy, we believe this presents a unique opportunity for the agency to correct some of the problems identified during our review. In order to close the gaps between NASA's current acquisition environment and best practices on knowledge-based acquisition, we recommend that NASA take steps to ensure NASA projects follow a knowledge-based approach for product development. Specifically, we recommend that the NASA Administrator direct the Office of the Chief Engineer to take the following two actions: In drafting its systems engineering policy, incorporate requirements in the policy for flight systems and ground support projects to capture specific product knowledge by key junctures in project development. The demonstration of this knowledge should be used as exit criteria for decision making at the following key junctures: Before projects are approved to transition from formulation to implementation, the policy should require that projects demonstrate that key technologies have reached a high maturity level. Before projects are approved to transition from final design to fabrication, assembly, and test, the policy should require that projects demonstrate that the design is stable. Before projects are approved to transition into production, the policy should require projects to demonstrate that the design can be manufactured within cost, schedule, and quality targets. Revise NPR 7120.5C to institute additional major decision reviews following the NAR for flight systems and ground support projects, which result in recommendations to the appropriate decision authority. These reviews should be tied to the key junctures during project development mentioned above in order to increase the likelihood that cost, schedule, and performance requirements of the project will be met. We provided a draft of this report to NASA for review and comment. In written comments, NASA indicated that it agreed with our recommendations and outlined specific actions that the agency plans to take to address them. The actions that NASA plans to take to address our recommendations are a positive step toward achieving successful project outcomes and ensuring that decision makers are appropriately investing the agency's resources. We are pleased to hear that many knowledge-based practices identified in our report are currently being practiced agencywide in the management and development NASA systems. The addition of such practices to NASA's policies will only strengthen their use agencywide and ensure that these practices continue to be utilized by less experienced project managers and systems engineers as the more experienced workforce retires. The effectiveness of such practices, however, will be limited if project officials are not held accountable for demonstrating a high level of knowledge, consistent with the success criteria that NASA plans to require in its policies, at key junctures in development. It is critical that project officials not only have a high level of knowledge about a project at key junctures, but also that this information is used by decision makers to make decisions on whether to invest additional resources and allow a project to proceed through the development life cycle. 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 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 your or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix IV. To determine the extent to which NASA's current policies support an acquisition approach consistent with best practices identified in GAO's work on system acquisitions, we reviewed and analyzed NASA-wide program and project management policies and systems engineering guidance. Our review and analysis of the policy focused on requirements for flight systems and ground support projects. We interviewed NASA Headquarters officials from the Office of the Chief Engineer who are responsible for the policy and guidance. We compared NASA's policy on program and project management with criteria contained in GAO best practices work on systems acquisition and space system acquisitions. We concentrated on whether the policy provides a framework for a knowledge-based process and the criteria necessary to carry out this intent. To determine how NASA-wide acquisition policies are implemented across the various NASA centers, we reviewed NASA center-specific program and project management policies and systems engineering policies and interviewed officials responsible for implementing those policies. While we interviewed officials from all centers, we focused on the centers that manage the majority of NASA's flight systems and ground support projects--GSFC, JPL, JSC, and MSFC. This approach included site visits with GSFC, JPL, JSC, and MSFC and teleconferences with the remaining centers. We compared examples of the centers' implementation of the policies and specific criteria included in these policies with our best practices work on systems acquisition. We performed our work from May 2005 to November 2005 in accordance with generally accepted government auditing standards. In addition to the individual named above, James L. Morrison, Assistant Director; Valerie Colaiaco, Tom Gordon, Alison Heafitz, Shelby S. Oakley, Ron Schwenn, Karen Sloan, and John S. Warren, Jr., made key contributions to this report. Space Acquisitions: Stronger Development Practices and Investment Planning Need to Address Continuing Problems. GAO-05-891T. Washington, D.C.: July 12, 2005. Defense Acquisitions: Incentives and Pressures That Drive Problems Affecting Satellite and Related Acquisitions. GAO-05-570R. Washington, D.C.: June 23, 2005. Defense Acquisitions: Space-Based Radar Effort Needs Additional Knowledge before Starting Development. GAO-04-759. Washington, D.C.: July 23, 2004. Defense Acquisitions: Risks Posed by DOD's New Space Systems Acquisition Policy. GAO-04-379R. Washington, D.C.: January 29, 2004. Space Acquisitions: Committing Prematurely to the Transformational Satellite Program Elevates Risks for Poor Cost, Schedule, and Performance Outcomes. GAO-04-71R. Washington, D.C.: December 4, 2003. Defense Acquisitions: Improvements Needed in Space Systems Acquisition Policy to Optimize Growing Investment in Space. GAO-04-253T. Washington, D.C.: November 18, 2003. Defense Acquisitions: Despite Restructuring, SBIRS High Program Remains at Risk of Cost and Schedule Overruns. GAO-04-48. Washington, D.C.: October 31, 2003. Defense Acquisitions: Improvements Needed in Space Systems Acquisition Management Policy. GAO-03-1073. Washington, D.C.: September 15, 2003. Military Space Operations: Common Problems and Their Effects on Satellite and Related Acquisitions. GAO-03-825R. Washington, D.C.: June 2, 2003. Military Space Operations: Planning, Funding, and Acquisition Challenges Facing Efforts to Strengthen Space Control. GAO-02-738. Washington, D.C.: September 23, 2002. Polar-Orbiting Environmental Satellites: Status, Plans, and Future Data Management Challenges. GAO-02-684T. Washington, D.C.: July 24, 2002. Defense Acquisitions: Space-Based Infrared System-Low at Risk of Missing Initial Deployment Date. GAO-01-6. Washington, D.C.: February 28, 2001. Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-05-301. Washington, D.C.: March 31, 2005. Defense Acquisitions: Stronger Management Practices Are Needed to Improve DOD's Software-Intensive Weapon Acquisitions. GAO-04-393. Washington, D.C.: March 1, 2004. Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-04-248. Washington, D.C.: March 31, 2004. Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, but More Controls Are Needed. GAO-04-53. Washington, D.C.: November 10, 2003. Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-03-476. Washington, D.C.: May 15, 2003. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002. Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001. Best Practices: A More Constructive Test Approach Is Key to Better Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000. Defense Acquisition: Employing Best Practices Can Shape Better Weapon System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000. Best Practices: DOD Training Can Do More to Help Weapon System Program Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16, 1999. Best Practices: Better Management of Technology Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999. Defense Acquisitions: Best Commercial Practices Can Improve Program Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999. Defense Acquisition: Improved Program Outcomes Are Possible. GAO/T-NSIAD-98-123. Washington, D.C.: March 18, 1998. Best Practices: Successful Application to Weapon Acquisition Requires Changes in DOD's Environment. GAO/NSIAD-98-56. Washington, D.C.: February 24, 1998. Major Acquisitions: Significant Changes Underway in DOD's Earned Value Management Process. GAO/NSIAD-97-108. Washington, D.C.: May 5, 1997. Best Practices: Commercial Quality Assurance Practices Offer Improvements for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26, 1996.
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The National Aeronautics and Space Administration (NASA) plans to spend over $100 billion on capabilities and technologies to achieve the initial goals of the President's 2004 Vision for Space Exploration. In the past, NASA has had difficulty meeting cost, schedule, and performance objectives for some of its projects because it failed to adequately define project requirements and quantify resources. NASA will be further challenged by a constrained federal budget and a shrinking experienced NASA workforce. To help face these challenges and manage projects with greater efficiency and accountability, NASA recently updated its program and project management policy and is developing an agencywide systems engineering policy. GAO has issued a series of reports on the importance of obtaining critical information and knowledge at key junctures in major system acquisitions to help meet cost and schedule objectives. This report (1) evaluates whether NASA's policy supports a knowledge-based acquisition approach and (2) describes how NASA centers are implementing the agency's acquisition policies and guidance. While NASA's revised policy for developing flight systems and ground support projects incorporates some of the best practices used by successful developers, it lacks certain key criteria and major decision reviews that support a knowledge-based acquisition framework. For example, NASA's policy requires projects to conduct a major decision review before moving from formulation to implementation. Further, before moving from formulation to implementation, projects must validate requirements and develop realistic cost and schedule estimates, human capital plans, a preliminary design, and a technology plan--key elements for matching needs to resources. However, NASA's policies do not require projects to demonstrate technologies at high levels of maturity before program start. By not establishing a minimum threshold for technology maturity, NASA increases the risk that design changes will be required later in development, when such changes are typically more costly to make. In addition, although NASA's policy does require project managers to establish a continuum of technical and management reviews, it does not specify what these reviews should be, nor does it require major decision reviews at other key points in a product's development. Acquiring knowledge at key junctures will become increasingly important as NASA proceeds to implement elements of the Vision. Without a major decision review at key milestones to ensure that the appropriate level of knowledge has been achieved to proceed to the next phase, the risk of cost and schedule overruns, as well as performance shortfalls, increases. NASA centers have varying approaches for implementing the agency's policies and guidance. Some centers have established product development criteria that are similar to the criteria used in a knowledge-based acquisition, while other centers have not. As a result, each center reports a different level and type of knowledge about a project at key decision points. Centers also rely on project managers and systems engineers to employ good project management and systems engineering practices. However, given the loss of experienced project managers and the decline of in-house systems engineering and technical capabilities, that reliance could be problematic. These situations make it difficult for decision makers to evaluate projects on the same basis and make sound investment decisions and tradeoffs based on those evaluations. A standardized, knowledge-based approach would prepare NASA to face competing budgetary priorities and better position the agency to make difficult decisions regarding the investment in and termination of projects.
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Although the current focus of concern is largely on the potential for several years of declining physician fees, the historic challenge for Medicare has been to find ways to moderate the rapid growth in spending for physician services. Before 1992, the fees that Medicare paid for those services were largely based on physicians' historical charges. Spending for physician services grew rapidly in the 1980s, at a rate that the Secretary of Health and Human Services (HHS) characterized as out of control. Although Congress froze fees or limited fee increases, spending continued to rise because of increases in the volume and intensity of physician services. From 1980 through 1991, for example, Medicare spending per beneficiary for physician services grew at an average annual rate of 11.6 percent. The ineffectiveness of fee controls alone led Congress to reform the way that Medicare set physician fees. The Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) established both a national fee schedule and a system of spending targets, which first affected physician fees in 1992. From 1992 through 1997, annual spending growth for physician services was far lower than the previous decade. The decline in spending growth was the result in large part of slower volume and intensity growth. (See fig. 1.) Over time, Medicare's spending target system has been revised and renamed. The SGR system, Medicare's current system for updating physician fees, was established in the Balanced Budget Act of 1997 (BBA) and was first used to adjust fees in 1999. Following the implementation of the fee schedule and spending targets in 1992, through 1999, average annual growth in volume and intensity of service use per beneficiary fell to 1.1 percent. More recently volume and intensity growth has trended upward, rising at an average annual rate of about 5 percent from 2000 through 2003. Although this average annual rate of growth remains substantially below that experienced before spending targets were introduced, the recent increases in volume and intensity growth are a reminder that inflationary pressures continue to challenge efforts to moderate growth in physician expenditures. The SGR system establishes spending targets to moderate physician services spending increases caused by excess growth in volume and intensity. SGR's spending targets do not cap expenditures for physician services. Instead, spending in excess of the target triggers a reduced fee update or a fee cut. In this way, the SGR system applies financial brakes to physician services spending and thus serves as an automatic budgetary control device. In addition, reduced fee updates signal physicians collectively and Congress that spending due to volume and intensity has increased more than allowed. To apply the SGR system, every year the Centers for Medicare & Medicaid Services (CMS) follows a statutory formula to estimate the allowed rate of increase in spending for physician services and uses that rate to construct the spending target for the following calendar year. The sustainable growth rate is the product of the estimated percentage change in (1) input prices for physician services;9, 10 (2) the average number of Medicare beneficiaries in the traditional fee-for-service (FFS) program; (3) national economic output, as measured by real (inflation-adjusted) GDP per capita; and (4) expected expenditures for physician services resulting from changes in laws or regulations. SGR spending targets are cumulative. That is, the sum of all physician services spending since 1996 is compared to the sum of all annual targets since the same year to determine whether spending has fallen short of, equaled, or exceeded the SGR targets. The use of cumulative targets means, for example, that if actual spending has exceeded the SGR system targets, fee updates in future years must be lowered sufficiently both to offset the accumulated excess spending and to slow expected spending for the coming year. CMS calculates changes in physician input prices based on the growth in the costs of providing physician services as measured by the Medicare Economic Index, growth in the costs of providing laboratory tests as measured by the consumer price index for urban consumers, and growth in the cost of Medicare Part B prescription drugs included in SGR spending. Under the SGR and MVPS systems, the Secretary of Health and Human Services defined physician services to include "services and supplies incident to physicians' services," such as laboratory tests and most Part B prescription drugs. Under SGR, spending per beneficiary adjusted for the estimated underlying cost of providing physician services is allowed to grow at the same rate that the national economy grows over time on a per-capita basis--currently projected to be slightly more than 2 percent annually. If volume and intensity grow faster, the annual increase in physician fees will be less than the estimated increase in the cost of providing services. Conversely, if volume and intensity grow more slowly than 2 percent annually, the SGR system permits physicians to benefit from fee increases that exceed the increased cost of providing services. To reduce the effect of business cycles on physician fees, MMA modified the SGR system to require that economic growth be measured as the 10-year moving average change in real per capita GDP. This measure is projected to range from 2.1 percent to 2.5 percent during the 2005 through 2014 period. When the SGR system was established, GDP growth was seen as a benchmark that would allow for affordable increases in volume and intensity. In its 1995 annual report to Congress, the Physician Payment Review Commission stated that limiting real expenditure growth to 1 or 2 percentage points above GDP would be a "realistic and affordable goal." Ultimately, BBA specified the growth rate of GDP alone. This limit was an indicator of what the 105th Congress thought the nation could afford to spend on volume and intensity increases. If cumulative spending on physician services is in line with SGR's target, the physician fee schedule update for the next calendar year is set equal to the estimated increase in the average cost of providing physician services as measured by the Medicare Economic Index (MEI). If cumulative spending exceeds the target, the fee update will be less than the change in MEI or may even be negative. If cumulative spending falls short of the target, the update will exceed the change in MEI. The SGR system places bounds on the extent to which fee updates can deviate from MEI. In general, with an MEI of about 2 percent, the largest allowable fee decrease would be about 5 percent and the largest fee increase would be about 5 percent. The 2004 Medicare Trustees Report announced that the projected physician fee update would be about negative 5 percent for 7 consecutive years beginning in 2006; the result is a cumulative reduction in physician fees of more than 31 percent from 2005 to 2012, while physicians' costs of providing services, as measured by MEI, are projected to rise by 19 percent. According to projections made by CMS Office of the Actuary (OACT) in July 2004, maximum fee reductions will be in effect from 2006 through 2012, while fee updates will be positive in 2014. (See fig. 2.) There are two principal reasons for the projected fee declines: increases in volume and intensity that exceed the SGR's allowance--partly as a result of spending for Part B prescription drugs--and the minimum fee updates for 2004 and 2005 specified by MMA. Recent growth in spending due to volume and intensity increases has been larger than SGR targets allow, resulting in excess spending that must be recouped through reduced fee updates. In general, the SGR system allows physician fee updates to equal or exceed the MEI as long as spending growth due to volume and intensity increases is no higher than the average growth in real GDP per capita--about 2.3 percent annually. However, in July 2004, CMS OACT projected that the volume and intensity of physician services paid for under the physician fee schedule would grow by 3 percent per year. To offset the resulting excess spending, the SGR system will have to reduce future physician fee updates. Additional downward pressure on physician fees arises from the growth in spending for other Medicare services that are included in the SGR system, but that are not paid for under the physician fee schedule. Such services include laboratory tests and many Part B outpatient prescription drugs that physicians provide to patients. Because physicians influence the volume of services they provide directly--that is, fee schedule services-- as well as these other services, defined by the Secretary of HHS as "incident to" physician services, expenditures for both types of services were included when spending targets were introduced. In July 2004, CMS OACT projected that SGR-covered Part B drug expenditures would grow more rapidly than other physician service expenditures, thus increasing the likelihood that future spending would exceed SGR system targets. To the extent that spending for SGR Part B drugs and other "incident to" services grows larger as a share of overall SGR spending, additional pressure is put on fee adjustments to offset excess spending and bring overall SGR spending in line with the system's targets. This occurs because the SGR system attempts to moderate spending only through the fee schedule, even when the excess spending is caused by expenditures for "incident to" services, such as Part B drugs, which are not paid for under the fee schedule. The MMA averted fee reductions projected for 2004 and 2005 by specifying an update to physician fees of no less than 1.5 percent for those 2 years. The MMA increases replaced SGR system fee reductions of 4.5 percent in 2004 and 3.3 percent in 2005 and thus will result in additional aggregate spending. Because MMA did not make corresponding revisions to the SGR system's spending targets, the SGR system must offset the additional spending by reducing fees beginning in 2006. An examination of the SGR fee update that would have gone into effect in 2005, absent the MMA minimum updates, illustrates the impact of the system's cumulative spending targets. To begin with, actual expenditures under the SGR system in 2004 are estimated to be $84.9 billion, whereas target expenditures for 2004 were $77.1 billion. As a result, SGR's 2005 fee updates would have needed to offset the $7.8 billion deficit from excess spending in 2004 plus the accumulated excess spending of $5.9 billion from previous years to realign expected spending with target spending. Because the SGR system is designed to offset accumulated excess spending over a period of years, the deficit for 2004 and preceding years reduces fee updates for multiple years. The projected sustained period of declining physician fees and the potential for beneficiaries' access to physician services to be disrupted have heightened interest in alternatives for the current SGR system. In general, potential alternatives cluster around two approaches. One approach would end the use of spending targets as a method for updating physician fees and encouraging fiscal discipline. The other approach would retain spending targets but modify the current SGR system to address perceived shortcomings. These modifications include such options as removing the prescription drug expenditures that are currently counted in the SGR system; resetting the targets and not requiring the system to recoup previous excess spending; and raising the allowance for increased spending due to volume and intensity growth. The Part B premium amount is adjusted each year so that expected premium revenues equal 25 percent of expected Part B spending. Beneficiaries must pay coinsurance--usually 20 percent--for most Part B services. physicians appropriately, it is important to consider how modifications or alterations to the SGR system would affect the long-term sustainability and affordability of the Medicare program. See GAO-05-85 for more information about these alternatives. See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington, D.C.: March 2001, 2002, 2003, and 2004). MedPAC suggested that other adjustments to the update might be necessary, for example, to ensure overall payment adequacy, correct for previous MEI forecast errors, and to address other factors. likely produce fee updates that ranged from 2.1 percent to 2.4 percent over the period from 2006 through 2014. (See table 1.) However, Medicare spending for physician services would rise, resulting in cumulative expenditures that are 22 percent greater over a 10-year period than under current law, based on CMS OACT estimates. Although MedPAC's recommended update approach would limit annual increases in the price Medicare pays for each service, the approach does not contain an explicit mechanism for constraining aggregate spending resulting from increases in the volume and intensity of services physicians provide. In 2004 testimony, MedPAC stated that fee updates for physician services should not be automatic, but should be informed by changes in beneficiaries' access to services, the quality of services provided, the appropriateness of cost increases, and other factors, similar to those that MedPAC takes into consideration when considering updates for other providers. Another approach for addressing the perceived shortcoming of the current SGR system would retain spending targets but modify one or more elements of the system. The key distinction of this approach, in contrast to basing updates on MEI, is that fiscal controls designed to moderate spending would continue to be integral to the system used to update fees. Although spending for physician services would likely also rise under this approach, the advantage of retaining spending targets is that the fee update system would automatically work to moderate spending if volume and intensity growth began to increase above allowable rates. The SGR system could be modified in a number of ways: for example, by raising the allowance for increased spending due to volume and intensity growth; resetting the base for the spending targets and not requiring the system to recoup previous excess spending; or removing the prescription drug expenditures that are currently counted in the SGR system. The current SGR system's allowance for volume and intensity growth could be increased, through congressional action, by some factor above the percentage change in real GDP per capita. As stated earlier, the current SGR system's allowance for volume and intensity growth is approximately 2.3 percent per year--the 10-year moving average in real GDP per capita-- while CMS OACT projected that volume and intensity growth would be more than 3 percent per year. To offset the increased spending associated with the higher volume and intensity growth, the SGR system will reduce updates below the increase in MEI. According to CMS OACT simulations, increasing the allowance for volume and intensity growth to GDP plus 1 percentage point would likely produce positive fee updates beginning in 2012--2 years earlier than is projected under current law. Because fee updates would be on average greater than under current law during the 10- year period from 2005 through 2014, Medicare spending for physician services would rise. CMS OACT estimated that cumulative expenditures over the 10-year period would increase by 4 percent more than under current law. (See table 1.) In 2002, we testified that physician spending targets and fees may need to be adjusted periodically as health needs change, technology improves, or health care markets evolve. Such adjustments could involve specifying a new base year from which to set future targets. Currently, the SGR system uses spending from 1996, trended forward by the sustainable growth rate computed for each year, to determine allowable spending. MMA avoided fee declines in 2004 and in 2005 by stipulating a minimum update of 1.5 percent in each of those 2 years, but the law did not similarly adjust the spending targets to account for the additional spending that would result from the minimum update. Consequently, under the SGR system the additional MMA spending and other accumulated excess spending will have to be recouped through fee reductions beginning in 2006. If the resulting negative fee updates are considered inappropriately low, one solution would be, through congressional action, to use actual spending from a recent year as a basis for setting future SGR system targets and forgiving the accumulated excess spending attributable to MMA and other factors. The effect of this action would be to increase future updates and, as with other alternatives presented here, overall spending. According to CMS OACT simulations, forgiving the accumulated excess spending as of 2005--that is, resetting the cumulative spending target so that it equals cumulative actual spending--would raise fees in 2006. However, because volume and intensity growth is projected to exceed the SGR system's allowance for such growth, negative updates would return beginning in 2008 and continue through 2013. Resulting cumulative spending over the 10-year period from 2005 through 2014 would be 13 percent higher than is projected under current law. (See table 1.) The Secretary of HHS could, under current authority, consider excluding Part B drugs from the definition of services furnished incident to physician services for purposes of the SGR system. Expenditures for these drugs have been growing rapidly, which, in turn, has put downward pressure on the fees paid to Medicare physicians. However, according to CMS OACT simulations, removing Part B drugs from the SGR system beginning in 2005 would not prevent several years of fee declines and would not decrease the volatility in the updates. Fees would decline by about 5 percent per year from 2006 through 2010. There would be positive updates beginning in 2011--3 years earlier than is projected under current law. (See table 1.) CMS OACT estimated that removing Part B drugs from the SGR system would result in cumulative spending over the 10-year period from 2005 through 2014 that is 5 percent higher than is projected under current law. Together Congress and CMS could implement several modifications to the SGR system, for example, by increasing the allowance for volume and intensity growth to GDP plus 1 percentage point, resetting the spending base for future SGR targets, and removing prescription drugs. According to CMS OACT simulations, this combination of options would result in positive updates ranging from 2.2 percent to 2.8 percent for the 2006-2014 period. CMS OACT projected that the combined options would increase aggregate spending by 23 percent over the 10-year period. (See table 1.) Medicare faces the challenge of moderating the growth in spending for physician services while ensuring that physicians are paid fairly so that beneficiaries have appropriate access to their services. Concerns have been raised that access to physician services could eventually be compromised if the SGR system is left unchanged and the projected fee cuts become a reality. These concerns have prompted policymakers to consider two broad approaches for updating physician fees. The first approach--eliminating targets--emphasizes fee stability while the second approach--retaining and modifying targets--includes an automatic fiscal brake. Either of the two approaches could be implemented in a way that would likely generate positive fee updates and each could be accompanied by separate, focused efforts to moderate volume and intensity growth. Because multiple years of projected 5 percent fee cuts are incorporated in Medicare's budgeting baseline, almost any change to the SGR system is likely to increase program spending above the baseline. As policymakers consider options for updating physician fees, it is important to be mindful of the serious financial challenges facing Medicare and the need to design policies that help ensure the long-term sustainability and affordability of the program. We look forward to working with the Subcommittee and others in Congress as policymakers seek to moderate program spending growth while ensuring appropriate physician payments. Madam Chairman, this concludes my prepared statement. I will be happy to answer questions you or the other Subcommittee Members may have. For further information regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101. James Cosgrove, Jessica Farb, Hannah Fein, and Jennifer Podulka 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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Concerns were raised about the system Medicare uses to determine annual changes to physician fees--the sustainable growth rate (SGR) system--when it reduced physician fees by almost 5 percent in 2002. Subsequent administrative and legislative actions modified or overrode the SGR system to avert fee declines in 2003, 2004, and 2005. However, projected fee reductions for 2006 to 2012 have raised new concerns about the SGR system. Policymakers question the appropriateness of the SGR system for updating physician fees and its effect on physicians' continued participation in the Medicare program if fees are permitted to decline. At the same time, there are concerns about the impact of increased spending on the long-term fiscal sustainability of Medicare. GAO was asked to discuss the SGR system. Specifically, this statement addresses the following: (1) how the SGR system is designed to moderate the growth in spending for physician services, (2) why physician fees are projected to decline under the SGR system, and (3) options for revising or replacing the SGR system and their implications for physician fee updates and Medicare spending. This statement is based on GAO's most recent report on the SGR system, Medicare Physician Payments: Concerns about Spending Target System Prompt Interest in Considering Reforms (GAO-05-85). To moderate Medicare spending for physician services, the SGR system sets spending targets and adjusts physician fees based on the extent to which actual spending aligns with specified targets. If growth in the number of services provided to each beneficiary--referred to as volume--and in the average complexity and costliness of services--referred to as intensity--is high enough, spending will exceed the SGR target. While the SGR system allows for some volume and intensity spending growth, this allowance is limited. If such growth exceeds the average growth in the national economy, as measured by the gross domestic product per capita, fee updates are set lower than inflation in the cost of operating a medical practice. A large gap between spending and the target may result in fee reductions. There are two principal reasons why physician fees are projected to decline under the SGR system beginning in 2006. One problem is that projected volume and intensity spending growth exceeds the SGR allowance for such growth. Second, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) increased the update for 2004 and 2005--thus increasing spending--but did not raise the spending targets for those years. The SGR system, which is designed to keep spending in line with its targets, must reduce fees beginning in 2006 to offset excess spending attributable to both volume and intensity growth and the MMA provision. In general, proposals to reform Medicare's method for updating physician fees would either (1) eliminate spending targets and establish new considerations for the annual fee updates or (2) retain spending targets, but modify certain aspects of the current system. The first approach emphasizes stable and positive fee updates, while the second approach automatically applies financial brakes whenever spending for physician services exceeds predefined spending targets. Either approach could be complemented by focused efforts to moderate volume and intensity growth directly. As policymakers consider options for updating physician fees, it is important to be mindful of the serious financial challenges facing Medicare and the need to design policies that help ensure the long-term sustainability and affordability of the program.
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