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Ensuring access to postsecondary education while reducing vulnerability of aid programs to fraud, waste, abuse, and mismanagement is one of the key management challenges Education faces. Education helps millions of students enroll in higher education programs by providing for more than $50 billion in grants and loans annually. The department is responsible for ensuring that these programs are efficiently managed, establishing procedures to ensure that loans are repaid, and preventing fraud and abuse. Since 1990, we have identified Education's grant and loan programs as high risk for fraud, waste, abuse, and mismanagement. Both Education and Congress have made changes to address management challenges in the student financial aid programs. Congress established Education's Office of Federal Student Aid (FSA) as a performance-based organization in 1998. Its purpose is to increase accountability of officials, provide greater flexibility in management, integrate information systems, reduce costs, and develop and maintain a system that contains complete, accurate and timely data that can ensure program integrity. In 2001, Education established a Management Improvement Team (MIT) of senior managers to formulate strategies to address key management problems throughout the department. According to Education, MIT has developed a system to identify, track, and resolve audit and management issues both agencywide and in the student financial aid programs. Education has faced challenges in four areas related to its grant and loan programs. These are (1) financial aid system integration issues, (2) fraud and error in student aid application and disbursement processes, (3) defaulted student loans, and (4) human capital management. I would now like to briefly discuss each of these challenges. Education has spent millions of dollars to integrate and modernize its many financial aid systems in an effort to provide more information and better service to students, parents, institutions, and lenders. Effectively and efficiently investing in information technology requires, among other things, an institutional blueprint that defines in both business and technical terms the organization's current and target operating environments and provides a transition road map. Because Education did not have this blueprint, commonly called an enterprise architecture, we recommended in 1997 that the department develop an architecture and establish standard reporting formats and data definitions. In September 2002, Education's Office of the Inspector General (OIG) reported that the department had made progress in taking specific actions to lay the groundwork for an enterprise architecture. Still, critical elements need to be completed, including integrating separate architectures into a departmentwide architecture and fully implementing common identifiers for students and institutions to use in departmentwide system applications. Education is planning to brief us shortly about the department's enterprise architecture and progress it has made. Also, in April 2002, we recommended that FSA and the department develop and include clear goals, strategies, and measures to better demonstrate its progress in implementing plans for integrating its financial aid systems in FSA's performance plans and subsequent performance reports. With respect to modernization plans, we reported in November 2001 that FSA selected a viable, industry-accepted means of integrating its existing data on student loans and grants. FSA has made progress in implementing this approach for its Common Origination and Disbursement process, which includes the implementation of a common record that institutions can use to submit student financial aid for Pell Grant and Direct Loan programs. The ultimate success of this process, however, hinges on addressing serious postimplementation operational problems and helping thousands of schools implement the common record. Further, as we reported in December 2002, FSA has not completed a number of elements that are important to managing any information technology investment. These include determining whether expected benefits are being achieved and tracking lessons learned related to schools' implementation of the common record. We have recommended that FSA develop metrics, baseline data, and a tracking process for certain benefits expected from the system, and that they develop and implement a process for capturing and disseminating lessons learned to schools that have not yet implemented the common record. FSA has begun to act on both of these issues. Education has also faced challenges in ensuring that information reported on student aid applications is correct and that adequate internal controls are in place to prevent improper payments of grants and loans. The department has taken steps, in two pilot programs with the Internal Revenue Service (IRS), to match income reported on student aid applications with federal tax returns. To continue this income match and implement it on a broader scale, legislation to allow the IRS to release the information is necessary. Education has worked with the Department of the Treasury and the Office of Management and Budget to ask that the Congress enact such legislation. The department also verifies income information by asking 30 percent of applicants to provide copies of their tax returns to their student financial aid offices. In addition to strengthening its controls over student aid applications, we found that Education also needed to address institutions that were disbursing grants to ineligible students. The department has taken steps to analyze student data to identify high concentrations of students over 65 and eligible noncitizens at individual institutions to determine whether problems exist that warrant further review. These actions are encouraging, and if properly implemented, should improve controls over these payments. A continuing challenge for Education and FSA is preventing and collecting defaulted student loans. While the national student loan default rate has decreased from 11.6 percent in fiscal year 1993 to 5.9 percent in fiscal year 2000, the cumulative amount of defaulted student loans has increased by almost $10 billion over the same period. Education and FSA have implemented several default management strategies, such as establishing electronic debiting as a repayment option, and working with some guaranty agencies to set up alternatives to service and process claims for defaulted loans. Our analysis of FSA's internal documents indicated that for fiscal years 2000 through 2002, FSA met or exceeded many of the goals related to these strategies. However, neither Congress nor the public can determine whether FSA's default management goals have been met because Education did not prepare performance reports that conform to the requirements in the Higher Education Act. FSA's report to Congress on its performance in fiscal years 2000 and 2001 was not timely nor did it indicate whether or not FSA met established performance goals. We have recommended that Education and FSA prepare and issue reports to Congress on FSA's performance that are timely and clearly identify whether performance goals were met. Like other federal agencies, Education must address serious human capital issues, such as succession planning, because about one-third of Education's workforce is eligible to retire. In June 2001, we recommended that the department develop human capital goals and measures for its performance plans. In April 2002, we recommended that the department and FSA coordinate closely to develop and implement a comprehensive human capital strategy. Education added a specific objective to its strategic plan, and in 2002, issued a comprehensive 5-year human capital plan that incorporates FSA. This plan outlines steps and time frames for improving human capital management and specifies four critical areas where improvements should be made: (1) top leadership commitment, (2) performance management, (3) workforce skills enhancement, and (4) leadership and succession planning. It will be important that Education focus continually on implementation of the plan to achieve results. Now, Mr. Chairman, I would like to discuss Education's financial management challenges and the progress they have made in addressing them. Financial Management Weaknesses in Education's financial management and information systems have limited its ability to achieve one of its key goals--improving financial management to help build a high-performing agency. Significant progress towards this goal was made recently when Education received an unqualified--or "clean"--opinion on its financial statements. Prior to this, with the exception of 1997, Education had not received a clean opinion since its first agencywide audit in 1995. While this is an important milestone for the department, significant management weaknesses remain that must be addressed for Education to meet its goal in this area. Beginning with the department's first agencywide audit in 1995, Education's auditors have repeatedly identified significant financial management weaknesses. These weaknesses included Education's inability to provide the auditors with sufficient evidence to satisfy themselves about the accuracy or completeness of certain amounts included in the financial statements, including billions of dollars of adjustments to amounts reported in previous years' financial statements. According to Education's auditor, these adjustments were to correct "unnatural account balances" or otherwise adjust balances to the amount management's analysis supported. The auditor reported that in many cases, the cause of the incorrect balances could not be definitively determined, and the adjusting entry prepared by management was a reasoned judgment of how to correct its accounts. Education's auditors have also consistently reported major internal control weaknesses related to financial management systems and financial reporting. These weaknesses included (1) the absence of a fully integrated financial management system, (2) deficiencies in financial management practices that require extensive analysis of accounts to resolve errors through manual adjustments, (3) the lack of a rigorous review of interim financial data for timely identification and correction of errors, (4) the inability to accumulate, analyze, and present reliable financial information in the form of financial statements, (5) the dependence on a variety of stopgap measures to prepare financial statements, (6) the insufficiency of compensating controls, such as top-level reviews to address and to seek to compensate for systemic control weaknesses, and (7) the lack of a review to identify and quantify improper payments. Education's auditors also reported that internal controls needed strengthening in numerous areas relating to Education's investment of millions of dollars in property and equipment. Education has taken actions over the last several years to improve its financial management and to address the weaknesses identified. For example, during 2001, Education's MIT developed specific actions to address issues raised in previous financial statement audits. According to a MIT report on its accomplishments, Education began performing certain critical reconciliations on a monthly basis and began preparing interim financial statements, which helped identify areas needing further study. Education also improved its internal controls over property and equipment, and its auditor did not report this area as a weakness in fiscal year 2002. In addition, according to Education's auditor, during fiscal year 2002, the department implemented a new general ledger software package and FSA implemented a new financial management system to support their management information reporting needs. The auditor also reported that the department implemented several processes during fiscal year 2002 to improve its financial management, including convening the Accounting Integrity Board, the Audit Steering Committee, and the Accounting Assurance Group to plan, implement and manage quality accounting change control; establishing the Financial Statement Committee and continuing the Financial Statement Preparation Team and other special task force teams all of which are designed to improve the financial statement processes; and developing and implementing reconciliation work plans, policies and procedures, specialized teams and regular management reviews of the final work products as well as management review for process improvement. While Education has made progress in addressing many of its weaknesses, in fiscal year 2002, the auditors again reported that significant financial management issues continued to impair the department's ability to accumulate, analyze, and present reliable financial information. These problems, in part, resulted from inadequate internal controls over Education's financial management systems and financial reporting process. The auditor also reported that weaknesses in the department's ability to report accurate financial information on a timely basis were due to deficiencies in certain of the department's financial management practices, including inadequate reconciliations and account analysis early in fiscal year 2002. The auditor added that issues associated with the transition to a new financial management system in fiscal year 2002 also contributed to the department's difficulties in these areas. While the auditor reported that it noted improvements in the latter part of the fiscal year, it reported that it continues to believe that the department needs to place additional focus on reconciliation procedures, account analysis, and financial reporting. Until these issues are fully resolved, Education's ability to produce timely, accurate, and useful financial information for its managers and stakeholders will be greatly impeded. In addition, beginning with fiscal year 2004, Education and other major government agencies will be required to produce audited financial statements within 45 days after the end of the fiscal year compared to 120 days for fiscal years 2002 and 2003. Education will need to continue to focus strongly on resolution of its financial management deficiencies in order to be in a position to meet these new reporting deadlines. As we testified before this Subcommittee in April 2002, we identified other internal control weaknesses that make Education vulnerable to improper payments and lost assets. In our testimony and related report, we stated that for May 1998 through September 2000, weak internal controls over the (1) grants and loan disbursement process failed to detect certain improper payments, (2) third party draft processes increased Education's vulnerability to improper payments, and (3) government purchase cards resulted in some fraudulent, improper, and questionable purchases. We also reported that Education lacked adequate internal controls over computers acquired with purchase cards and third party drafts. Among other things, we found that computer purchases valued at almost $400,000 were not recorded in Education's property records, and $200,000 of that computer equipment could not be located. In response to our work, Education made several changes to its policies and procedures to improve internal controls and program integrity. These changes were a step in the right direction; but in many cases, our follow-up work indicated that they had not been effectively implemented. In March 2002, we reported that vulnerabilities remained in all areas we reviewed, except for third party drafts, which were discontinued altogether. For example, we reported that Education developed a new approval process for its purchase card program; however, our testing of 3 months of purchase card statements under the new process found that over 20 percent lacked proper support for the items purchased. In October 2002, Education told us that new policies and procedures were implemented and aimed at reducing the department's vulnerability to future improper use of purchase cards. These new policies and procedures relate to reviewing and approving purchase card transactions and providing related training. Further, the department told us that misuse of purchase and travel cards is now specifically included in the department's Table of Penalties with the desired effect of reducing misuse and abuse of government issued credit cards. Education also told us that it recognizes that reviewing and improving internal controls is an ongoing task and that it intends to remain vigilant in this area. These are positive steps that should help reduce the instances of improper purchases. Finally, Education will need to continue its actions in addressing weaknesses in its financial management information systems. The Federal Financial Management Improvement Act (FFMIA) of 1996 requires agencies to institute financial management systems that substantially comply with federal financial management systems requirements, applicable accounting standards, and the federal government's Standard General Ledger. Every year since FFMIA was enacted, Education's auditors have reported that Education's systems did not substantially comply with the act's requirements. In previous years, the auditors reported that without a fully integrated financial management system, deficiencies in the general ledger system, deficiencies in the manual adjustment process, and the need to strengthen other financial management controls such as reconciliation processes, collectively impair Education's ability to accumulate, analyze, and present reliable financial information. In addition, according to Education's auditor, although the department implemented a new financial management system during fiscal year 2002, issues associated with the transition to the new system contributed to difficulties in providing reliable, timely information for managing current operations and timely reporting of financial information to central agencies; therefore, Education still did not substantially comply with FFMIA's requirements. Education also needs to address identified computer security weaknesses in its financial management and other information systems. In September 2001, we reported that Education had made progress in correcting certain information system control weaknesses. At the same time, we identified weaknesses in Education's systems that place critical financial and sensitive grant information at risk of unauthorized access and disclosure, and key operations at risk of disruption. We recommended that Education correct certain information system control weaknesses and fully implement a comprehensive departmentwide computer security management program. In response, Education stated that it had developed a corrective action plan and is taking steps to further strengthen and develop a more comprehensive information security program. In addition, Education's auditor reported that for fiscal year 2002, the department made progress in strengthening controls over its information technology processes, but needs to continue efforts to develop, implement, and maintain an agencywide risk-based information security plan, programs, and practices to provide security throughout the life cycle of all systems. In closing, Chairman, I want to reiterate that Education is taking actions and making substantial progress in addressing major challenges related to its student aid programs and financial management. At the same time, some very difficult issues remain that must be resolved before Education is able to produce relevant, reliable, and timely information to efficiently and effectively manage the department and provide full accountability to its stakeholders. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other members of the Subcommittee may have.
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In its 2003 performance and accountability report on the Department of Education, GAO identified challenges in, among other areas, student financial aid programs and financial management. The information GAO presents in this testimony is intended to assist Congress in assessing Education's progress in addressing and overcoming these challenges. Education has taken steps to address its continuing challenges of reducing vulnerabilities in its student aid programs and improving its financial management, such as establishing a senior management team to address management problems, including financial management, throughout the agency. And, while Education has made significant progress, weaknesses remain that will require the continued commitment and vigilance of Education's management to resolve. Reduce vulnerability of student aid programs to fraud, waste, abuse, and mismanagement: Education has made considerable changes to address the ongoing challenges in administering its student aid programs. However, Education needs to continue to address systems integration issues, reduce fraud and error in student aid application and disbursement processes, collect on student loan defaults, and improve its human capital management. Improve financial management: Education has implemented many actions to address its financial management weaknesses. Significant progress was made recently when Education received an unqualified--or "clean"--opinion on its financial statements for fiscal year 2002. While this is an important milestone for the department, internal control and systems weaknesses remain that impede Education's ability to produce timely, accurate, and useful financial information for its managers and stakeholders.
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Air ambulances are an integral part of U.S. emergency medical systems, primarily transporting patients between hospitals, but also providing transport from accident scenes or for organs, medical supplies, and specialty medical teams. Air ambulances may be helicopters or fixed-wing aircraft. Helicopter air ambulances provide on-scene responses and much of the shorter-distance hospital-to-hospital transport, while fixed-wing aircraft are used mainly for longer facility-to-facility transport. (See fig. 1.) Helicopter air ambulances make up about 74 percent of the air ambulance fleet and, unlike fixed-wing aircraft, do not always operate under the direction of air traffic controllers. They also often operate in challenging conditions, flying, for example, at night during inclement weather and using makeshift landing zones at remote sites. My testimony today focuses on the safety of helicopter air ambulance operations. Air ambulance operations can take many different forms but are generally one of two business models--hospital-based or stand-alone. In a hospital- based model, a hospital typically provides the medical services and staff and contracts with an aviation services provider for pilots, mechanics, and aircraft. The aviation services provider also holds the FAA operating certificate. The hospital pays the operator for services supplied. In a stand-alone (independent or community-based) model, an independent operator sets up a base in a community and serves various facilities and localities. Typically, the operator holds the FAA operating certificate and either employs both the medical and flight crews or contracts with an aviation services provider for them. This stand-alone model carries more financial risk for the operator because revenues depend solely on payments for transporting patients. Some operators provide both hospital- based and stand-alone services and may have bases located over wide geographic areas. Regardless of the business model employed, most air ambulances--except government and military aircraft--must operate under rules specified in Part 135 of Title 14 of the Code of Federal Regulations when patients are on board and may operate under rules specified in Part 91 when patients are not present. As a result, different legs of air ambulance missions may be flown under different rules. However, some operators fly under part 135 regardless of whether patients are on board the aircraft. (See fig. 2.) Flight rules under Parts 91 and 135 differ in two key areas--(1) minimum requirements for weather and visibility and (2) rest requirements for pilots. The Part 135 requirements are more stringent. According to industry experts and observers, the air ambulance industry has grown, but data limitations make it difficult to determine by how much. Data for several years on the number of aircraft and number of operating locations are available in a database maintained by the Calspan- University of Buffalo Research Center (CUBRC) in alliance with the Association of Air Medical Services (AAMS). For 2003, the first year for which data are available, AAMS members reported a total of 545 helicopters stationed at 472 bases (airports, hospitals, and helipads). By 2008, the number of helicopters listed in the database had grown to 840, an increase of 54 percent, and the number of bases had grown to 699, an increase of 48 percent (see fig. 3). While a database official said that the data partly reflect the use of a revised criterion that allowed for the inclusion of more helicopters and for improved reporting since the database was established, the increase also reflects actual growth. Data are less readily available on whether this increase number of aircraft translates into an increased number of operating hours. FAA does not collect flight-hour data from air ambulance operators. Unlike scheduled air carriers, which are required to report flight hours, air ambulance operators and other types of on-demand operators regulated under Part 135 are not required to report flight activity data to FAA or the Department of Transportation. Historically, FAA estimated the number of flight hours, using responses to its annual General Aviation and Air Taxi and Avionics (GAATAA) survey. These estimates may not be reliable, however, because the survey is based on a sample of aircraft owners and response rates have historically been low. According to the government and industry officials we interviewed and the literature we reviewed, most of the air ambulance industry's growth has been in the stand-alone (independent) provider business model. Testimony from industry stakeholders recently submitted to NTSB further identifies the stand-alone provider business model as the current area of industry growth. The growth in the stand-alone provider business model has led to increased competition in some locales. According to the officials we interviewed and others who have studied the industry, the increase in the stand-alone provider business model is linked to the development, mandated in 1997, of a Medicare fee schedule for ambulance transports, which has increased the potential for profit making. This fee schedule was implemented gradually starting in 2002, and since January 2006, 100 percent of payments for air ambulance services have been made under the fee schedule. Because the fee schedule has created the potential for higher and more certain revenues, competition has increased in certain areas, according to many of our sources. Increased competition can lead to potentially unsafe practices, industry experts said. Although we were unable to determine how widespread these activities are, experts cited the potential for such practices, including helicopter shopping and call jumping. Helicopter shopping refers to calling a series of operators until an operator agrees to take a flight assignment, without telling the subsequently called operators why the previously called operators declined the flight. This practice can be unsafe if the operator that accepts the flight assignment is not aware of all of the facts surrounding the assignment. Call jumping occurs when an air ambulance operator responds to a scene without being dispatched to it or when multiple operators are summoned to an accident scene. This situation is potentially dangerous because the aircraft are all operating in the same uncontrolled airspace--often at night or in marginal weather conditions--increasing the risk of a midair collision or other accident. From 1998 through 2008, the air ambulance industry averaged 13 accidents per year, according to NTSB data. The annual number of air ambulance accidents increased from 8 in 1998 to a high of 19 in 2003. Since 2003, the number of accidents has slightly declined, fluctuating between 11 and 15 accidents per year. While the total number of air ambulance accidents peaked in 2003, the number of fatal accidents peaked in 2008, when 9 fatal accidents occurred (see fig. 4). Of 141 accidents that occurred from 1998 to 2008, 48 accidents resulted in the deaths of 128 people. From 1998 through 2007, the air ambulance industry averaged 10 fatalities per year. The number of overall fatalities increased sharply in 2008, however, to 29. Both the spike in the number of fatal accidents in 2008 and the overall number of accidents are a cause for concern. However, given the apparent growth in the industry, the increase in the number of accidents may not indicate that the industry has experienced, on the whole, the industry's safety record has worsened. More specifically, without actual data on the number of hours flown, no accident rate can be accurately calculated. Because an accurate accident rate is important to a complete understanding of the industry's safety, we recommended in 2007 that FAA collect data on flight activity, including flight hours. In response, FAA has surveyed all helicopter air ambulance operators to collect flight activity data. However, to date, FAA's survey response rate is low, raising questions about whether this information can serve as an accurate measure or indicator of flight activity. In the absence of actual flight activity data, others have attempted to estimate flight hours and accident rates for the industry. For example, an Air Medical Physician Association (AMPA) study estimated annual flight hours for the air medical industry through an operator survey, determining that the overall air medical helicopter accident rate has dropped slightly in recent years to approximately 3 accidents per 100,000 flight hours. However, the study's preliminary estimates for 2008 indicate that the fatal accident rate tripled over the 2007 rate, increasing from 0.54 fatal accidents per 100,000 flight hours in 2007 to 1.8 fatal accidents per 100,000 flight hours in 2008. Data on the causes and factors underlying air ambulance accidents indicate that while the majority of accidents are caused by pilot error, a number of risks, including nighttime operations, adverse weather conditions, and flights to remote sites, also contribute to accidents. NTSB data on helicopter accidents occurring from 1998 through 2008 show that pilot error was deemed the probable cause in more than 70 percent of air ambulance accidents, while factors related to flight environment (such as light, weather, and terrain) contributed to 54 percent of all accidents. Nighttime accidents for air ambulance helicopters were prevalent, and air ambulance accidents tended to be more severe when they occurred at night than during the day. Similarly, air ambulance accidents were often associated with adverse weather conditions (e.g., wind gust and fog). Finally, flying to remote sites may further expose the crew to other risks associated with unfamiliar topography and makeshift landing sites. In 2007, we reported that the air ambulance industry's response to the higher number of accidents has taken a variety of forms, including research into accident causes and training. Since then, the industry has continued its focus on improving safety by, for example, initiating efforts to develop an industry risk profile and share weather information. In July 2008, for instance, AAMS convened a conference (summit) on safety to encourage open communication between the medical and aviation sectors of the industry. AAMS plans to issue a summary of the summit's proceedings that will include recommended next steps. Table 1 highlights examples of recent industry initiatives. In 2007, we reported that FAA, the primary federal agency overseeing air ambulance operators, has issued guidance, expanded inspection resources, and collaborated with the industry to reduce the number of air ambulance accidents. Since then, FAA has taken additional steps to improve air ambulance safety including the following: Enhanced oversight to better reflect the unique nature of the industry. FAA has changed its oversight to reflect the varying sizes of operators. Specifically, large operators with 25 or more helicopters dedicated to air medical flights are now assigned to dedicated FAA Certificate Management Teams (CMT)--groups of inspectors that are assigned to one air ambulance operator. These CMTs range in size from 4 inspectors for Keystone Helicopter Corporation, which has a fleet of 38 helicopters, to 24 inspectors for Air Methods, which has a fleet of 322 helicopters. Additionally, CMTs use a data- and risk-based process to target inspections to areas that pose greater safety risk. For operators of all sizes, FAA has asked inspectors to consider using the Surveillance Priority Index tool, which can be used to identify an operator's most pressing safety hazards. In addition, FAA is hiring more aviation safety inspectors with rotorcraft experience. Provided technical resources. FAA has revised its guidance for the use of night vision goggles (NVG) and established a cadre of NVG national resource inspectors. FAA has also developed technical standards for the manufacture of helicopter terrain awareness and warning systems for air medical helicopters. These standards articulate the minimum performance standards and documentation requirements that the technology must meet to obtain FAA approval. FAA also commissioned the development of an air ambulance weather tool, which provides weather assessments for the community. Launched accident mitigation program. Initiated in January 2009, this program provides guidance for inspectors of air ambulance operators, requiring them to ensure, among other things, that these operators have a process in place to facilitate safe operations, such as a risk assessment program. Revised minimum standards for weather and safe cruise altitudes: To enhance safety, FAA revised its minimal requirements for weather and safe cruise altitudes for helicopter air ambulances in November 2008. Specifically, FAA revised its specifications to require that if a patient is on board for a flight or flight segment and at least one of the flight segments is therefore subject to Part 135 rules, then all of the flight segments must be conducted within the revised weather minimums and above a minimum safe cruise altitude determined in preflight planning. Issued guidance on operational control: To help operators better assess risk, improve the flow of information before and during flights, and increase support for flight operations, FAA issued guidance to help air medical operators develop, implement, and integrate operations control centers and enhance operational control procedures. To date, FAA has opted not to use its rulemaking authority to require certain actions, relying instead on notices and guidance to encourage air ambulance operators to take certain actions. FAA guidance and notices are not mandatory for air ambulance operators and are not subject to enforcement. FAA officials told us that rulemaking is a time-consuming process that can take years to complete, hindering the agency's ability to quickly respond to emerging issues. By issuing guidance rather than regulations, FAA has been able to quickly respond to concerns about air ambulance safety. However, we previously noted that FAA lacked information on the extent to which air ambulance operators were implementing the agency's voluntary guidance and on the effect such guidance was having. Consequently, we recommended that FAA collect information on operators' implementation of the voluntary guidance and evaluate the effectiveness of that guidance. In response, in January 2009, FAA directed safety inspectors to survey the air medical operators they oversee about their adoption of suggested practices, such as implementing risk assessment programs and developing operations control centers. According to the inspectors, most of the 74 operators surveyed said they had adopted these practices. Despite the actions taken by the industry and the federal government, 2008 was the deadliest year on record for the air ambulance industry. As a board member noted at the recent NTSB hearing on air ambulance safety, the recent accident record of the industry is unacceptable. Based on our body of work on aviation safety, including air ambulance safety; a review of the published literature; and interviews with government and industry officials, we have identified several potential strategies for improving air ambulance safety. Each of these strategies has merits and challenges, and we have not analyzed their benefits and costs. But, as the recent accident numbers show, additional efforts are warranted. Obtain complete and accurate data on air ambulance operations: As we reported in 2007, FAA lacks basic industry information, such as the number of flights and flight hours. In response to our prior recommendation that FAA collect flight activity data, FAA surveyed all helicopter air ambulance operators in 2008, but fewer than 40 percent responded, thereby raising questions about the reliability of the information collected. The low response rate also suggests that many operators will not provide this information unless they are required to do so. Until FAA obtains complete and reliable information from all air ambulance operators, it will be unable to gain a complete understanding of the industry and determine whether its efforts to improve industry safety are sufficient and accurately targeted. Increase use of safety technologies: We have previously reported that using appropriate technology and infrastructure can help improve aviation safety. For example, the development and installation of terrain awareness and warning systems on large passenger carriers has almost completely eliminated controlled flights into terrain, particularly for aircraft equipped with this system. When we studied the air ambulance industry in 2006 and 2007, the most frequently cited helicopter-appropriate technology was night vision goggles. Additional safety technology has been developed or is in development that will help aircraft avoid cables and enhance terrain awareness for pilots, among other things. However, testimony submitted by industry stakeholders at NTSB's February 2009 hearing on air ambulance safety indicated that the implementation of such technology has been slow. NTSB previously recommended that FAA require terrain awareness and warning systems on air ambulances. Proposed legislation (H.R. 1201) would also require FAA to complete a study within one year of the date of enactment on the feasibility of requiring flight data and cockpit voice recorders on new and existing air ambulances. Sustain recent efforts to improve air ambulance safety: Our past aviation safety work and anecdotal information on air ambulance accident trends suggest that the industry and federal government must sustain recent efforts to improve air ambulance safety. In 1988, after the number of accidents increased in the mid-1980s, NTSB published a study that examined air ambulance safety issues. The study contained 19 safety recommendations to FAA and others. FAA took action, including implementing the NTSB recommendations, and the number of ambulance accidents declined in the years that immediately followed. However, as time passed, the number of accidents started to increase, peaking in 2003. This again triggered a flurry of government and industry actions. Similarly, FAA took steps to address runway incursions and overruns after the number and rate of incursions peaked in fiscal year 2001, but FAA's efforts later waned, and the number and rate of incursions and overruns remained steady. Fully Address NTSB recommendations: In 2006, NTSB published a special report focusing on the air ambulance industry, which included four recommendations to FAA to improve air ambulance safety. Specifically, NTSB called for FAA to (1) require that all flights with medical personnel on board be conducted in accordance with Part 135 regulations, (2) develop and implement flight risk evaluation programs, (3) require formalized dispatch and flight-following procedures, and (4) require terrain awareness and warning systems on aircraft. As of January 2009, FAA had sufficiently addressed only the recommendation to require formalized dispatch and flight-following procedures, according to NTSB. However, NTSB's February 2009 air ambulance hearing highlighted the status of the NTSB recommendations, and major industry associations have said they agree in principle with the recommendations, but would like to work with FAA and NTSB to adapt the recommendations to the industry's circumstances and gain more flexibility. Proposed legislation (H.R. 1201) also would require most of the safety enhancements NTSB recommended. Adopt safety management systems within the air ambulance industry: Air operators rely on a number of protocols to help reduce the potential for poor or erroneous judgment, but evidence suggests that these protocols may be inconsistently implemented or followed in air ambulance operations. According to an FAA report on air ambulance accidents from 1998 through 2004, a lack of operational control (authority over initiating, conducting, and terminating a flight) and poor aeronautical decision making were significant factors contributing to these accidents. To combat such issues, FAA has been encouraging air ambulance operators to move toward adopting safety management systems, providing guidance, developing a generic flight risk assessment tool for operators, and requiring inspectors to promote the adoption of safety best practices. Clarify the role of states in overseeing air ambulance services: Air ambulance industry stakeholders disagree on the role that states should play in overseeing broader aspects of air medical operations. In particular, some industry stakeholders have advocated a greater role for states in regulating air ambulance services as part of their public health function. Other industry stakeholders, however, oppose increased state oversight, noting, for example, that the Airline Deregulation Act explicitly prohibits states from regulating the price, route, or service of an air carrier. This legislation generally limits oversight at the state or local levels to the medical care and equipment provided by air ambulance services, although the extent of this oversight varies by state. Proposed legislation (H.R. 978) would recognize and clarify the authority of the states to regulate intrastate air ambulance services in accordance with their authority over public health. Determine the appropriate use of air ambulance services: According to a May 2007 article by two physicians, multiple organizations are concerned that air ambulance services are overused and misused. The study further notes concerns that decisions about where to transport a patient may be influenced by nonmedical reasons, such as insurance coverage or agreements with hospitals. Another industry expert has posited that excessive use of air ambulances may be unsafe and not beneficial for most patients, citing recent studies that conclude few air transport patients benefited significantly over patients transported by ground and noting the recent increase in the number of air medical accidents. Other studies, however, have disagreed with this position, citing reductions in mortality achieved by using air ambulances to quickly transport critically injured patients. We provided a draft copy of this testimony to FAA for review and comment. FAA provided technical clarifications, which we incorporated as appropriate. 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 Dr. Gerald L. Dillingham at (202) 512-2834 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Individuals making key contributions to this testimony were Nikki Clowers, Assistant Director; Vashun Cole, Elizabeth Eisenstadt, Brooke Leary, and Pamela Vines. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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Air ambulance transport is widely regarded as improving the chances of survival for trauma victims and other critical patients. However, recent increases in the number of air ambulance accidents have led to greater industry scrutiny by government agencies, the public, the media, and the industry itself. The National Transportation Safety Board (NTSB) and others have called on the Federal Aviation Administration (FAA), which provides safety oversight, to issue more stringent safety requirements for the industry. This testimony discusses (1) recent trends in the air ambulance industry with regard to its size, composition, and safety record; (2) recent industry and government efforts to improve air ambulance safety; and (3) potential strategies for improving air ambulance safety. This testimony is based primarily on GAO's February 2007 study on air ambulance safety (GAO-07-353). To update and supplement this 2007 report, GAO analyzed the latest safety information from NTSB and FAA, reviewed published literature on the state of the air ambulance industry, and interviewed FAA officials and industry representatives. GAO provided a copy of the draft testimony statement to FAA. FAA provided technical comments, which GAO incorporated as appropriate. The air ambulance industry has increased in size, and concerns about its safety have grown in recent years. Available data suggest that the industry grew, most notably in the number of stand alone (independent or community-based) as opposed to hospital-based operators, and competition increased among operators, from 2003 through 2008. During this period, the number of air ambulance accidents remained at historical levels, fluctuating between 11 and 15 accidents per year, and in 2008, the number of fatal accidents peaked at 9. This accident record is cause for concern. However, a lack of reliable data on flight hours precludes calculation of the industry accident rate--a critical piece of information in determining whether the increased number of accidents reflects industry growth or a declining safety record. The air ambulance industry and FAA have acted to address accident trends and causes. For example, FAA enhanced its oversight to reflect the varying sizes of operators, provided technical resources to the industry, launched an accident mitigation program, and revised the minimum standards for weather and safe cruising altitudes that apply to air ambulance operations. Despite the actions to improve air ambulance safety, 2008 was the deadliest year on record for the industry. Through its work on aviation safety, including air ambulance safety; review of the published literature; and interviews with government and industry officials, GAO has identified several potential strategies for improving air ambulance safety, including the following: (1) Obtain complete and accurate data on air ambulance operations. (2) Increase the use of safety technologies. (3) Sustain recent efforts to improve air ambulance safety. (4) Fully address NTSB's recommendations. (5) Adopt safety management systems within the air ambulance industry. (6) Clarify the role of states in overseeing air medical services. (7) Determine the appropriate use of air ambulance services.
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Federal programs for bridge construction, reconstruction, and repair are authorized in surface transportation acts. In 2012, MAP-21 consolidated a number of existing highway formula programs, including the Highway Bridge Program (HBP). Bridge projects are now generally funded through the National Highway Performance Program (NHPP) and the Surface Transportation Block Grant Program (STBGP). MAP-21 included a number of statutory requirements related to transforming the surface transportation system to a performance-based approach. For instance, MAP-21 directed DOT to establish performance measures related to highway safety, asset condition, and highway system performance, among other things. In some cases, MAP-21 required DOT to use the rulemaking process to implement performance-based requirements. In 2015, the Fixing America's Surface Transportation Act (FAST Act), which reauthorized surface transportation programs, largely maintained current program structures, including MAP-21's overall performance- management approach. The FAST Act also expanded the eligibility of NHPP funds to be used for reconstruction, resurfacing, restoration, rehabilitation, or preservation of a non-National Highway System (non- NHS) bridge if the bridge is on a Federal-aid highway. FHWA is the agency charged with oversight of the condition of the nation's bridges. FHWA administers the federal-aid highway program that provides about $40 billion each year to states to design, construct, and preserve the nation's roadway and bridge infrastructure. These funds are distributed through annual apportionments established by statutory formulas. FHWA oversees the federal-aid highway program primarily through its 52 Division Offices located in each state, D.C., and Puerto Rico. FHWA Division Offices have 10 to 61 staff each, depending on the size of the state's highway program and other factors. As of June 2016, FHWA had approximately 2,800 staff--about two-thirds in the field and the remaining third at FHWA headquarters. FHWA distributes and tracks federal funds for highway and bridge projects and collects some data to estimate annual spending by state and local governments on highway and bridge projects. Specifically, FHWA tracks federal-aid highway program obligations in FMIS, for individual project segments or contracts. This allows FHWA to collect and report information on the types of activities (such as obligations for the construction of new bridges) funded with Highway Trust Fund monies. Although federal funding is provided to states to help improve highway infrastructure, state and local agencies own and maintain most of the nation's bridges. State and local agencies typically provide matching funds on bridge projects that receive federal funding and may contribute funds beyond their match amount. State-level DOTs are responsible for ensuring bridge inspections are completed and for inventorying bridges within their states according to federal standards (except for tribally or federally owned bridges). State DOTs and local-planning organizations have discretion in determining how to allocate available federal funds among various projects and are responsible for selecting highway projects, including bridge projects. FHWA collects some data to estimate annual spending by state and local governments on highway and bridge projects. Specifically, FHWA requests that state DOTs submit several forms to the Office of Transportation Policy Studies on a regular basis, such as: Form 532, State Highway Expenditures--submitted annually, it requests the total spent on all highways by the state, including bridges; bridges are not separately reported. Form 536, Local Highway Finance Report--submitted biennially, it requests the total spent on all highways by all units of the state's local governments. Bridges are not separately reported. Acknowledging difficulties in obtaining data from local agencies, FHWA recommends that states use sampling and estimation to prepare this form, such as collecting data from a selection of local governments and then expanding the sample to generate statewide totals. Form 534, State Highway Capital Outlay and Maintenance Expenditures--submitted annually, it requests bridge-specific and other highway outlays. This form is designed to complement the data in Form 532 by classifying the highway expenditures of states into improvement types, such as new construction and rehabilitation, among other things. As part of its oversight role, FHWA collects information from states on bridge conditions and maintains this data in its NBI database. Bridges that receive low inspection ratings on specific bridge elements are classified as deficient. Bridges may be classified as deficient for one of two reasons: A structurally deficient bridge has one or more structural components, such as the deck that directly carries vehicles, in poor condition. Structurally deficient bridges often require maintenance and repair to remain in service. A functionally obsolete bridge has a configuration or design that may no longer be adequate for the traffic it serves, such as being too narrow or having inadequate overhead clearance. Functionally obsolete bridges do not necessarily require repair to remain in service. A bridge that is both structurally deficient and functionally obsolete is listed as structurally deficient in the NBI. In this report, we assess the conditions of bridges classified as structurally deficient by both the total deck area and number of bridges. Analysis of conditions based on the total number of bridges without considering the size of bridges can create an incomplete picture. A state may have a large number of deficient bridges, but if the deficient bridges are small bridges, the total deck area in need could still be relatively low. In comparison, another state could have very few deficient bridges, but if those deficient bridges are large, the total deck area in need could be much higher. Bridges may vary significantly in size and generally, the needs of larger bridges are more costly than those of smaller bridges. Measuring the total deck area, which accounts for the size of a bridge, provides more information than counting the number of bridges (see fig. 1). We found that bridge conditions, as indicated by data in the NBI, have improved nationwide over the past 10 years, as measured by total deck area and number of bridges that are structurally deficient. The percentage of structurally deficient deck area and bridges declined along the same trajectory from 2006 to 2015. Specifically, the deck area on bridges classified as structurally deficient decreased from 9 percent to 7 percent, and over the same time period, structurally deficient bridges, by number of bridges, decreased from 13 percent to 10 percent (see fig. 2). Bridge owners have broad discretion in determining how to address bridge needs, but statutory requirements enacted in 2012 directed that states allocate some federal funds to bridges if states do not meet specified standards. FHWA does not issue guidance on which bridges to target with federal funds, such as specifically targeting structurally deficient bridges. However, MAP-21 contained a penalty provision where any state whose percentage of total deck area of bridges on the NHS classified as structurally deficient exceeds 10 percent for 3 years in a row must devote funds (equal to 50 percent of the state's fiscal year 2009 HBP apportionment) to eligible projects on bridges on the NHS until they meet this minimum threshold. FHWA officials told us they plan to use bridge condition data from 2014 through 2016 to determine if a penalty is to be applied to the states, and begin imposing this penalty in 2017 if needed. Despite overall improvements, among states there is variation in bridge conditions. Specifically, our review of 2015 NBI data shows that some states have substantially higher percentages of deck area on bridges classified as structurally deficient than others have (see fig. 3). For example, 21 percent of the total deck area in Rhode Island, affecting 23 percent of the 766 bridges in the state, is structurally deficient. While in Texas, less than 2 percent of the total deck area, affecting less than 2 percent of the state's 53,209 bridges, is structurally deficient. Most but not all states have made some improvements in reducing their percentage of deck area on bridges classified as structurally deficient over the past 10 years. Forty-one states, D.C., and Puerto Rico reduced the percentage from 2006 to 2015. Rhode Island had the greatest reduction, going from over 40 percent to over 20 percent of total deck area on bridges that are structurally deficient. However, in 9 states the percentage increased from 2006 to 2015. Delaware had the highest increase in the percentage of deck area on bridges classified as structurally deficient, going from 2 percent to almost 6 percent. GAO has reported that reducing structurally deficient bridges may not always be a state's highest priority. For example, a state may have other priorities for bridge projects such as seismic retrofitting. According to AASHTO representatives, states use their judgment in deciding how to prioritize their funding for bridge projects. See appendix II for more information about the percentages of bridges and total deck area that are structurally deficient in each state. The number of bridges and amount of total deck area increased dramatically from the 1950s through 1970s. The average age of bridges nationwide is 45 years, based on our analysis of NBI data. According to FHWA, the design life of the majority of existing bridges is 50 years, though bridges have life spans that are dependent on factors such as materials, environment, level of use, and level of maintenance. Also according to FHWA, new design guidelines and construction materials may raise the expected service life of new bridges to 75 years or longer. However, states and other bridge owners are faced with significant challenges in addressing the needs of existing bridges. In the 1950s, at the beginning of the Interstate-era, through the 1970s, the number of bridges constructed in the United States as well as the total square footage of bridge deck constructed increased greatly (see fig. 4). Analysis of NBI data indicates that the large number of bridges built during that time has led to an increase in the need to address those bridges that are now structurally deficient. Specifically, as shown in figure 5, the levels of structurally deficient total deck area are greatest for those built from 1960 through 1974, during which years the total deck area of bridges built in the United States peaked. The increased total deck area of bridges built after the 1950s suggest that an increase in bridges with structural deficiency may be expected and thus would increase the need for bridge maintenance, replacement, or rehabilitation. Federal funds obligated for bridges have remained relatively stable over the last 10 years, between $6 billion and $7 billion annually in most years (see table 1). However, total federal obligations for bridges were notably higher in 2 years (2009 to 2010) due to an influx of funds from the American Recovery and Reinvestment Act of 2009 (Recovery Act). Prior to 2013, the majority of obligations for bridges came from the HBP. Since 2013, such obligations have mostly come from the NHPP and STP. In the last 10 years, federal obligations have shifted somewhat from building new bridges to projects that preserve existing bridges. Based on our analysis comparing 2006 to 2015 obligations, the types of improvements made to bridges have somewhat changed (see fig. 6). For example, fewer federal obligations were directed to bridge replacements in 2015 than in 2006 (decreasing from 57 percent in 2006 to 48 percent in 2015). Also, fewer obligations went toward new bridges in 2015 than in 2006 (from 15 percent to 13 percent). Additionally, more obligations went toward bridge rehabilitation work--major work required to restore the structural integrity of a bridge or necessary to correct major safety defects--in 2015 than in 2006 (this increased from 23 percent of obligations in 2006 to 28 percent in 2015). Finally, the percentage of obligations used for preventative maintenance increased from 2006 to 2015 (from 6 percent to 11 percent). This is partly because more preventative maintenance activities such as bridge cleaning, painting steel bridges, sealing concrete, and repairing or replacing deck joints, became eligible for federal bridge program funding in 2006. Based on data collected from state and local governments, FHWA reported that total estimated spending on bridges increased in recent years, from about $11.5 billion in 2006 up to about $17.5 billion in 2012 (see table 2). Analysis of this FHWA data suggests that state and local funding for bridges has increased. FHWA tracks both the condition of bridges and the funding targeted to them, as described below. As part of its oversight role, FHWA seeks to ensure that states comply with the NBIS, which details the process for and frequency of bridge inspections. FHWA also collects bridge condition data from states and maintains the NBI, the primary source of information on the nation's bridges. The NBI contains information on each bridge, such as its location, size, age, condition, and inspection dates. FHWA (1) maintains data on total federal obligations dedicated to bridges each year; (2) periodically estimates the contributions from state and local agencies through data collection efforts; and (3) periodically reports to Congress its estimates of total funds dedicated to bridges (including state and local funds) in its Conditions & Performance Report, issued roughly every 2 years. The report also estimates future-spending needs to maintain or improve current conditions and performance. However, FHWA currently lacks a mechanism for tracking the relationship between the invested funds and the corresponding outcomes-- maintained and improved bridge conditions. Given that FHWA already estimates total funds dedicated to bridges and collects data on bridge conditions nationwide, it has the information needed to create performance measures that would demonstrate the link between federal funding and the outcomes for bridges. According to leading practices for government management identified by OMB and GAO, agencies should not only have and report performance measures but also use them to link outcomes with resources invested. Specifically, the Government Performance and Results Act (GPRA) of 1993 and the GPRA Modernization Act of 2010 establish the framework for performance management in the federal government. Under this framework, federal agencies are required to, among other things, assess whether relevant programs and activities are contributing as planned to established goals. Further, MAP-21 included a declaration on the importance of accountability and linking performance outcomes to investment decisions. We have reported that linking performance outcomes with information on resources invested (i.e., data on the resources used to produce an outcome, including costs) can help agencies to more clearly understand how changes in invested resources may result in changes to performance. We have also reported that an effective way to show the relationship between resources invested and outcomes is for agencies to use efficiency measures. These measures are typically defined as the ratio of two elements: a program's inputs (such as its costs or hours worked by staff), to its outputs or outcomes (see fig. 7). OMB has issued guidance with examples of meaningful performance measures, including some efficiency measures: for the Forest Service, cost per acre of environmentally important forest protected (provides costs per acre, including actual program obligations and other dedicated funds); for the Patent and Trade Office, cost per patent processed (provides costs per patent, including staff expenses and overhead costs); and for the Office of Child Support Enforcement, total child support dollars collected per dollar of program expenditures (provides outcomes-- dollars in child support collected--per total administrative expenditures including staff expenses). However, determining inputs--or invested resources--for efficiency measures can be challenging when there are non-federal entities contributing resources. Despite the usefulness of efficiency measures, we have acknowledged that many of the outcomes for which federal programs are responsible are part of broader efforts involving federal, state, local, and other partners, and thus it can be difficult to isolate a particular federal program's contribution to the broader outcomes. This is the case for highway programs, since funds from federal, state and local sources all contribute to maintained or improved asset conditions. However, federal guidance exists that may help. To assist agencies in implementing the GPRA framework, OMB issued guidance about how federal agencies might address the challenge of developing performance measures for programs that co-mingle funds from different sources (i.e., federal, state, and local funds) in support of a broad goal. The guidance acknowledged that it can be difficult to assess the marginal impact of the federal investment for programs where combined co-mingled funding contributes to the same broad performance outcome, but recommended that agencies should nonetheless seek to assess the marginal impact of the federal investment to the overall outcomes. OMB guidance noted that in such cases, the resource inputs from non-federal partners may be relevant in assessing the effectiveness of programs matched by federal assistance. OMB suggested that in such cases, agencies should consider crafting two performance measures of efficiency: one measure reporting unit costs in terms of output per federal dollar spent and another measure reporting unit costs in terms of the output per combined dollars spent. FHWA officials told us that they have not developed measures linking resources to outcomes. This is mostly due to limitations of the previous version of their financial tracking system, FMIS. Specifically, officials explained that prior to the most recent version of FMIS (Version 5), which was launched in October 2015, data were collected on a project segment level that may have included multiple bridges. Thus, it was not possible to directly compare federal obligations on bridge projects to outcomes, in the form of bridge conditions found in the NBI. However, when asked, officials said that such a comparison could be possible with the newest version of FMIS by creating a connection between FMIS and the NBI and showing what happens to bridge conditions when federal obligations change over time. Using such performance measures would help FHWA to demonstrate the link between federal funding and outcomes for bridges. As FHWA has reported in recent budget requests, states face increasing challenges in finding sufficient funding for their infrastructure needs. In addition, as GAO has previously reported, bridge infrastructure--like most of the nation's physical infrastructure--is under strain. Steady increases in road usage, congestion, and the aging of the nation's bridges will likely continue to present challenges in the future. Most of the state government officials we interviewed reported that, consistent with FHWA data, bridge funding has been stable since the federal bridge program was consolidated into other programs in 2012. We interviewed officials from 24 states and D.C., and officials from 21 states and D.C. told us there had been no change in funding their bridge programs in the last 4 years. Officials from 3 states reported an overall increase in bridge funding since that time, although officials from 2 of those states indicated that the increase in bridge funding was not necessarily a result of federal changes. The general stability in bridge funding may be a result of the long time frame for programming bridge projects, which could create a lag in funding levels' response to policy changes. AASHTO representatives told us it is difficult to judge the impact of federal statutory changes on bridges because of the long-term nature of infrastructure projects. Ten states and D.C. provided us with examples of bridge-programming cycles of 5 years or greater. For example, Ohio DOT officials told us that they program their bridge projects 6 years into the future. Through this process, state officials determine their project needs and request a planned allocation for the 6th year of the funding cycle. With this type of long-term planning and budgeting process, it may take several years for a change in federal policy to have a noticeable effect on bridge projects' funding. Officials from some selected states reported increased flexibility in their ability to use federal funds for bridges. In addition to allowing states the flexibility to determine whether to spend federal highway funds on bridges or other highway needs, changes provided by MAP-21 gave states flexibility to use federal funds for a greater range of bridge projects. Prior to MAP-21, only bridges that met certain criteria--such as being rated below a certain threshold or not having received federal funds in the previous 10 years--could receive federal funds. Officials from 10 of the 24 states and D.C. mentioned the increased flexibility in using highway funds for bridge projects since MAP-21. See table 3 for examples of how states used the increased flexibility. Officials from most selected states told us there have been no changes in prioritizing bridges relative to other transportation assets. Specifically, officials from 18 states and D.C. reported that they give bridges the same priority as they did prior to MAP-21. Officials from several of these states said that bridges have remained a high priority because of safety concerns. For example, an official from the New York DOT said that there is a keen awareness of what happens when bridges are not maintained, citing the state's major bridge failures in the 1980s--the Mianus River Bridge in 1983 and the Schoharie Creek Bridge in 1987, and thus bridges have remained a priority over time in New York. Though most states have reportedly not changed the way they prioritize bridges, officials from 2 states told us that bridges' relative priority may change after they implement performance management principles. For example, California officials told us they are transitioning toward a performance-based management approach where the needs of different transportation assets, including bridges and pavement, will be weighed against each other in order to meet performance targets within budgetary constraints. According to officials, a possible outcome is that local agencies in California may need more funding to repair their pavement or other assets to meet performance targets, which have yet to be determined through the FHWA rulemaking process on performance measures that is under way. Further, officials stated that these changes could have an impact on future bridge funding and relative priority. Likewise in Iowa, officials said that the state is moving toward using asset management principles in future decision making, which will involve more comparisons across different types of projects. Officials from a majority of the states and local agencies we interviewed cited inadequate funding as a challenge for their bridge programs. Of the officials we interviewed from 24 states and D.C., officials from 14 described inadequate funding as a challenge. See table 4 for examples of challenges of inadequate bridge funding cited. Local agency officials also discussed inadequate funding as a challenge for their bridge programs. Officials from 6 of the 10 local agencies we interviewed mentioned that inadequate funding for bridges was a challenge. For example, officials at the Oklahoma City Department of Public Works reported that many needed bridge projects are delayed because they lack sufficient funds. Further, they are only able to address the most critical needs due to limited funding. Transportation officials in Seattle, Washington, told us that the state DOT distributes a total of about $35 million per year in federal funds to local agencies, which compete for a part of those funds; however, the city's highest priority bridge has a replacement cost of about $350 million, which far surpasses what they may receive. Given the gap in funding for large projects, officials said they will be forced to close large bridges that are deemed unsafe if they are unable to raise the funds needed to repair them. Some state and local officials reported that many bridges are reaching the end of their intended service life. According to officials from several states and local agencies, most bridges were designed to last 50 years. Officials from 13 of the states we interviewed reported aging bridges as a challenge. For many of these states, the challenge of aging bridges is intertwined with the challenge of inadequate funds. State DOT officials stated that aging bridges require more costly maintenance and repairs and many need to be replaced. See table 5 for examples of challenges cited related to aging bridge inventories. Other challenges were also cited by state DOT officials. See table 6 for examples of challenges that were less frequently stated. Bridge conditions have generally improved nationwide over the past decade. However the increase in the number and size of bridges that are approaching the limits of their design life will likely place a greater demand on bridge owners in the near future, making it more difficult to mitigate issues in a cost-effective manner. While FHWA collects information on bridge conditions annually and maintains data on federal obligations dedicated to bridges, it lacks performance measures demonstrating the link between bridge funding and changes in bridge conditions. This lack is in part because a limitation in the prior financial- tracking system, which did not allow the direct comparison of federal obligations with bridge projects' outcomes. However, with recent improvements to FMIS, FHWA has the information needed to create an efficiency measure or measures to demonstrate the link between federal funding and the outcomes for bridges. This information can support Congress in making informed choices about how to best invest the limited available resources in maintaining or improving the condition of the nation's bridges. We recommend that the Secretary of the Department of Transportation direct the FHWA Administrator to develop an efficiency measure or measures that demonstrate the linkage between the federal funding of bridges and the desired performance outcomes, such as maintained or improved bridge conditions, and report the resulting information to Congress. We provided a draft of this report to DOT for its review and comment. In written comments, reproduced in appendix III, DOT concurred with our recommendation. In addition, DOT provided technical comments that we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees and the Secretary of Transportation. 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) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. The names of GAO staff who made key contributions to this report are listed in appendix IV. This report addresses the funding and management of bridges and examines: (1) trends, over the past 10 years, in the condition of the nation's bridges; (2) trends, over the same period, in federal funding of the nation's bridges and how FHWA monitors the linkage between this funding and outcomes; and (3) changes since MAP-21 in how selected states fund and manage their bridge programs, including any challenges they face. To determine trends in the condition of the nation's bridges, we reviewed and analyzed FHWA's National Bridge Inventory (NBI) data from calendar years 2006 through 2015. We limited our review of NBI data to bridges that are located on public roads and that are at least 20 feet in length. We obtained NBI data for bridges during the selected calendar years for an aggregate of all records and by state, including all 50 states; District of Columbia (D.C.); and Puerto Rico. Specifically, we reviewed data by number of bridges and total deck area, looking at deficiency status and year of bridge construction, among other data. We calculated total deck area based on a formula using structure length and deck width--or in the case of culverts (structures with fill over them), approach roadway width-- using NBI data. To determine trends in funding the nation's bridges, we reviewed and analyzed federal obligations data on bridge projects in FHWA's Fiscal Management Information System (FMIS) from fiscal years 2006 through 2015. Specifically, we obtained federal obligations data for bridge new construction, bridge replacement, bridge rehabilitation, bridge preventative maintenance, bridge protection, and bridge inspection and related training. We analyzed the data by improvement codes and by federal highway programs. In addition, we analyzed FHWA's available data on state and local governments' spending for bridge projects by reviewing data from the 2013 FHWA Conditions and Performance Report, reviewing FHWA's Highway Statistics Series of reports, and interviewing FHWA officials. We assessed the reliability of the data that we used by reviewing documentation and interviewing officials on data verification and found the data to be reliable for our purposes. We also reviewed Office of Management and Budget (OMB) guidance and leading practices we have previously identified related to tracking, through performance measures, the linkage between funding and outcomes and compared current activities to this guidance and these leading practices. To determine how states fund and manage their bridge programs, including any challenges they face, we interviewed representatives from the American Association of State Highway and Transportation Officials and the National Association of County Engineers. We also interviewed state officials from 24 states and D.C. We selected this non-generalizable sample of states because they have large bridge inventories, relatively high levels of federal surface transportation funding, and for geographic dispersion. The selected states were: California, Connecticut, Florida, Hawaii, Illinois, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Vermont, and Washington. From the selected states, we further selected 5 states for site visits, based on selection criteria similar to that stated above, in order to obtain additional information from each state. We selected California, Oklahoma, Rhode Island, Texas, and Washington for site visits. In these states, we met with state transportation officials, FHWA Division Office officials, and officials from two local-government transportation agencies from each state. We selected the non- generalizable sample of local agencies based on recommendations from state officials of nearby local agencies that could accommodate our site visit schedule. The selected local agencies were: Los Angeles County (California); Placer County (California); City of Oklahoma City; Oklahoma Cooperative Circuit Engineering District #7; City of Providence (Rhode Island); Rhode Island Turnpike and Bridge Authority; City of Austin (Texas); Williamson County (Texas); King County (Washington); and City of Seattle (Washington). In addition to the individual named above, Heather MacLeod, Assistant Director, Jessica Bryant-Bertail, Brian Chung, Danielle Ellingston, Dave Hooper, Ying Long, SaraAnn Moessbauer, Josh Ormond, and Amy Rosewarne made key contributions to this report.
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The nation's 612,000 bridges are critical elements of the surface transportation system, but the entire system is under growing strain and funding it is on GAO's High Risk List. While state and local governments own and maintain most of the nation's bridges, the federal government provides some funding for them, administered by FHWA. In 2012, legislative changes consolidated the bridge-funding program into other highway programs, giving states more flexibility in how to allocate funds. GAO was asked to review the funding and management of bridges. This report examines trends, over the past 10 years, in (1) the condition and (2) the funding of the nation's bridges, as well as (3) how states fund and manage their bridge programs, given the 2012 legislative changes. GAO analyzed FHWA's bridge conditions and funding data; reviewed applicable laws, relevant FHWA program guidance, and federal guidance on performance measures; and interviewed federal officials and transportation officials from 24 states and D.C., selected to include those with large bridge inventories, among other factors. Bridge conditions have generally improved nationwide from 2006 to 2015, based on GAO analysis of federal bridge data. For example, the percentage of structurally deficient bridge deck area (the surface area that carries vehicles) decreased from 9 percent to 7 percent nationwide during this period. The number of structurally deficient bridges also decreased from 13 percent to 10 percent nationwide. However, some states have substantially higher percentages of structurally deficient deck area than others. Bridge conditions may become more challenging to address as bridges age, because the number of bridges and amount of total deck area increased dramatically from the 1950s through the 1970s, generally with a 50-year design life. Analysis of federal bridge data shows that the amount of structurally deficient deck area is greatest for bridges built from 1960 through 1974, indicating an expected need for additional maintenance, replacement, or rehabilitation. Federal funds obligated for bridge projects have remained relatively stable from 2006 to 2015, between $6 billion and $7 billion annually in most years. During this period, the use of federal funds on bridges shifted somewhat from building new bridges to projects that preserve existing bridges, such as bridge rehabilitation or preventative maintenance. While the Federal Highway Administration (FHWA) estimates total funds dedicated to bridges and collects data on bridge conditions nationwide, it does not track the linkage between federal funds and changes in bridge conditions. GAO has previously reported that linking performance outcomes with resources invested can help agencies to more clearly determine how changes in invested resources may result in changes to performance. Using such performance measures would help FHWA demonstrate the link between federal funding and outcomes for bridges. Officials from the selected 24 states and the District of Columbia (D.C.) reported little change in the way they have funded and managed bridges since 2012. Officials from 21 states and D.C. reported bridge funding has been stable since the federal bridge program was consolidated in 2012. Officials from 3 states reported an increase in bridge funding since that time. The general stability in bridge funding may be a result of the long time frame for planning bridge projects; for example, bridge funding cycles can be 5 years or longer, a time span that means any changes would not be apparent for several years. Officials from 10 states mentioned increased flexibility in their ability to use federal funds for bridge projects. Changes from the Moving Ahead for Progress in the 21st Century Act provided states flexibility to determine whether to spend federal highway funds on bridges or other highway needs. Further, officials from 18 states and D.C. reported that they have not changed how they prioritize bridge projects relative to other transportation projects. With respect to challenges, officials from 14 states described inadequate funding as a challenge, and officials from 13 states reported aging bridges as a challenge. For many of these states, the challenge of maintaining aging bridges is intertwined with the challenge of inadequate funds. GAO recommends that DOT direct FHWA to develop measures on the linkage between the federal funding of bridges and the desired outcomes--maintained or improved bridge conditions--and report results to Congress. DOT concurred with our recommendation. DOT also provided technical comments, which we incorporated, as appropriate.
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As shown in figure 1, expenditures for the section 515 program increased throughout the 1970s, peaked in 1979, and fell sharply after that. In recent years, the program has received about $115 million annually and has allocated $55 million for new construction, $55 million for rehabilitation, and $5 million for equity loans. The president's budget for fiscal year 2003 proposes to eliminate the new construction funding. The number of units added to the portfolio each year has followed the funding curve. During the peak funding years, over 20,000 new units were added to the portfolio annually. Fewer than 5,000 new units have been produced annually since 1995. In 1998, RHS created the Office of Rental Housing Preservation to administer the prepayment program. Mandated in the Housing and Community Development Act of 1992, the office's tasks include improving the effectiveness and integrity of the agency's prepayment and preservation processes. As of fiscal year 2001, the average size of an RHS property was 27 units. About 8 percent of the properties, comprising about 5 percent of the units, were owned by small operators, often families, while most of the other properties had a more complex ownership structure--typically a managing partner, who owned 5 percent of the property, and many limited partners with smaller shares. About half of the section 515 units receive RHS rental assistance, which makes up the difference between 30 percent of the assisted household's income and the unit's rent. About 14 percent of section 515 units have HUD project or tenant-based section 8 rental subsidies, which cover the difference between tenants' payments and fair-market rents, as determined by HUD on the basis of an annual survey of rents in over 2,700 market areas. Therefore, in those areas where fair-market rents are typically higher than the rents approved by RHS, section 515 properties with section 8 assistance usually generate more income for the owners. Both RHS and HUD provide project-based rental assistance, meaning that the assistance stays with the unit. HUD's section 8 voucher program provides tenant-based vouchers, meaning that the assistance stays with the tenant and is portable--households can use vouchers to rent any affordable units that meet HUD's housing quality standards. In the program's early years, it was expected that the original loans, which are amortized over 40 or 50 years, would be refinanced before major rehabilitation was needed. However, with prepayment restrictions and limited rental assistance and rehabilitation funds, this original expectation has not been realized. To maintain the properties in good condition, RHS relies on owners to put aside funds in a reserve account. RHS requires borrowers to place 1 percent of the original cost of the properties into the reserve account each year for the first 10 years until 10 percent is held in reserve. The borrower must continue to make contributions to the reserve account to maintain it as withdrawals are made against the account to fund rehabilitation work. RHS is concerned about the adequacy of funding reserves at only 1 percent per year for 10 years and how to determine exactly what must be done on an ongoing basis to preserve each property. While owners are required to set aside a portion of their rent revenue in a reserve account to provide for modernization needs, these reserve accounts have often not been large enough to adequately provide for major rehabilitation. Concerns about the loss of affordable units led Congress to enact legislation designed to keep section 515 properties in the portfolio and to protect low-income tenants from being displaced. Figure 2 details the key legislation. The legislation restricting prepayment of section 515 loans has resulted in litigation. Owners of section 515 properties who wished to prepay the loan pursuant to their original loan agreements and remove their properties from the section 515 program have sued the federal government. The owners claim that the federal government, with the enactment of the legislation and the subsequent refusal by RHS to accept unfettered prepayment, committed a breach of contract and an unconstitutional taking of their properties. The federal government maintains that no such breach occurred. To date, prepayment activity has been minimal. Over 4,550 new properties entered the portfolio since the 1988 prepayment restrictions went into effect. This number far exceeded the number of properties that left the portfolio after prepayment. For example, RHS data for fiscal years 1998 through 2001 show that fewer than 100 properties, on average have left the portfolio each year. Fiscal year 2001 is the only year when the number of prepayments exceeded the number of properties added to the portfolio. However, this exception reflects a decline in funding rather than an increase in prepayments. RHS officials noted that prepayment requests were particularly limited in 1995 after an RHS administrative notice, citing an application processing backlog and limited funding, resulted in discouraging owners from applying for prepayment. Since 1988, the impact of prepayment has been minimized by a statutory restriction on owners who prepay by stipulating that, under certain circumstances, the rents for tenants not be increased for as long as they remain in the units. During fiscal years 1999 through 2001, the owners of 283 properties prepaid their loans. Following prepayment, 86, or about 30 percent, of these properties left the program without restrictions because RHS determined that these properties were not needed in the market area and their departure would not adversely affect housing opportunities for minority households. The loans for 197, or about 70 percent, of the properties were prepaid with restrictions on the rents of RHS-assisted households that would remain in effect as long as these households continued to reside in the properties. The owners of 88 other properties applied for prepayment but decided, instead, to accept RHS incentives to stay in the program for 20 more years. Table 1 shows the prepayments by fiscal year. If the statutory requirement covering loans made before December 15, 1989, were changed to allow prepayment without restriction after 20 years from the date of the loan, we estimate that prepayment could be an option for the owners of 3,872, or about 24 percent, of the 16,366 section 515 properties. This estimate is based on our analysis of three factors that we could measure and that RHS and industry representatives agree would limit the potential for prepayment and conversion to market-rate rents. However, a number of economic constraints on individual properties, which we could not readily measure, would be likely to limit the number of actual prepayments even further. Nevertheless, despite these potential constraints, RHS officials are concerned that owners who are dissatisfied with RHS's procedures and statutory requirements could apply to leave the program if the opportunity arose even if prepayment were not economically advantageous. As shown in Figure 3, as of January 1, 2002, there were 3,772 section 515 properties that had served low-income households for 20 years or were financed before 1979 and were never subject to a 20-year low-income use restriction. In our analysis, we found that owners of 946 of these properties could consider applying for prepayment. The loans on another 6,457 properties were eligible for prepayment; however, the properties were still subject to a 20-year use restriction expiring between January 1, 2002, and December 15, 2009. We also found that over the next 8 years owners of 2,926 of these properties would be able to consider prepayment after they meet the 20-year restriction. The loans made on 6,137 properties on or after December 15, 1989, were not eligible for prepayment because the statute in effect when the loans were made precluded prepayment. Our estimate of the number of properties whose owners could consider prepaying is based on three factors that RHS and industry representatives believe limit the potential for prepaying. These factors are as follows: Ownership by a nonprofit organization or public entity. Prepaying mortgages in an attempt to gain financially through converting to market- rate rents could conflict with these organizations' basic mission of providing high-quality, affordable housing for low-income families. Heavy dependence on RHS rental assistance that would cease upon prepayment. Industry experts and RHS officials in headquarters and the states we visited emphasized that, except in areas where growth has brought unexpected prosperity, high dependence on RHS rental assistance is a strong indicator that a property would have a difficult time maintaining adequate cash flow without such assistance. Location in a county where the population declined in the 1990s. Such properties most likely would not be able to obtain significantly higher rents in the private market than they are receiving under federal subsidies because the relative lack of population growth reduces demand for housing and keeps rents from rising. After adjusting for these factors, we determined that the owners of 3,872 properties, or 24 percent of the total properties, could consider prepaying their loans. The number of loans that actually would be prepaid depends on several property-specific factors that we could not readily measure. Factors affecting prepayment potential include whether individual property owners (1) could operate without the subsidized direct loans, (2) had property located in areas where high rental demand has raised market rents above RHS rents, (3) had the funds or financing to meet future capital needs, and (4) could meet any tax requirements they would incur. For example, in 1986, tax laws were changed to eliminate accelerated depreciation. Owners who entered the program before the 1986 tax law change enjoyed the benefits of accelerated depreciation by annually writing off a larger portion of the original value of the property on their tax return than was permissible after the tax law change. In some cases, owners have fully depreciated their property, leaving them a zero cost basis, instead of the original value of the property, when determining their capital gains liability. While these owners enjoyed the write-off benefits associated with the tax savings, their current tax burden can significantly reduce the remaining proceeds. As a result, some owners are staying in the program to avoid the tax consequences. On the other hand, RHS officials are concerned that owners who are dissatisfied with RHS's procedures and statutory requirements could apply to leave the program if prepayment were allowed, even if the costs exceeded the expected financial benefits. For example, the acting assistant deputy administrator for multifamily housing said he interprets the ongoing lawsuits and discussions he has had with owners who believe they were mistreated by the government as a strong indicator that psychological factors might override economic considerations if the law were changed covering loans made prior to December 15, 1989. Also, some owners want to get out of the program because of dissatisfaction with RHS's oversight or because they had planned to use the proceeds from the sale of their properties to fund their retirements. RHS officials were unable to quantify the extent to which these views prevail or could affect the portfolio. RHS officials, however, believe that planned enhancements to its management systems, scheduled to be completed during the summer of 2002, will allow them to better identify property owners and determine the number of properties in the portfolio that are at risk. It should also help them better monitor replacement reserves and other property specific financial matters, which, in turn, could allow them to better predict prepayment potential. Our estimate would also change if HUD tenant-based vouchers were made available or RHS were able to offer tenant-based vouchers. Owners with tenant-based vouchers could then prepay and exit the program but continue to receive federal subsidies for the units where RHS tenants chose to remain. In the program's early years, it was expected that the original loans would be refinanced before major rehabilitation was needed. However, with prepayment and funding restricted, this original expectation has not been realized, and RHS does not know the full cost of the long-term rehabilitation needs of the properties in its portfolio. RHS field staffs perform annual and triennial property inspections. However, the inspections identify current deficiencies rather than the long-term rehabilitation needs of the individual properties, and RHS does not know the extent to which reserve accounts will be able to cover long-term rehabilitation needs. Without a mechanism to prioritize the portfolio's rehabilitation needs, including a process for ensuring the adequacy of individual property reserve accounts, RHS cannot be sure it is spending limited rehabilitation funds as effectively as possible and cannot tell Congress how much funding it will need to deal with the portfolio's long- term rehabilitation needs. RHS state personnel inspect the exterior condition of each section 515 property annually and conduct more detailed inspections of each property every 3 years. However, according to RHS inspection guidelines, the inspections are intended to identify current deficiencies, such as cracks in exterior walls or plumbing problems. Our review of selected inspection documents in state offices we visited confirmed that the inspections are limited to current deficiencies and RHS headquarters and state officials confirmed that the inspection process is not designed to determine and quantify the long-term rehabilitation needs of the individual properties. RHS has not determined to what extent properties' reserve accounts will be adequate to meet long-term needs. According to RHS representatives, privately owned multifamily rental properties often turn over after just 7 to 12 years, and such a change in ownership usually results in rehabilitation by the new owner. However, with limited turnover and limited funding, RHS properties primarily rely on reserve accounts for their capital and rehabilitation needs, and RHS officials are concerned that the section 515 reserve accounts often are not adequate to fund the rehabilitation of the properties. Without comprehensive information on the physical condition of all the properties in the portfolio, including the adequacy of the reserve accounts, RHS has only been able to provide a wide range of estimates on the amount of funding needed. An August 2000 RHS internal study estimates that without increased funding or policy changes, in 5 years, 25 percent of the section 515 properties will no longer be safe and sanitary. Further, a 1999 internal study estimated that it would take between $800 million and $3.2 billion to meet the properties' long-term rehabilitation needs. A background paper by the Millennial Housing Commission on preserving affordable housing notes that a reserve account system, such as the one designed by RHS, would be adequate in the private market where greater turnover with higher cash flow is the norm. However, the paper continues that such a system is not reasonable in the public housing market that, by design, does not have the equivalent ability to refinance and generate cash flow. In this regard, the paper noted that reserve systems like RHS's, are generally adequate to cover only between one-third and one-half of long- term capital needs. RHS and industry representatives agree that the overriding issue for section 515 properties is how to deal with the long-term needs of an aging portfolio. Since 1999, RHS has allocated about $55 million in rehabilitation funds annually, but owners' requests for funds to meet safety and sanitary standards alone have totaled $130 million or more for each of the past few years. Over the past several years, RHS headquarters has encouraged its state offices to allow individual property owners to undertake capital needs assessments and has amended loan agreements to increase their rental assistance payments as necessary to cover the future capital and rehabilitation needs identified in the assessments. However, with varying emphasis by RHS state offices and limited funding for increased rental assistance, the assessments have proceeded on an ad hoc basis. As a result, RHS cannot be sure that it is spending these funds as cost- effectively as possible. The August 2000 RHS study highlighting the scope of the long-term rehabilitation problem also recommended that the agency seek funding for a physical-needs-assessment study of the existing portfolio, but no funding was requested. USDA's fiscal year 2003 budget proposal requests funds for RHS to study its multifamily housing portfolio to determine how future construction could be provided at less cost to taxpayers. The proposal does not, however, request funds to obtain a comprehensive baseline of the existing portfolio's long-term capital needs. With little new construction and limited prepayment, maintaining the long- term quality of aging portfolio has become the overriding issue. While RHS's practice of allocating its limited funds to properties with documented capital needs has helped properties on an ad hoc basis, RHS does not have a process to determine and quantify the portfolio's long- term rehabilitation needs. As a result, RHS cannot ensure that it is spending its limited funds as cost-effectively as possible and cannot provide Congress with a reliable or well supported estimate of the funding needed to deal with the portfolio's long-term rehabilitation needs. To better ensure that limited funds are being spent as cost-effectively as possible, we recommend that the Secretary of Agriculture direct the RHS Administrator to undertake a comprehensive assessment of the section 515 portfolio's long-term capital and rehabilitation needs. Further, the results of the assessment should be used to set priorities for the portfolio's immediate rehabilitation needs and to develop an estimate for Congress on the amount and types of funding needed to deal with the portfolio's long-term rehabilitation needs. We provided USDA with a draft of this report for their review and comment. RHS's acting deputy administrator for multifamily housing said that our report was thorough and balanced, and he supported the report's recommendation. He said that the agency is focusing on developing strategies to address the long-term needs of the portfolio, including building a national database. He said that, given the rapidly aging portfolio, the time is ripe to conduct a comprehensive effort to establish credible cost estimates for long-term capital needs. The acting deputy administrator took issue with two points. First, he said that our draft gave the impression that RHS does not know the rehabilitation needs of the properties. He stated that RHS knows the physical condition of each property in the portfolio from its annual field staff reviews, but agrees that the data from the routine inspections are not compiled into a national database that would define long-term portfolio needs. We agree and have revised the report to clarify this point. Second, the acting deputy administrator said that he agrees that heavy dependence on rental assistance would limit prepayments from occurring. However, he said that the factor would be less of a deterrent to prepayment if vouchers were made available to prepaying properties. We added language in the report to clarify this point. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of the report to interested congressional committees and members of Congress; the secretary of agriculture; the director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-7631. Key contributors to this report are Angela Davis, Bess Eisenstadt, Andy Finkel, Curtis Groves, Rich LaMore, John McDonough, and Tom Taydus. Our work was based on a review of published data; discussions with officials from the Rural Housing Service (RHS), the Department of Housing and Urban Development, the housing industry, and RHS property owners; and an in-depth analysis of RHS's prepayment and section 515 files. We also reviewed background papers prepared by the Millennial Housing Commission and attended a roundtable discussion on housing preservation issues sponsored by the Housing Assistance Council. Furthermore, we judgmentally selected and visited RHS offices in Massachusetts, New Hampshire, and Vermont, where we identified factors that could influence prepayment decisions by property owners. As part of determining how many section 515 properties have been prepaid in recent years and the impact of their prepayment on the section 515 portfolio, we identified key laws and regulations affecting the implementation and operation of the prepayment program. Through discussions with agency officials and reviews of independent publications and legal documents, we identified key changes in the section 515 program, including legislative changes affecting prepayment. Where data was available, we determined the number of properties whose loans were prepaid. We also collected detailed funding and unit production information to document changes in the section 515 portfolio since the program began. To estimate the impact of changing the legislation to allow prepayment without restrictions after 20 years, we planned to survey property owners about their prepayment intentions and obtain specific information from RHS on each property in the section 515 portfolio. However, RHS officials informed us that the information needed to survey the owners was not readily available because RHS's database did not identify specific owners. In addition, many of the properties are owned by large partnerships whose individual owners are not easily identifiable. While we interviewed a number of section 515 property owners on prepayment issues, we were unable to survey all property owners because the RHS database did not identify specific owners. Therefore we do not know the extent that the views of the owners we interviewed are representative of all section 515 owners. RHS also informed us that specific information about individual properties was not readily available because the agency's accounting systems track loans rather than properties and most properties had more than one loan. However, RHS combined information from three separate accounting systems that helped us determine the likelihood of prepayment for each property. We were able to isolate 16,507 properties from RHS's database by identifying loans with the same street addresses and county codes, but we had to drop 141 properties from our analysis because of inaccurate county code information. We reviewed the case files for individual properties at the three RHS state offices we visited. From these reviews and discussions about the properties with the state RHS officials, we identified factors that could help determine the likelihood of prepayment. We also compared information from state office case files with information in RHS's database. To determine the capital and rehabilitation requirements of the section 515 properties, we evaluated RHS reviews that identified the conditions of the properties and the estimated costs to meet the requirements. We obtained the views of RHS and industry representatives concerning the extent of the rehabilitation needs. We also documented RHS's inspection processes for identifying rehabilitation requirements at the properties.
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Nearly 450,000 elderly and other households depend on federal assistance to live in multifamily rural rental properties that were constructed with subsidized federal loans. Because the properties were built in areas when and where privately financed housing units, affordable by lower income households, were not considered economically feasible, the U.S. Department of Agriculture's Rural Housing Service (RHS) has made direct loans available to developers of affordable multifamily housing under its section 515 program. RHS has funded many more new properties than the portfolio has lost through prepayment. The number of new properties added to the portfolio exceeded the number that left the program after prepayment in every year except 2001. If the statutory requirement restricting prepayment for loans made before December 1989, were changed to allow prepayment without restrictions after 20 years from the date of the loan, prepayment could be an option for the owners of 3,900 of all section 515 properties over the next eight years. RHS field staff routinely inspect properties, complete and retain detailed descriptions of noted deficiencies, and transmit the summaries of the deficiencies identified to a central database. Only current deficiencies are identified, however, so the data are of only limited value for determining the cost of the long-term rehabilitation needs of individual properties.
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IRS is responsible for administering our nation's voluntary tax system in a fair and equitable manner. To do so, IRS has roughly 100,000 employees, many of whom interact directly with taxpayers. In fiscal year 1994, IRS processed over 200 million tax returns, issued about 86 million tax refunds, handled about 39 million calls for tax assistance, conducted about 1.4 million tax audits, and issued about 19 million collection notices for delinquent taxes. These activities resulted in millions of telephone and personal contacts with taxpayers. Many of these interactions have the potential to make taxpayers feel as if they have been mistreated or abused by IRS employees with whom they have dealt or by the "tax system" in general. IRS has several offices that are involved in handling taxpayers' concerns about how they have been treated, including those alleging taxpayer abuse, which are not resolved through normal daily operations. IRS' Inspection Service (Inspection), which includes the Internal Audit and Internal Security Divisions, is to investigate taxpayer allegations involving potential criminal misconduct by IRS employees. Problem Resolution Offices in IRS' district offices and service centers are to help taxpayers who have been unable to resolve their problems through normal IRS channels with other IRS staff. IRS' Office of Legislative Affairs is to track responses to congressional inquiries, often on behalf of constituents, as well as direct correspondence with the Commissioner or other IRS executives involving the tax system or IRS' administration of it. OIG and DOJ may also get involved with taxpayer abuse allegations. OIG may investigate allegations involving senior IRS officials, those who serve in General Schedule (GS) grade-15 positions or higher, as well as IRS Inspection employees. IRS employees accused of criminal misconduct may be prosecuted by a DOJ U. S. Attorney. IRS employees who are sued by taxpayers for actions taken within the employees' official duties may be defended by attorneys with the DOJ Tax Division. In our 1994 report on IRS' controls to protect against taxpayer abuse, we were unable to determine the overall adequacy of IRS' controls and made several recommendations to improve them. Foremost among our recommendations was that IRS define taxpayer abuse and collect relevant management information to systematically track its nature and extent. At that time, in the absence of an IRS definition, we defined taxpayer abuse to include instances when (1) an IRS employee violated a law, regulation, or the IRS Rules of Conduct; (2) an IRS employee was unnecessarily aggressive in applying discretionary enforcement power; or (3) IRS' information systems broke down, e.g. when taxpayers repeatedly received tax deficiency notices and payment demands despite continual contacts with IRS to resolve problems with their accounts. Other recommendations in our 1994 report addressed such concerns as unauthorized access to computerized taxpayer information, improper use and processing of taxpayer cash payments, and the need for IRS notification of potential employee liability for trust fund recovery penalties. IRS did not agree with the need to define taxpayer abuse--a term it found objectionable--nor to track its nature and extent; but IRS agreed to take corrective action on many of our other recommendations. To determine the adequacy of IRS' current controls over taxpayer abuse, we identified and documented actions taken by IRS in response to the recommendations in our 1994 report. We also identified any additional actions that IRS has initiated since then, relative to how IRS treats taxpayers. Finally, we discussed with IRS officials a recent commitment they made to define and establish a taxpayer complaints tracking system and the current status of this effort. To determine the extent of information available concerning the number and outcomes of abuse allegations received and investigated by IRS, OIG, and DOJ, we interviewed officials from the respective organizations and reviewed documentation relative to their information systems. We were told that the information systems maintained by these organizations do not include specific data elements for alleged taxpayer abuse. However, these officials said they believed that examples of alleged taxpayer abuse may be found within other general data categories in five IRS systems, two DOJ systems, and an OIG system. For example, IRS officials indicated that alleged taxpayer abuse might be found in a system used to track disciplinary actions against employees. This information is captured under the general data categories of "taxpayer charge or complaint" and "misuse of position or authority." Similar examples were provided by officials from each organization as described in appendix II. We discussed the general objectives and uses of the relevant information systems with officials from the respective agencies. We also reviewed examples of the data produced by these systems under the suggested general data categories to ascertain if it was possible from these examples to determine whether taxpayer abuse may have occurred. We did not attempt to verify the accuracy of the data we received, because to do so would require an extensive, time-consuming review of related case files. This was beyond the scope and time available for this study. To determine OIG's role in investigating allegations of taxpayer abuse, we obtained and reviewed Treasury orders and directives establishing and delineating the responsibilities of OIG, as well as a 1994 Memorandum of Understanding between OIG and IRS outlining specific procedures to be followed by each staff for reporting and investigating allegations of misconduct and fraud, waste, and abuse. We also obtained statistics from OIG staff concerning the number of allegations they received and investigations they conducted involving IRS employees for fiscal year 1995--the latest year for which data were available. In addition, we discussed OIG's role and the relationship between OIG and IRS staffs with senior officials from both OIG and IRS. We requested comments on a draft of this report from the Commissioner of Internal Revenue, the Treasury Inspector General, and the Attorney General. On August 9, 1996, we received written comments from IRS, which are summarized on page 15 and are reprinted in appendix III. We also received written comments, which were technical in nature, from both the Treasury's OIG and DOJ. These comments have been incorporated in the report where appropriate. We performed our audit work in Washington, D.C., between April and July 1996 in accordance with generally accepted government auditing standards. While IRS has made improvements in its controls over the treatment of taxpayers since our 1994 report, we are still unable to reach a conclusion at this time on the overall adequacy of IRS' controls. We cannot determine the adequacy of these controls because IRS officials have not yet established a capability to capture management information, which is needed to ensure that abuse is identified and addressed and to prevent its recurrence. We are, however, encouraged by a recent commitment on the part of IRS' Deputy Commissioner to establish a tracking system for taxpayer complaints. Such a system has the potential to greatly improve IRS' controls to protect against taxpayer abuse and better ensure that taxpayers are treated properly. In exploring how IRS could satisfy a mandate included in the recently enacted Taxpayer Bill of Rights 2 to report annually to Congress on employee misconduct and taxpayer complaints, IRS recognized and acknowledged that such a mandate could not be satisfied with its existing information systems and that a definition for "taxpayer complaints" would be necessary, along with sufficient related management information to ensure that complaints are identified, addressed, and analyzed to prevent their recurrence. Although IRS said it still believes the term "taxpayer abuse" is misleading, inaccurate, and inflammatory, IRS decided to use the basic elements that we used in our 1994 report definition for taxpayer abuse as a starting point to develop a definition for taxpayer complaints. The basic elements from our report included when (1) an IRS employee violated a law, regulation, or the IRS Rules of Conduct; (2) an IRS employee was unnecessarily aggressive in applying discretionary enforcement power; or (3) IRS' information systems broke down, e.g. when taxpayers repeatedly received tax deficiency notices and payment demands despite continual contacts with IRS to resolve problems with their accounts. With input from members of IRS' Executive Committee, an IRS task group decided upon the following definition for taxpayer complaints: an allegation by a taxpayer or taxpayer representative that (1) an IRS employee violated a law, regulation, or the IRS Rules of Conduct; (2) an IRS employee used inappropriate behavior in the treatment of taxpayers while conducting official business, such as rudeness, overzealousness, excessive aggressiveness, discriminatory treatment, intimidation, and the like; or (3) an IRS system failed to function properly or within prescribed time frames. This definition was endorsed by the IRS Deputy Commissioner in a June 17, 1996, memorandum. IRS has decided to use the Problem Resolution Office Management Information System (PROMIS), with modifications, as a platform for compiling information about taxpayer complaints involving inappropriate employee behavior and systemic breakdowns. However, numerous decisions remain concerning how to track and assess the handling of all taxpayer complaints. For example, IRS already has two systems that are designed to capture data relevant to alleged employee misconduct. PROMIS is currently designed to capture data relevant to possible systemic breakdowns. The two systems capturing misconduct information, however, do not capture data in a manner that is comparable to one another or to PROMIS. IRS officials readily concede that at present, there is no IRS information system designed to capture data relevant to complaints of inappropriate employee behavior. They realize that to capture and compile information relevant to all three elements of the taxpayer complaints definition in a comparable and uniform manner will be a considerable challenge, especially for the highly subjective element involving inappropriate employee behavior. However, the officials assured us that they are now committed to rising to that challenge. While we are encouraged by IRS' commitment, we recognize the formidable challenge IRS faces to capture complete, consistent, and accurate information about the IRS definition for taxpayer complaints. Rising to the challenge, however, is critical for IRS to have adequate controls to protect against taxpayer abuse as well as being able to satisfy its new requirement to annually report to Congress on employee misconduct and taxpayer complaints. Since our 1994 study, IRS has initiated various actions to implement our recommendations, as described in appendix I. For example, among other actions, IRS has initiated the following : Regarding unauthorized employee access to computerized taxpayer accounts, IRS (1) issued a 12-point Information Security Policy to all employees in January 1995, stressing the importance of taxpayer privacy and the security of tax data and (2) has begun development of an Information System Target Security Architecture to include management, operational, and technical controls for incorporation in the Tax System Modernization Program--a long-term effort to modernize IRS' computer and telecommunications systems. Regarding the improper use and processing of taxpayer cash payments, IRS (1) included statements in its 1995 forms and instructions encouraging taxpayers to make payments with either a check or money order rather than cash and (2) is instructing its managers to conduct periodic unannounced reconciliations of cash receipts used by the IRS staff who collect taxes from taxpayers. Regarding the need for IRS to notify employers of the potential liability of their officers and employees for a trust fund recovery penalty when businesses fail to collect or pay withheld income, employment, or excise taxes, IRS has included notices of this liability in both Publication 334, "Tax Guide for Small Businesses" and Circular E, "Employer's Tax Guide." In addition to these actions, IRS has recently undertaken other initiatives in anticipation of some provisions included in the recently enacted Taxpayer Bill of Rights 2. In January 1996, IRS announced a series of initiatives designed to reduce taxpayer burden and make it easier for taxpayers to understand and exercise their rights. These initiatives included (1) enhanced powers for the Taxpayer Ombudsman, such as explicit authority to issue a refund to a taxpayer to relieve a severe financial hardship; (2) notification of a spouse regarding any collection action taken against a divorced or separated spouse for a joint tax liability; (3) increased computerized record storage and electronic filing options for businesses; (4) expedited appeals procedures for employment tax issues; and (5) a test of an appeals mediation procedure. IRS has also started to use information on taxpayer problems captured in PROMIS. IRS recently used this system to identify the volume of taxpayer problems categorized by various major issues, such as refund inquiries, collection actions, penalties, and the earned income tax credit. The Ombudsman has requested IRS' top executives to review the major issues identified for their respective offices or regions in an effort to devise cost-effective ways to reduce these problems. While we did not test the implementation of these various initiatives, they appear to be conceptually sound and thus we believe that, if effectively implemented, they should help to strengthen IRS' overall controls and procedures to identify, address, and prevent the recurrence of taxpayer abuse. It is not possible to readily determine the extent to which allegations of taxpayer abuse are received and investigated from the information systems maintained by IRS, OIG, and DOJ. These systems were designed as case tracking and resource management systems intended to serve the management information needs of particular functions, such as IRS' Internal Security Division. None of these systems include specific data elements for "taxpayer abuse;" however, they contain data elements that encompass broad categories of misconduct, taxpayer problems, or legal actions. Without reviewing specific case files, information contained in these systems related to allegations and investigations of taxpayer abuse is not easily distinguishable from information on allegations and investigations that do not involve taxpayers. Consequently, as currently designed, these systems cannot be used individually or collectively to account for IRS' handling of all instances of alleged taxpayer abuse. Officials of the respective organizations indicated that several information systems might include information related to taxpayer abuse allegations--five maintained by IRS, two by DOJ, and one by OIG--as described in appendix II. For example: Two of the IRS systems--the Internal Security Management Information System (ISMIS) and the Automated Labor and Employee Relations Tracking System (ALERTS)--capture information on cases involving employee misconduct, which may in some cases involve taxpayer abuse. ISMIS is used to determine the status and outcome of Internal Security investigations of alleged employee misconduct; ALERTS is used to track disciplinary actions taken against employees. While ISMIS and ALERTS both track aspects of alleged employee misconduct, these systems do not share common data elements or otherwise capture information in a consistent manner. IRS also has three systems that include information on concerns raised by taxpayers. These systems include two maintained by the Office of Legislative Affairs--the Congressional Correspondence Tracking System and the Commissioner's Mail Tracking System--as well as PROMIS, which we described earlier. The two Legislative Affairs systems basically track taxpayers' inquiries, including those made through congressional offices, to ensure that responses are provided by appropriate IRS officials. PROMIS tracks similar information to ensure that taxpayers' problems are resolved and to determine whether the problems are recurring in nature. OIG has an information system known as the OIG Office of Investigations Management Information System (OIG/OIMIS) that is used to track the status and outcomes of OIG investigations as well as the status and outcomes of actions taken by IRS in response to OIG investigations and referrals. As discussed further in the next section of this report, most OIG investigations do not involve allegations of taxpayer abuse because those IRS employees that OIG typically investigates--primarily senior-level officials--usually do not interact directly with taxpayers. DOJ has two information systems that include data that may be related to taxpayer abuse allegations and investigations. The Executive Office of the U. S. Attorneys maintains a Centralized Caseload System that is used to consolidate the status and results of civil and criminal prosecutions conducted by offices of the U. S. Attorney throughout the country. Cases involving criminal misconduct by IRS employees would be referred to and may be prosecuted by the U.S. Attorney in the particular jurisdiction in which the alleged misconduct occurred. The Tax Division also maintains a Case Management System that is used for case tracking, time reporting, and statistical analysis of litigation cases conducted by the Tax Division. Lawsuits against either IRS or IRS employees are litigated by the Tax Division, with representation provided to IRS employees if the Tax Division determines that the actions taken by the employees were within the scope of employment. The officials familiar with these systems stated that, while the systems include data elements in which potential taxpayer abuse may have occurred, they do not include a specific data element for taxpayer abuse, which could be used to easily distinguish abuse allegations from others not involving taxpayers. For example, officials from the Executive Office for the U. S. Attorneys stated that the public corruption and tort categories of their Case Management System may include instances of taxpayer abuse, but the system could not be used to identify such instances without a review of individual case files. From our review of data from these systems, we concluded that none of them, either individually or collectively, have common or comparable data elements that can be used to identify the number or outcomes of taxpayer abuse allegations or related investigations and actions. Rather, each system was developed to provide information for a particular organizational function, usually for case tracking, inventory, or other managerial purposes relative to the mission of that particular function. While each system has data elements that could reflect how taxpayers have been treated, as described in appendix II, the data elements vary and may relate to the same allegation and same IRS employee. Without common or comparable data elements and unique allegation and employee identifiers, these systems do not collect information in a consistent manner that could be used to accurately account for all allegations of taxpayer abuse. OIG is responsible for investigating allegations of misconduct and waste, fraud, and abuse involving senior IRS officials, GS-15s and above, as well as IRS Inspection employees. OIG also has oversight responsibility for the overall operations of Inspection. Since November 1994, OIG has had increased flexibility for referring allegations involving GS-15s to IRS for investigation or administrative action. This was due to resource constraints and an increased emphasis by OIG on investigations involving criminal misconduct and procurement fraud across all Treasury bureaus. In fiscal year 1995, OIG conducted 44 investigations--14 percent of the 321 allegations it received--for the most part, implicating senior IRS officials. OIG officials stated that these investigations rarely involved allegations of taxpayer abuse because senior IRS officials and Inspection employees usually do not interact directly with taxpayers. OIG and Inspection have a unique relationship, relative to that of OIG and other Treasury bureau audit and investigative authorities. The IRS Chief Inspector, who reports directly to the IRS Commissioner, is responsible for IRS internal audits and investigations as well as coordinating Inspection activities with OIG. Inspection is to work closely with OIG in planning and performing its duties, and is to provide information on its activities and results to OIG for incorporation into OIG's semiannual report to Congress. Disputes the IRS Chief Inspector may have with the Commissioner can be resolved through OIG and the Secretary of the Treasury, to whom OIG reports. The Department of the Treasury established the Office of the Inspector General (IG) consistent with the authority provided in the "Inspector General Act of 1978," although Treasury already had internal audit and investigation capabilities for the Department as well as its bureaus. The existing capabilities included Inspection, which was responsible for all audits and investigations of IRS operations. Among OIG's express authorities were the investigation of allegations implicating senior IRS officials and the oversight of Inspection's audit and investigative activities. OIG resources to discharge these responsibilities were augmented in fiscal year 1990, by the transfer of 21 staff years from IRS' appropriations to that of OIG. The IG Act was amended in 1988 with special provisions included to, among other things, ensure the privacy of tax-related information. These provisions did not limit OIG's authority but required an explicit accounting of OIG's access to tax-related information in performing audits or investigations of IRS operations. The OIG's authorities were also articulated in Treasury Order 114-01 signed by the Secretary of the Treasury in May 1989. Specifically related to OIG investigative authorities, in September 1992, the Treasury IG issued Treasury Directive 40-01 summarizing the authority vested in OIG and the reporting responsibilities of various Treasury bureaus. Among the responsibilities of law enforcement bureaus, including IRS, are to (1) provide a monthly report to OIG concerning significant internal investigative and audit activities, (2) notify OIG immediately upon receiving allegations involving senior officials or internal affairs or inspection employees, and (3) submit written responses to OIG detailing actions taken or planned in response to OIG investigative reports and OIG referrals for agency management action. Under procedures established in a Memorandum of Understanding between OIG and IRS in November 1994, the requirement for immediate referrals to OIG of all misconduct allegations was reiterated and supplemented. OIG has the discretion to refer any allegation to IRS for appropriate action, i.e., either investigation by Inspection or administrative action by IRS management. If IRS officials believe that an allegation referred by OIG warrants OIG attention, they may refer the case back to OIG requesting that OIG conduct an investigation. OIG officials advised us that under the original 1992 directive, they generally handled most allegations implicating Senior Executive Service (SES) and Inspection employees, while reserving the right of first refusal on GS-15 employees. Under the procedures adopted in 1994, which were driven in part by resource constraints and OIG's need to do more criminal misconduct and procurement fraud investigations across all Treasury bureaus, OIG officials stated they have generally referred allegations involving GS-15s and below to IRS for investigation or management action. The same is true for allegations against any employees, including those in SES, involving administrative matters and allegations dealing primarily with tax disputes. OIG officials said that a determination is made by OIG after a preliminary review of the merits of the allegations whether to investigate, refer to IRS to either investigate or take administrative action, or to take no action at all. Table 1 summarizes the number and disposition of allegations received by OIG involving IRS in fiscal year 1995. In fiscal year 1995, OIG received 321 allegations, many of which involved senior IRS officials. After a preliminary review, OIG decided no action was warranted on 71 of the allegations, referred 201 to IRS--either for investigation or administrative action--investigated 44, and closed 5 others for various administrative reasons. OIG officials stated that, based on their investigative experience, most allegations of wrongdoing by IRS staff that involve taxpayers do not involve senior level IRS officials or Inspection employees. Rather, these allegations typically involve those IRS Examination and Collection employees who most often interact directly with taxpayers. OIG officials are to assess the adequacy of IRS' actions in response to OIG investigations and referrals as follows: (1) IRS is required to make written responses on actions taken within 90 days and 120 days, respectively, on OIG investigative reports of completed investigations and OIG referrals for investigations or management action; (2) OIG investigators are to assess the adequacy of IRS' responses before closing the OIG case; and (3) OIG Office of Oversight is to assess the overall effectiveness of IRS Inspection capabilities and systems through periodic operational reviews. In addition to assessing IRS' responses to OIG investigations and referrals, each quarter the IG, Deputy IG, and Assistant IG for Investigations meet to brief the IRS Commissioner, Deputy Commissioner, and Chief Inspector on the status of allegations involving senior IRS officials, including those being investigated by OIG and those awaiting IRS action. While officials from both agencies agree that the arrangement is working well to ensure allegations involving senior IRS officials and Inspection employees are being handled properly, OIG officials expressed some concern with the amount of time IRS typically takes to respond with actions on OIG investigations and referrals. IRS officials acknowledged that responses are not always within OIG time frames because, among other reasons, determinations about taking disciplinary actions and imposing such actions may take a considerable amount of time. Also, they said some cases must be returned for additional development by OIG, which may prolong the time for completion. The IRS officials, however, also suggested that actions on OIG referrals are closely monitored as evidenced by their inclusion in discussions during quarterly IG briefings with the Commissioner. While we did not independently test the effectiveness of this OIG/IRS arrangement, we found no evidence to suggest these allegations are not being properly handled. IRS has taken specific steps in relation to certain recommendations made in our 1994 report and initiated other actions to strengthen its controls over taxpayer abuse by its employees. Even so, at this time, we remain unable to determine the adequacy of IRS' system of controls to identify, address, and prevent instances of abuse. However, we are encouraged by IRS' recent decision to develop a taxpayer complaint tracking system that essentially adopts the definition of taxpayer abuse included in our 1994 report as a starting point for defining the elements of taxpayer complaints. We believe this is a critically important commitment that IRS must sustain. If effectively designed and implemented, IRS should have an enhanced ability to identify, address, and protect against the mistreatment of taxpayers by IRS employees or the tax system in general. While we are encouraged by IRS' commitment, we also recognize the formidable challenge IRS faces in developing an effective complaints tracking system. IRS needs a more effective complaints tracking system because, while IRS, OIG, and DOJ information systems contain data about the treatment of taxpayers, the data relevant to employee misconduct or taxpayer complaints are not readily or easily distinguishable from other allegations that do not involve taxpayers. The systems do not have the same employee identifiers or common data elements. Nor are the data captured in a consistent manner that allows for consolidation relative to the number or outcome of taxpayer complaints using the definition IRS is adopting. Given IRS' recent commitment and related efforts it has under way to design and implement a taxpayer complaints tracking system and the recently enacted Taxpayer Bill of Rights 2, we are making no new recommendations at this time. The IRS Chief, Management and Administration commented on a draft of this report by letter dated August 9, 1996, (see app. III) in which he reiterated IRS' commitment to preserving and enhancing taxpayers' rights. The Treasury's OIG and DOJ also provided technical comments, which we incorporated in this report where appropriate. As agreed with your staff, unless you announce the contents of this report earlier, we plan no further distribution of this report until 15 days from the date of this letter. At that time, we will send copies of this report to the Ranking Minority Member, Senate Committee on Finance; the Chairman and the Ranking Minority Member, Senate Committee on Governmental Affairs; and the Chairman and the Ranking Minority Member, House Committee on Ways and Means. We will also send copies to other interested congressional committees, the Commissioner of Internal Revenue, the Treasury Inspector General, the Attorney General, and other interested parties. We will also make copies available to others upon request. The major contributors to this report are listed in appendix IV. If you have any questions concerning this report, please contact me at (202) 512-9044. Establish a servicewide definition of taxpayer abuse or mistreatment and identify and gather the management information needed to systematically track its nature and extent. IRS has recently established a definition for "taxpayer complaints" and is now committed to establishing a complaints tracking process. Ensure that Tax Systems Modernization provides the capability to minimize unauthorized employees access to taxpayer information in the computer system that eventually replaces the Integrated Data Retrieval System. Issued a 12-point Information Security Policy to all IRS staff; published "High-Level Security Requirements;" and started development of an Information System Target Security Architecture. Revise the guidelines for information gathering projects to require that specific criteria be established for selecting taxpayers' returns to be examined during each project and to require that there is a separation of duties between staff who identify returns with potential for tax changes and staff who select the returns to be examined. Issued an updated memorandum to field staff regarding the highly sensitive nature of information gathering projects. Reconcile all outstanding cash receipts more often than once a year and stress in forms, notices, and publications that taxpayers should use checks or money orders whenever possible to pay their tax bills, rather than cash. IRS is instructing its managers to conduct random unannounced reconciliations of cash receipts used by IRS staff who receive cash payments from taxpayers. Revised Publication 594, "Understanding the Collection Process," Publication 17, "Your Federal Income Tax," and the 1995 1040 tax package to encourage taxpayers to pay with checks or money orders, rather than cash. Better inform taxpayers about their responsibility and potential liability for the trust fund recovery penalty by providing taxpayers with special information packets. Revised Publication 334, "Tax Guide for Small Business," and Circular E, "Employer's Tax Guide," to explain the potential liability for the trust fund recovery penalty if amounts withheld are not remitted to the government; and started including Notice 784, "Could You Be Personally Liable for Certain Unpaid Federal Taxes?" with the first balance due notice for business taxes. Provide specific guidance for IRS employees on how they should handle White House contacts other than those involving tax checks of potential appointees or routine administrative matters. No actions taken or planned. Because we did not find instances of improper contacts, IRS is of the opinion that current procedures covering third-party contacts are adequate. Seek ways to alleviate taxpayers' frustration in the short term by analyzing the most prevalent kinds of information-handling problems and ensuring that requirements now being developed for Tax Systems Modernization information systems provide for long-term solutions to those problems. Requested top executives to review major issues the Ombudsman identified via the Problem Resolution Program that have resulted in repeat taxpayer problems. Internal Security management use this system to track the status of investigations and for operational and workload management. Labor Relations staff use this system to track the status and results of possible disciplinary action relative to IRS employee behavior. IRS - Problem Resolution Office Management Information System (PROMIS) Problem Resolution Office staff use this system to monitor the status of open taxpayer problems to generate statistics on the volume of problems received by major categories. IRS - Commissioner's Mail Tracking System Legislative Affairs staff use this system to track correspondence to the Commissioner and other IRS office heads/executives. Legislative Affairs staff use this system to track correspondence from congressional sources and from referrals by the Treasury Department and the White House. OIG management and desk officers use the system to monitor the status of OIG investigations and to monitor whether required responses to OIG investigations and referrals to the Treasury bureaus, such as IRS, have been received. DOJ EOUSA - Centralized Caseload System EOUSA management use the system to monitor the status and results of civil and criminal prosecutions and to oversee field office caseloads. Tax Division management uses the system to monitor the status and results of civil and criminal cases, manage attorney caseloads, and prepare internal and external reports, such as for the Office of Management and Budget and the Congress. Rachel DeMarcus, Assistant General Counsel Shirley A. Jones, Attorney Advisor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO examined the: (1) adequacy of the Internal Revenue Service's (IRS) controls to protect against abuse of taxpayers; (2) extent of information available concerning abuse allegations received and investigated by IRS, the Department of the Treasury Office of the Inspector General (OIG), and the Department of Justice (DOJ); and (3) OIG role in investigating abuse allegations. GAO found that: (1) the adequacy of IRS controls against taxpayer abuse is uncertain because IRS does not have the capability to capture management information on taxpayer abuse; (2) IRS is establishing a tracking system to handle taxpayer complaints and reviewing its management information systems to determine the best way to capture relevant information for the complaint system; (3) the tracking system will enable IRS to better identify instances of taxpayer abuse and ensure that actions are taken to prevent their recurrence; (4) IRS is improving controls over its employees' access to computerized taxpayer accounts, establishing an expedited appeals process for some collection actions, and classifying recurring taxpayer problems by major issues; (5) it is not possible to determine the extent to which allegations of taxpayer abuse are received and investigated, since IRS, OIG, and DOJ information systems do not include specific data elements on taxpayer abuse; (6) OIG has increased the number of investigations involving senior IRS employees' alleged misconduct, fraud, and abuse; (7) OIG refers most of these allegations to IRS for investigation and administrative action; and (8) IRS is taking a considerable amount of time to respond to OIG investigations and referrals regarding senior IRS officials' disciplinary actions.
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RTC's sales centers planned and carried out land sales initiatives. Asset marketing specialists at the National Sales Center and in regional sales centers developed disposition plans, identified the assets to be offered for sale in the initiatives, and obtained approval from RTC management to carry out the sales initiatives. Initiatives offering assets with a combined book value in excess of $250 million required RTC headquarters approval. Field offices were permitted to approve their own sales initiatives when the book value of the assets being offered totaled $250 million or less. In December 1993, RTC issued its business plan. In developing the plan, RTC used a standard methodology to comparatively evaluate the net recoveries from similar asset types sold through different disposition methods. Similar expense data, but not all expense data, were gathered for relevant transactions and, according to RTC, standard methodologies were used to evaluate all types of equity partnerships, large sealed bids/portfolio sales, and auctions, respectively. However, at the time these evaluations were done, the most significant land sales initiatives using alternative disposition methods, such as the Multiple Investor Fund and equity partnership structures, had not yet closed. Therefore, land was not included in the business plan analysis as a separate asset type. In 1993, RTC decided to test the equity partnership structure for land (Land Fund I). It then became more important for RTC to assess relative recoveries of distinct disposition methods. Also, in December 1993, the RTC Completion Act of 1993 established various requirements for the disposition of real property, including land and nonperforming loans secured by real estate. The act required that before such assets are offered in a bulk transaction, RTC must determine in writing that a bulk transfer would maximize the net recovery to RTC while providing an opportunity for broad participation by qualified bidders, including minority- and women-owned businesses. The required written justifications are to be included in the case submitted to RTC management to obtain approval for each land sales initiative. We reviewed RTC's land disposition activities to determine how RTC was dealing with its land assets inventory. Our objectives were to determine whether RTC had (1) developed and implemented a strategy for disposing of its land assets and (2) assessed the results of its land sales initiatives to identify the most cost-effective disposition methods and best practices. To accomplish our first objective, we reviewed the November 1991 Land Task Force strategy paper and RTC's directive implementing the land disposition strategy. We interviewed the head of the task force to discuss the (1) basis for RTC's strategy, (2) results of the land inventory evaluations done by the task force, and (3) land sales initiatives RTC planned to implement in 1993. We also interviewed RTC headquarters officials in Washington, D.C.; and contacted field office officials in Atlanta; Dallas; Denver; Kansas City; Newport Beach, CA; and Valley Forge, PA. We obtained information on the implementation of RTC's land disposition policy and related policies and procedures, inventories of land and loans secured by land, land sales initiatives and their results, and land sales initiatives in the planning stage. To accomplish our second objective, we reviewed 6 of the 13 land sales initiatives RTC's National Sales Center planned to implement in 1993. These initiatives were judgmentally selected to represent a cross-section of the types of land sales strategies used by RTC, the ways RTC pooled assets for land sales initiatives, and size of initiatives in terms of number of assets offered for sale. The selected initiatives included five different sales strategies and five different ways to pool the assets. The size of the initiatives ranged from 35 to 410 assets. (App. I lists the 1993 National Sales Center initiatives and identifies those we reviewed.) We also reviewed an auction--the Pride of Texas--planned by the Dallas field office. We selected this initiative because it provided an example of a field office initiative involving land assets located in a local area with national advertising. For each of the seven land sales initiatives we selected for review, we interviewed the RTC asset marketing specialists in Washington, D.C., and one in Dallas who planned and executed the selected initiatives. These individuals provided documents relating to each initiative, including case approvals and listings of assets reserved for the initiatives. In these interviews, we also discussed the availability and sources of sales expense data for the initiatives we reviewed and obtained copies of all expense data that these asset marketing specialists had in their files. We focused on direct costs associated with the initiatives and not on other costs incurred by RTC, such as indirect overhead and asset management and disposition fees, because RTC would have incurred these costs even if the bulk sales had not been implemented. The costs we attempted to determine are listed in appendix II. We also attempted to obtain cost data that RTC could not provide from the contractors it had hired to carry out the initiatives we reviewed. We contacted 11 RTC contractors providing financial advisory, due diligence, and auctioneer services for the selected land sales initiatives to get information about the services they provided and the fees they billed to RTC for these services. We also contacted RTC's Office of Inspector General to discuss work done on contractor billings for services provided on two of the initiatives we reviewed. Finally, we interviewed RTC headquarters officials from the National Sales Center, Office of Contract Operations, Management Information Division, and Department of Corporate Finance, as well as field office officials in Dallas, to determine whether the results of individual land sale initiatives were evaluated. We also reviewed reports on the results of 1992, 1993, and 1994 program compliance reviews to determine whether reviewing officials were assessing compliance with the land sales initiative policy directive. On February 6, 1995, we met with RTC's Vice President for Asset Marketing, RTC officials representing the National Sales Center, the Office of Contracts, and the Chief Financial Officer to discuss a draft of this report. Their comments were considered and have been incorporated into the report where appropriate. On March 3, 1995, RTC provided written comments on a draft of this report, which are evaluated in the agency comments section and elsewhere in the report where appropriate. RTC's written comments are reprinted in appendix IV. We did our work between January 1993 and December 1994 in accordance with generally accepted government auditing standards. Until the summer of 1991, RTC did not place a high priority on the disposition of land assets. Instead, priority was given to other asset categories that could be disposed of quickly, such as securities and residential mortgages--of which RTC had a large inventory--and commercial and residential real estate that had greater holding costs. The experience RTC gained through the disposition of other types of hard-to-sell assets, such as nonperforming commercial real estate loans, paved the way for structuring of land sales. Recognizing the challenge posed by land assets, RTC formed a land task force in the summer of 1991 to analyze its land inventory and develop a strategy for disposing of these assets. The task force estimated that, continuing at RTC's then average annual rate of land sales, it would take RTC over 16 years to dispose of its remaining land assets. Initially, land was offered on a sealed bid or auction basis, and later in various forms of equity partnerships. RTC had not yet tested the market for equity partnerships when the Land Task Force issued its strategy paper. In its November 1991 strategy paper, the task force recommended that RTC use specific types of sales methods to dispose of land assets and select assets for initiatives that were similar in size, type, and location to respond to investor preferences. The specific sales methods recommended by the task force included (1) auctions for land assets with book values under $1 million, (2) local promotional campaigns for land assets with book values ranging from $1 million to $5 million, (3) sealed bid offerings for land assets with book values over $5 million, and (4) solicited proposals from qualified investors for portfolios of large land assets with an aggregate book value in excess of $100 million. In May 1992, RTC issued its land sales directive, Circular 10300.23 entitled Land Sales Strategies and Programs. This directive incorporated the task force's recommendations into RTC's guidelines for establishing and implementing land sales strategies. In implementing the task force's recommendation to solicit proposals from investors, the directive specified two possible initiatives: (1) multiple investor funds for pools of land assets ranging from $1 billion to $2 billion in total book value and (2) competitive solicitations of qualified individual investors for large portfolios of land assets with an aggregate book value of less than $1 billion. The directive required RTC field offices to identify available land assets and develop plans for their disposition. These plans were to include (1) an analysis of available land assets, (2) a list of the land sale initiatives planned or in process and their sales goals, and (3) a separate marketing plan for each individual land asset with a book value of $5 million or more. The directive emphasized the importance of ensuring that land assets be carefully evaluated before being included in a specific sales initiative to ensure that the proper sales method is selected. In choosing a sales method for an initiative, the offices were to select the one that was most appropriate for the types of land assets to be offered for sale. The directive also required that the sales method selected satisfy RTC's mandate to achieve the highest net recovery on the sale of assets while avoiding disruptions in local real estate markets. Finally, the directive required the land task force to (1) review field office initiative plans for consistency and compliance with recommended land policies and sales methods and (2) evaluate the results of land sales initiatives at the completion of each initiative and identify which sales methods are most effective. Using the various sales methods set forth in the land sales strategy directive, RTC disposed of about $16 billion (book value) in land and loans secured by land during 1993 and the first half of 1994. RTC figures showed that it had about $4.6 billion (book value) in land and nonperforming loans secured by land remaining in its asset inventory as of April 30, 1994. By the end of February 1995, RTC indicated that it had reduced its inventory of these types of assets to about $850 million. RTC has until December 31, 1995, to complete any land sales initiatives it undertakes. The RTC Completion Act of 1993 set this date for RTC to cease its operations. Any assets remaining in RTC's inventory at that time will be transferred to the Federal Deposit Insurance Corporation (FDIC) for disposition. As part of the planning process for transitioning to FDIC, RTC is to identify its best practices, which should be considered for use by FDIC. RTC believes that the recovery analysis it is doing on the various disposition methods it uses will help it accomplish this task. In addition, RTC believes this analysis should help FDIC as it considers alternate disposition methods for its own inventory of land and other assets and for similar assets it inherits from RTC in December 1995. RTC policy required the results of land sales initiatives to be evaluated. However, RTC did not (1) establish a standard methodology for making the required evaluations, (2) perform the evaluations, or (3) take adequate steps to ensure that these evaluations were done. Also, RTC did not develop a formal procedure to capture the expense data needed to calculate the net recoveries on the sale of land assets. As a result, RTC could not assess the relative cost effectiveness of the various sales methods it used. Relative cost effectiveness was a key component to be used in the required evaluations since they were meant to identify the most effective methods. RTC also did not have the data needed to analyze expense variations and thus could not use this information to better manage future land sales initiatives. In its May 1992 directive on land sales strategies, RTC underscored the importance of sales initiative evaluations in satisfying its mandate to maximize net recoveries on the sale of assets under its control. It required that the results of land sales initiatives be evaluated at the completion of each initiative to identify the most effective sales methods. Nevertheless, a standard methodology to evaluate initiative results was not developed by either the land task force, which was to do the required evaluations, or other units within RTC. A standard methodology is necessary to ensure that RTC collects and considers similar data for each initiative to consistently assess the results of the initiatives to identify the most cost-effective sales techniques and best practices. Furthermore, no evaluations were done by RTC staff to comply with the land sales directive requirement. RTC normally uses its program compliance reviews to evaluate the various RTC offices' compliance with RTC policies and procedural requirements in executing the Corporation's various business functions. One of the purposes of the program compliance review process is to identify procedural deficiencies that hamper or prevent the implementation of policy requirement. However, our review of the program compliance reports showed that these reviews, which have been done at least annually since RTC's inception, were not used to determine whether the land sales initiative evaluation requirement was being implemented throughout RTC. Expense data are needed, by definition, to compute net recoveries from the land sales initiatives and evaluate the results of these initiatives compared to other disposition methods. While RTC management acknowledged the importance of evaluating sales initiative results, they did not establish adequate policies and procedures to ensure that all essential actual expense data needed to make the net recovery calculations were collected. As a result, RTC did not compute the net recoveries for the land sales initiatives, identify the most cost-effective initiatives and best practices, refine its land disposition strategies, or analyze expense variations to better manage future land sales initiatives. Because RTC procedures did not require them to do so, asset marketing specialists generally did not monitor total sales initiative expenses or use the land sales initiative budgets to control costs and identify costly practices. Also, RTC's systems could not generate expense reports on the individual land sales initiatives. RTC's Financial Management System (FMS), except for auctions, lacked codes needed to sort expense data by sales initiative. RTC expanded the list of FMS codes in 1994; however, codes were not set up for all sales initiatives planned for 1994 and 1995. The lack of (1) FMS codes and (2) formal compilation of actual sales initiative expenses prevented RTC and us from getting data by sales initiative to evaluate and compare the results between and among sales initiatives. Two of the five asset marketing specialists who managed the National Sales Center initiatives we reviewed provided partial expense data obtained from a portfolio sales adviser and other contractors hired to help carry out the initiatives. However, the three other specialists were not able to provide similar data. The National Sales Center maintained a system with some expense data, including contracted financial sales advisory and due diligence services and some marketing expenses. However, this system did not capture data for other expenses, such as legal services and advertising. Because RTC did not collect complete data for all the expenses incurred to implement individual land sales initiatives, we attempted to obtain the missing data from other sources for the land sales initiatives we reviewed. We identified, primarily from contractor records, almost $49 million in expenses incurred on the seven land sales initiatives we reviewed. However, we were unable to locate complete data for all of the expenses for each of the initiatives. Mainly, we located data on contracting fees incurred to carry out the initiatives as well as certain other sales initiative expenses incurred for legal services, advertising, and the facilities used to conduct the sale. We included all amounts invoiced by RTC's contractors that we located. Some of the due diligence fees, totaling millions of dollars, for several initiatives were being disputed by RTC at the time of our review; and we were not certain how the fees dispute would be resolved. For the East Coast Land Sale, we were unable to break out invoiced expenses for due diligence services between that initiative and other initiatives commingled in the billing. For three of the seven initiatives, data we located lacked the detail needed to identify amounts for several expense categories, such as marketing brochures, asset information packages, the due diligence library, and travel, due to commingling of expenses. We identified expense data for most of the expense categories for five of the seven land sale initiatives we reviewed. For these five initiatives, there were large variations in the amounts spent within the various expense categories as well as in the total expenses RTC incurred. Some of the variation within the expense categories and among sales initiatives can be attributed to differences in the numbers, locations, and quality of assets included in the initiatives. However, because RTC did not do comparative analyses, explicit reasons for most of the variations were not determined. In September 1993, we reported on RTC's lack of adequate evaluation of sales program results and its failure to collect essential cost data needed to measure program effectiveness. We said that if RTC had accurate information on asset characteristics, revenues, expenses, holding periods, gross and net proceeds, and sales methods by asset type, it could more effectively manage its disposition program and evaluate the results of its various sales methods. We concluded that data limitations impaired RTC's analysis of the sales methods it used and recommended that RTC improve its methods for collecting and summarizing asset sales and financial data to maximize recoveries on its hard-to-sell assets. We also reported, in December 1993, that there were substantial variations in fees paid for similar loan servicing services. We concluded that without information on all the costs under its loan servicing contracts, RTC could not effectively monitor the fees charged by contractors or establish cost-effective fee structures. We recommended that RTC routinely collect the information needed to monitor loan servicing fees and expenses and use this information to develop cost-effective compensation structures in future contracts. RTC has implemented the recommendations we made in that report. It is monitoring its loan servicing fees and expenses and using this information in awarding new contracts. On June 28, 1994, we briefed RTC management on the results of our work on land sales initiatives. In response to this briefing and our September 1993 data limitations report recommendation that RTC improve its methods for collecting and summarizing asset sales and financial data, RTC took actions to address the concerns we raised. RTC acknowledged that although information regarding the amount of gross sales proceeds from past multiasset sales transactions was readily available, the amount of corresponding sales expenses can only be determined after substantial research. It also acknowledged that documentation of estimated and actual sales expenses for each multiasset sale would be useful in determining the effectiveness of different sales methods and for monitoring sales expense data. On August 15, 1994, RTC issued a directive, Circular 10300.39 entitled Multi-Asset Sales Transactions Budgets, to establish procedures for tracking multiasset sales expenses. This directive applies to all multiasset sales initiatives, regardless of type, developed by RTC or any of its contractors for the disposition of loans, real estate, or other assets. The procedures in the new directive, which became effective for all relevant sales cases approved after July 31, 1994, require (1) a sales budget to be prepared for each multiasset sales initiative that must be submitted with the case memorandum requesting authority to proceed with the initiative and (2) actual sales expenses to be compiled and entered onto a copy of the original budget no later than 90 days after the sale closing (transfer of title). To ensure consistency, a standard multiasset sales transaction budget format (see app. III) was developed that must be used to record budget and expense information. The directive assigns responsibility for ensuring that the sales budget is completed and updated to the individual responsible for managing the initiative. This individual is to coordinate with legal, contracting, and other parties as needed to obtain estimated and final sales-related expense data. RTC has developed a strategy for disposing of its remaining land assets, and during 1993 it implemented a variety of land sales initiatives to dispose of these assets. Although RTC required each land sales initiative to be evaluated, it did not develop a standard methodology for these evaluations, nor were the required evaluations done. Consequently, RTC could not assess the relative cost effectiveness of the various land sales methods it used. Furthermore, RTC did not assess the implementation of the evaluation requirement through its program compliance reviews to ensure that policies and procedural requirements were being executed properly and consistently. Had RTC used these reviews, it likely would have recognized that there were procedural deficiencies that were preventing the implementation of the land sales initiative evaluation requirement. Until August 1994, RTC did not have adequate policies and procedures to collect the essential expense data needed to compute the net recoveries from individual land sales initiatives. As a result, RTC could not identify the most cost-effective initiatives, refine its land disposition strategies based on results, or analyze expense variations to better manage future land sales initiatives. We believe it is important that RTC evaluate its land sales initiatives because they would provide valuable best practices information that would be of interest to FDIC as it decides which, if any, RTC asset disposition strategies it may want to adopt as RTC's operations transition into FDIC. In August 1994, RTC issued procedures requiring sales budgets to be prepared and data to be collected on actual sales expenses. These procedures, if properly implemented, should provide the data RTC needs to evaluate the results of land sales initiatives, including those focused specifically on land and nonperforming loans secured by land. The original sales budget should enable RTC to better determine the appropriate delegated authority approval level for the sales initiatives. The actual sales expense data, along with other relevant information, should enable RTC to evaluate the effectiveness of different sales initiatives and monitor sales-related expenses to identify the most effective marketing and sales techniques. However, RTC still needs to develop a standard evaluation methodology to consistently assess the results of land sales initiatives at the completion of each land sales initiative to identify the most cost-effective sales techniques and best practices. We recommend that RTC's Deputy and Acting Chief Executive Officer direct the Vice President of Asset Sales and Management to develop an appropriate standard methodology for evaluating the results of land sales initiatives, and ensure that required evaluations are done at the completion of each land sales initiative to identify the best sales methods, most effective marketing techniques, and promote their use on future land sale initiatives. On February 6, 1995, we met with RTC's Vice President for Asset Marketing, RTC officials representing the National Sales Center, the Office of Contracts, and the Chief Financial Officer to discuss a draft of this report. In summary, they said that they generally concurred with the findings and conclusions as presented in the report. They offered various suggestions to clarify the discussion of their use of sales initiative budgets and their inability to compile all the actual expense data needed to do the required evaluations of individual land sales initiatives. Their comments were considered and have been incorporated into the report where appropriate. On March 3, 1995, RTC provided written comments (see app. IV) on the draft of this report. In this response, RTC agreed with our recommendations, described the actions being taken to implement them, and offered some general comments on RTC's land disposition methods. RTC said that it has implemented (1) a standard methodology, which is being updated, for evaluating the results of all major sales initiatives and (2) a system in which the results of sales are being captured for a quarterly formal comparative recovery rate analysis report. If the sales data are not submitted after the sale, RTC said a follow-up request is sent to the staff conducting the sale. In addition, RTC said that it will evaluate enhancing its internal control review process to test for compliance with the evaluation requirement. If effectively implemented, we believe that the actions taken and planned by RTC should address the issues discussed in this report. In its general comments, RTC said that while the actual results of equity partnership structures will not be known with accuracy for years, its estimates made after transaction closings suggest that equity partnerships generally will exceed recoveries from other disposition methods. We are not in a position to comment on whether, in the long term, using equity partnerships will maximize the recoveries from asset sales. Because RTC was created as a mixed-ownership government corporation, it is not required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs, the House Committee on Government Operations, and the House and Senate Committees on Appropriations. However, we would appreciate receiving such a statement within 60 days of the date of this letter to assist in our follow-up actions and to enable us to keep the appropriate congressional committees informed of RTC activities. We are sending copies of this report to interested congressional members and committees and the Chairmen of the Thrift Depositor Protection Oversight Board and the Federal Deposit Insurance Corporation. We will also make copies available to others upon request. Major contributors to this report are listed in appendix V. If you or your staff have any questions concerning this report, please call me on (202) 736-0479. Richard Y. Horiuchi Peggy A. Stott 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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GAO reviewed the Resolution Trust Corporation's (RTC) land disposition activities, focusing on whether RTC: (1) developed and implemented a strategy to dispose of its land assets; and (2) assessed the results of its land sales initiatives to identify the most cost-effective disposition methods and best practices. GAO found that RTC: (1) adopted a land disposition strategy in May 1992 and formed a land task force to analyze its land inventory; (2) disposed of about $16 billion in land and loans between January 1993 and June 1994, although it had about $850 million in these assets remaining unsold as of February 1995; (3) was unable to identify the most effective land disposition methods because it failed to develop a formal procedure to collect all the actual expense data related to each land sales initiative or establish a methodology for evaluating the results of each initiative; and (4) issued a directive requiring that the expenses for each multiasset sales initiative be documented, which should allow it to identify the most effective marketing and sales techniques and best practices.
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The Army has taken a number of steps since June 2010 at different levels to provide for more effective management and oversight of contracts supporting Arlington, including improving visibility of contracts, establishing new support relationships, formalizing policies and procedures, and increasing the use of dedicated contracting staff to manage and improve acquisition processes. While significant progress has been made, we have recommended that the Army take further action in these areas to ensure continued improvement and institutionalize progress made to date. These recommendations and the agency's response are discussed later in this statement. Arlington does not have its own contracting authority and, as such, relies on other contracting offices to award and manage contracts on its behalf. ANCP receives contracting support in one of two main ways, either by (1) working directly with contracting offices to define requirements, ensure the appropriate contract vehicle, and provide contract oversight, or (2) partnering with another program office to leverage expertise and get help with defining requirements and providing contract oversight. Those program offices, in turn, use other contracting arrangements to obtain services and perform work for Arlington. Using data from multiple sources, we identified 56 contracts and task orders that were active during fiscal year 2010 and the first three quarters of fiscal year 2011 under which these contracting offices obligated roughly $35.2 million on Arlington's behalf. These contracts and task orders supported cemetery operations, such as landscaping, custodial, and guard services; construction and facility maintenance; and new efforts to enhance information-technology systems for the automation of burial operations. Figure 1 identifies the contracting relationships, along with the number of contracts and dollars obligated by contracting office, for the contracts and task orders we reviewed. At the time of our review, we found that ANCP did not maintain complete data on contracts supporting its operations. We have previously reported that the effective acquisition of services requires reliable data to enable informed management decisions.leadership may be without sufficient information to identify, track, and ensure the effective management and oversight of its contracts. While we obtained information on Arlington contracts from various sources, limitations associated with each of these sources make identifying and tracking Arlington's contracts as a whole difficult. For example: Without complete data, ANCP Internal ANCP data. A contract specialist detailed to ANCP in September 2010 developed and maintained a spreadsheet to identify and track data for specific contracts covering daily cemetery operations and maintenance services. Likewise, ANCP resource management staff maintain a separate spreadsheet that tracks purchase requests and some associated contracts, as well as the amount of funding provided to other organizations through the use of military interdepartmental purchase requests. Neither of these spreadsheets identifies the specific contracts and obligations associated with Arlington's current information-technology and construction requirements. Existing contract and financial systems. The Federal Procurement Data System-Next Generation (FPDS-NG) is the primary system used to track governmentwide contract data, including those for the Department of Defense (DOD) and the Army. The Arlington funding office identification number, a unique code that is intended to identify transactions specific to Arlington, is not consistently used in this system and, in fact, was used for only 34 of the 56 contracts in our review. In October 2010 and consistent with a broader Army initiative, ANCP implemented the General Fund Enterprise Business System (GFEBS) to enhance financial management and oversight and to improve its capability to track expenditures. We found that data in this system did not identify the specific information-technology contracts supported by the Army Communications-Electronics Command, Army Geospatial Center, Naval Supply Systems Command Weapon Systems Support office, and others. Officials at ANCP and at the MICC-Fort Belvoir stated that they were exploring the use of additional data resources to assist in tracking Arlington contracts, including the Virtual Contracting Enterprise, an electronic tool intended to help enable visibility and analysis of elements of the contracting process. Contracting support organizations. We also found that Army contracting offices had difficulty in readily providing complete and accurate data to us on Arlington contracts. For example, the National Capital Region Contracting Center could not provide a complete list of active contracts supporting Arlington during fiscal years 2010 and 2011 and in some cases did not provide accurate dollar amounts associated with the contracts it identified. USACE also had difficulty providing a complete list of active Arlington contracts for this time frame. The MICC-Fort Belvoir contracting office was able to provide a complete list of the recently awarded contracts supporting Arlington with accurate dollar amounts for this time frame, and those data were supported by similar information from Arlington. The Army has also taken a number of steps to better align ANCP contract support with the expertise of its partners. However, some of the agreements governing these relationships do not yet fully define roles and responsibilities for contracting support. We have previously reported that a key factor in improving DOD's service acquisition outcomes--that is, obtaining the right service, at the right price, in the right manner--is having defined responsibilities and associated support structures. Going forward, sustained attention on the part of ANCP and its partners will be important to ensure that contracts of all types and risk levels are managed effectively. The following summarizes ongoing efforts in this area: ANCP established a new contracting support agreement with the Army Contracting Command in August 2010. The agreement states that the command will assign appropriate contracting offices to provide support, in coordination with ANCP, and will conduct joint periodic reviews of new and ongoing contract requirements. In April 2011, ANCP also signed a separate agreement with the MICC, part of the Army Contracting Command, which outlines additional responsibilities for providing contracting support to ANCP. While this agreement states that the MICC, through the Fort Belvoir contracting office, will provide the full range of contracting support, it does not specify the types of requirements that will be supported, nor does it specify that other offices within the command may also do so. ANCP signed an updated support agreement with USACE in December 2010, which states that these organizations will coordinate to assign appropriate offices to provide contracting support and that USACE will provide periodic joint reviews of ongoing and upcoming requirements. At the time of our review, USACE officials noted that they were in the process of finalizing an overarching program management plan with ANCP, which, if implemented, provides additional detail about the structure of and roles and responsibilities for support. USACE and ANCP have also established a Senior Executive Review Group, which updates the senior leadership at both organizations on the status of ongoing efforts. ANCP has also put agreements in place with the Army Information Technology Agency (ITA) and the Army Analytics Group, which provide program support for managing information-technology infrastructure and enhance operational capabilities. Officials at ANCP decided to leverage this existing Army expertise, rather than attempting to develop such capabilities independently as was the case under the previous Arlington management. For example, the agreement in place with ITA identifies the services that will be provided to Arlington, performance metrics against which ITA will be measured, as well as Arlington's responsibilities. These organizations are also responsible for managing the use of contracts in support of their efforts; however, the agreement with ANCP does not specifically address roles and responsibilities associated with the use and management of these contracts supporting Arlington requirements. Although officials from these organizations told us that they currently understand their responsibilities, without being clearly defined in the existing agreements, roles and responsibilities may be less clear in the future when personnel change. ANCP has developed new internal policies and procedures and improved training for staff serving as contracting officer's representatives, and has dedicated additional staff resources to improve contract management. Many of these efforts were in process at the time of our review, including decisions on contracting staff needs, and their success will depend on continued management attention. The following summarizes our findings in this area: Arlington has taken several steps to more formally define its own internal policies and procedures for contract management. In July 2010, the Executive Director of ANCP issued guidance stating that the Army Contracting Command and USACE are the only authorized contracting centers for Arlington. Further, ANCP is continuing efforts to (1) develop standard operating procedures associated with purchase requests; (2) develop memorandums for all ANCP employees that outline principles of the procurement process, as well as training requirements for contracting officer's representatives; and (3) create a common location for reference materials and information associated with Arlington contracts. In May 2011, the Executive Director issued guidance requiring contracting officer's representative training for all personnel assigned to perform that role, and at the time of our review, all of the individuals serving as contracting officer's representatives had received training for that position. ANCP, in coordination with the MICC-Fort Belvoir contracting office is evaluating staffing requirements to determine the appropriate number, skill level, and location of contracting personnel. In July 2010, the Army completed a study that assessed Arlington's manpower requirements and identified the need for three full-time contract specialist positions. While these positions have not been filled to date, ANCP's needs have instead been met through the use of staff provided by the MICC. At the time of our review, the MICC-Fort Belvoir was providing a total of 10 contracting staff positions in support of Arlington, 5 of which are funded by ANCP, with the other 5 funded by the MICC-Fort Belvoir to help ensure adequate support for Arlington requirements. ANCP officials have identified the need for a more senior contracting specialist and stated that they intend to request an update to their staffing allowance for fiscal year 2013 to fill this new position. Prior reviews of Arlington have identified numerous issues with contracts in place prior to the new leadership at ANCP. While our review of similar contracts found common concerns, we also found that contracts and task orders awarded since June 2010 reflect improvements in acquisition practices. Our previous contracting-related work has identified the need to have well-defined requirements, sound business arrangements (i.e., contracts in place), and the right oversight mechanisms to ensure positive outcomes. We found examples of improved documentation, better definition and consolidation of existing requirements for services supporting daily cemetery operations, and more specific requirements for contractor performance. At the time of our review, many of these efforts were still under way, so while initial steps taken reflect improvement, their ultimate success is not yet certain. The Army has also taken positive steps and implemented improvements to address other management deficiencies and to provide information and assistance to families. It has implemented improvements across a broad range of areas at Arlington, including developing procedures for ensuring accountability over remains, taking actions to better provide information- assurance, and improving its capability to respond to the public and to families' inquiries. For example, Arlington officials have updated and documented the cemetery's chain-of-custody procedures for remains, to include multiple verification steps by staff members and the tracking of decedent information through a daily schedule, electronic databases, and tags affixed to urns and caskets entering Arlington. Nevertheless, we identified several areas where challenges remain: Managing information-technology investments. Since June 2010, ANCP has invested in information-technology improvements to correct existing problems at Arlington and has begun projects to further enhance the cemetery's information-technology capabilities. However, these investments and planned improvements are not yet guided by an enterprise architecture--or modernization blueprint. Our experience has shown that developing this type of architecture can help minimize risk of developing systems that are duplicative, poorly integrated, and unnecessarily costly to maintain. ANCP is working to develop an enterprise architecture, and officials told us in January that they expect the architecture will be finalized in September 2012. Until the architecture is in place and ANCP's ongoing and planned information-technology investments are assessed against that architecture, ANCP lacks assurance that these investments will be aligned with its future operational environment, increasing the risk that modernization efforts will not adequately meet the organization's needs. Updating workforce plans. The Army took a number of positive steps to address deficiencies in its workforce plans, including completing an initial assessment of its organizational structure in July 2010 after the Army IG found that Arlington was significantly understaffed. However, ANCP's staffing requirements and business processes have continued to evolve, and these changes have made that initial workforce assessment outdated. Since the July 2010 assessment, officials have identified the need for a number of new positions, including positions in ANCP's public-affairs office and a new security and emergency-response group. Additionally, Arlington has revised a number of its business processes, which could result in a change in staffing needs. Although ANCP has adjusted its staffing levels to address emerging requirements, its staffing needs have not been formally reassessed. Our prior work has demonstrated that this kind of assessment can improve workforce planning, which can enable an organization to remain aware of and be prepared for its current and future needs as an organization. ANCP officials have periodically updated Arlington's organizational structure as they identify new requirements, and officials told us in January that they plan to completely reassess staffing within ANCP in the summer of 2012 to ensure that it has the staff needed to achieve its goals and objectives. Until this reassessment is completed and documented, ANCP lacks assurance that it has the correct number and types of staff needed to achieve its goals and objectives. Developing an organizational assessment program. Since 2009 ANCP has been the subject of a number of audits and assessments by external organizations that have reviewed many aspects of its management and operations, but it has not yet developed its own assessment program for evaluating and improving cemetery performance on a continuous basis. Both the Army IG and VA have noted the importance of assessment programs in identifying and enabling improvements of cemetery operations to ensure that cemetery standards are met. Further, the Army has emphasized the importance of maintaining an inspection program that includes a management tool to identify, prevent, or eliminate problem areas. At the time of our review, ANCP officials told us they were in the process of developing an assessment program and were adapting VA's program to meet the needs of the Army's national cemeteries. ANCP officials estimated in January that they will be ready to perform their first self-assessment in late 2012. Until ANCP institutes an assessment program that includes an ability to complete a self- assessment of operations and an external assessment by cemetery subject-matter experts, it is limited in its ability to evaluate and improve aspects of cemetery performance. Coordinating with key partners. While ANCP has improved its coordination with other Army organizations, we found that it has encountered challenges in coordinating with key operational partners, such as the Military District of Washington, the military service honor guards, and Joint Base Myer-Henderson Hall. Officials from these organizations told us that communication and collaboration with Arlington have improved, but they have encountered challenges and there are opportunities for continued improvement. For example, officials from the Military District of Washington and the military service honor guards indicated that at times they have experienced difficulties working with Arlington's Interment Scheduling Branch and provided records showing that from June 24, 2010, through December 15, 2010, there were at least 27 instances where scheduling conflicts took place. These challenges are due in part to a lack of written agreements that fully define how these operational partners will support and interact with Arlington. Our prior work has found that agencies can derive benefits from enhancing and sustaining their collaborative efforts by institutionalizing these efforts with agreements that define common outcomes, establish agreed-upon roles and responsibilities, identify mechanisms used to monitor and evaluate collaborative efforts, and enable the organizations to leverage their resources. ANCP has a written agreement in place with Joint Base Myer-Henderson Hall, but this agreement does not address the full scope of how these organizations work together. Additionally, ANCP has drafted, but has not yet signed, a memorandum of agreement with the Military District of Washington. ANCP has not drafted memorandums of agreement with the military service honor guards despite each military service honor guard having its own scheduling procedure that it implements directly with Arlington and each service working with Arlington to address operational challenges. ANCP, by developing memorandums of agreement with its key operational partners, will be better positioned to ensure effective collaboration with these organizations and help to minimize future communication and coordination challenges. Developing a strategic plan. Although ANCP officials have been taking steps to address challenges at Arlington, at the time of our review they had not adopted a strategic plan aimed at achieving the cemetery's longer-term goals. An effective strategic plan can help managers to prioritize goals; identify actions, milestones, and resource requirements for achieving those goals; and establish measures for assessing progress and outcomes. Our prior work has shown that leading organizations prepare strategic plans that define a clear mission statement, a set of outcome-related goals, and a description of how the organization intends to achieve those goals. Without a strategic plan, ANCP is not well positioned to ensure that cemetery improvements are in line with the organizational mission and achieve desired outcomes. ANCP officials told us during our review that they were at a point where the immediate crisis at the cemetery had subsided and they could focus their efforts on implementing their longer-term goals and priorities. In January, ANCP officials showed us a newly developed campaign plan. While we have not evaluated this plan, our preliminary review found that it contains elements of an effective strategic plan, including expected outcomes and objectives for the cemetery and related performance metrics and milestones. Developing written guidance for providing assistance to families. After the Army IG issued its findings in June 2010, numerous families called Arlington to verify the burial locations of their loved ones. ANCP developed a protocol for investigating these cases and responding to the families. Our review found that ANCP implemented this protocol, and we reviewed file documentation for a sample of these cases. In reviewing the assistance provided by ANCP when a burial error occurred, we found that ANCP's Executive Director or Chief of Staff contacted the affected families. ANCP's Executive Director--in consultation with cemetery officials and affected families--made decisions on a case-by-case basis about the assistance that was provided to each family. For instance, some families who lived outside of the Washington, D.C., area were reimbursed for hotel and travel costs. However, the factors that were considered when making these decisions were not documented in a written policy. In its June 2010 report, the Army IG noted in general that the absence of written policies left Arlington at risk of developing knowledge gaps as employees leave the cemetery. By developing written guidance that addresses the cemetery's interactions with families affected by burial errors, ANCP could identify pertinent DOD and Army regulations and other guidance that should be considered when making such decisions. Also, with written guidance the program staff could identify the types of assistance that can be provided to families. In January, ANCP provided us with a revised protocol for both agency-identified and family member-initiated gravesite inquiries. The revised protocol provides guidance on the cemetery's interactions with the next of kin and emphasizes the importance of maintaining transparency and open communication with affected families. A transfer of jurisdiction for the Army's two national cemeteries to VA is feasible based on historical precedent for the national cemeteries and examples of other reorganization efforts in the federal government. However, we identified several factors that may affect the advisability of making such a change, including the potential costs and benefits, potential transition challenges, and the potential effect on Arlington's unique characteristics. In addition, given that the Army has taken steps to address deficiencies at Arlington and has improved its management, it may be premature to move forward with a change in jurisdiction, particularly if other options for improvement exist that entail less disruption. During our review, we identified opportunities for enhancing collaboration between the Army and VA that could leverage their strengths and potentially lead to improvements at all national cemeteries. Transferring cemetery jurisdiction could have both benefits and costs. Our prior work suggests that government reorganization can provide an opportunity for greater effectiveness in program management and result in improved efficiency over the long-term, and can also result in short- term operational costs.told us they were not aware of relevant studies that may provide insight into the potential benefits and costs of making a change in cemetery jurisdiction. However, our review identified areas where VA's and the Army's national cemeteries have similar, but not identical, needs and have developed independent capabilities to meet those needs. For example, each agency has its own staff, processes, and systems for determining burial eligibility and scheduling and managing burials. While consolidating these capabilities may result in long-term efficiencies, there could also be challenges and short-term costs. At the time of our review, Army and VA officials Potential transition challenges may arise in transferring cemetery jurisdiction. Army and VA cemeteries have similar operational requirements to provide burial services for service members, veterans, and veterans' family members; however, officials identified areas where the organizations differ and stated that there could be transition challenges if VA were to manage Arlington, including challenges pertaining to the regulatory framework, appropriations structure, and contracts. For example, Arlington has more restrictive eligibility criteria for in-ground burials, which has the result of limiting the number of individuals eligible for burial at the cemetery. If Arlington cemetery were to be subject to the same eligibility criteria as VA's cemeteries, the eligibility for in-ground burials at Arlington would be greatly expanded. Additionally, the Army's national cemeteries are funded through a different appropriations structure than VA's national cemeteries. If the Army's national cemeteries were transferred to VA, Congress would have to choose whether to alter the funding structure currently in place for Arlington. Burial eligibility at VA's national cemeteries is governed by 38 U.S.C. SS 2402 and 38 C.F.R. SS 38.620. Burial eligibility at Arlington is governed by 38 U.S.C. SS 2410 and 32 C.F.R. SS 553.15. Mission and vision statements. The Army and VA have developed their own mission and vision statements for their national cemeteries that differ in several ways. Specifically, VA seeks to be a model of excellence for burials and memorials, while Arlington seeks to be the nation's premier military cemetery. Military honors provided to veterans. The Army and VA have varying approaches to providing military funeral honors. VA is not responsible for providing honors to veterans, and VA cemeteries generally are not involved in helping families obtain military honors from DOD. In contrast, Arlington provides a range of burial honors depending on whether an individual is a service member killed in action, a veteran, or an officer. Ceremonies and special events. Arlington hosts a large number of ceremonies and special events in a given year, some of which may involve the President of the United States as well as visiting heads of state. From June 10, 2010, through October 1, 2011, Arlington hosted more than 3,200 wreath-laying ceremonies, over 70 memorial ceremonies, and 19 state visits, in addition to Veterans Day and Memorial Day ceremonies, and also special honors for Corporal Frank Buckles, the last American servicemember from World War I. VA officials told us that their cemeteries do not support a similar volume of ceremonies, and as a result they have less experience in this area than the Army. During our review, we found that there are opportunities to expand collaboration between the Army and VA that could improve the efficiency and effectiveness of these organizations' cemetery operations. Our prior work has shown that achieving results for the nation increasingly requires that federal agencies work together, and when considering the nation's long-range fiscal challenges, the federal government must identify ways to deliver results more efficiently and in a way that is consistent with its limited resources. Since the Army IG issued its findings in June 2010, the Army and VA have taken steps to partner more effectively. The Army's hiring of several senior VA employees to help manage Arlington has helped to foster collaboration, and the two agencies signed a memorandum of understanding that allows ANCP employees to attend classes at VA's National Training Center. However, the Army and VA may have opportunities to collaborate and avoid duplication in other areas that could benefit the operations of either or both cemetery organizations. For example, the Army and VA are upgrading or redesigning some of their core information-technology systems supporting cemetery operations. By continuing to collaborate in this area, the agencies can better ensure that their information-technology systems are able to communicate, thereby helping to prevent operational challenges stemming from a lack of compatibility between these systems in the future. In addition, each agency may have specialized capabilities that it could share with the other. VA, for example, has staff dedicated to determining burial eligibility, and the Army has an agency that provides geographic-information-system and global-positioning-system capabilities--technologies that VA officials said that they are examining for use at VA's national cemeteries. While the Army and VA have taken steps to improve collaboration, at the time of our review the agencies had not established a formal mechanism to identify and analyze issues of shared interest, such as process improvements, lessons learned, areas for reducing duplication, and solutions to common problems. VA officials indicated that they planned to meet with ANCP officials in the second quarter of fiscal year 2012, with the aim of enhancing collaboration between the two agencies. Unless the Army and VA collaborate to identify areas where the agencies can assist each other, they could miss opportunities to take advantage of each other's strengths--thereby missing chances to improve the efficiency and effectiveness of cemetery operations--and are at risk of investing in duplicative capabilities. The success of the Army's efforts to improve contracting and management at Arlington will depend on continued focus in various areas. Accordingly, we made a number of recommendations in our December 2011 reports. In the area of contracting, we recommended that the Army implement a method to track complete and accurate contract data, ensure that support agreements clearly identify roles and responsibilities for contracting, and determine the number and skills necessary for contracting staff. In its written comments, DOD partially concurred with these recommendations, agreeing that there is a need to take actions to address the issues we raised, but indicating that our recommendations did not adequately capture Army efforts currently underway. We believe our report reflects the significant progress made by Arlington and that implementation of our recommendations will help to institutionalize the positive steps taken to date. With regard to our recommendation to identify and implement a method to track complete and accurate contact data, DOD noted that Arlington intends to implement, by April 2012, a methodology based on an electronic tool which is expected to collect and reconcile information from a number of existing data systems. Should this methodology consider the shortcomings within these data systems as identified in our report, we believe this would satisfy our recommendations. DOD noted planned actions, expected for completion by March 2012 that, if implemented, would satisfy the intent of our other two recommendations. With regard to other management challenges at Arlington, we recommended that the Army implement its enterprise architecture and reassess ongoing and planned information-technology investments; update its assessment of ANCP's workforce needs; develop and implement a program for assessing and improving cemetery operations; develop memorandums of understanding with Arlington's key operational partners; develop a strategic plan; and develop written guidance to help determine the types of assistance that will be provided to families affected by burial errors. DOD fully agreed with our recommendations that the Army update its assessment of ANCP's workforce needs and implement a program for assessing and improving cemetery operations. DOD partially agreed with our other recommendations. In January, ANCP officials provided us with updates on its plans to take corrective actions, as discussed in this statement. With regard to implementing an enterprise architecture, DOD stated that investments made to date in information technology have been modest and necessary to address critical deficiencies. We recognize that some vulnerabilities must be expeditiously addressed. Nevertheless, our prior work shows that organizations increase the risk that their information-technology investments will not align with their future operational environment if these investments are not guided by an approved enterprise architecture. Regarding its work with key operational partners, DOD stated that it recognizes the value of establishing memorandums of agreement and noted the progress that the Army has made in developing memorandums of agreement with some of its operational partners. We believe that the Army should continue to pursue and finalize agreements with key operational partners that cover the full range of areas where these organizations must work effectively together. With regard to a strategic plan, DOD stated that it was in the process of developing such a plan. As discussed previously, ANCP officials in January showed us a newly developed campaign plan that, based on our preliminary review, contains elements of an effective strategic plan. Regarding written guidance on the factors that the Executive Director will consider when determining the types of assistance provided to families affected by burial errors, DOD stated that such guidance would limit the Executive Director's ability to exercise leadership and judgment to make an appropriate determination. We disagree with this view. Our recommendation does not limit the Executive Director's discretion, which we consider to be an essential part of ensuring that families receive the assistance they require in these difficult situations. Our recommendation, if implemented, would improve visibility into the factors that guide decision making in these cases. Finally, we recommended that the Army and VA implement a joint working group or other such mechanism to enable ANCP and VA's National Cemetery Administration to collaborate more closely in the future. Both DOD and VA concurred with this recommendation. As noted, VA stated that a planning meeting to enhance collaboration is planned for the second quarter of 2012. Chairmen Wilson and Wittman, Ranking Members Davis and Cooper, and Members of the Subcommittees, this completes our prepared statement. We would be pleased to respond to any questions that you may have at this time. For questions about this statement, please contact Belva Martin, Director, Acquisition and Sourcing Management, on (202) 512-4841 or [email protected] or Brian Lepore, Director, Defense Capabilities and Management, on (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 testimony. Individuals who made key contributions to this testimony include Brian Mullins, Assistant Director; Tom Gosling, Assistant Director; Kyler Arnold; Russell Bryan; George M. Duncan; Kathryn Edelman; Julie Hadley; Kristine Hassinger; Lina Khan; and Alex Winograd. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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Arlington National Cemetery (Arlington) is the final resting place for many of our nation's military servicemembers, their family members, and others. In June 2010, the Army Inspector General identified problems at the cemetery, including deficiencies in contracting and management, burial errors, and a failure to notify next of kin of errors. In response, the Secretary of the Army issued guidance creating the position of the Executive Director of the Army National Cemeteries Program (ANCP) to manage Arlington and requiring changes to address the deficiencies and improve cemetery operations. In response to Public Law 111-339, GAO assessed several areas, including (1) actions taken to improve contract management and oversight, (2) the Army's efforts to address identified management deficiencies and provide information and assistance to families regarding efforts to detect and correct burial errors, and (3) factors affecting the feasibility and advisability of transferring jurisdiction for the Army's national cemeteries to the Department of Veterans Affairs (VA). The information in this testimony summarizes GAO's recent reports on Arlington contracting (GAO-12-99) and management (GAO-12-105). These reports are based on, among other things, analyzing guidance, policies, plans, contract files, and other documentation from the Army, Arlington, and other organizations and interviews with Army and VA officials. GAO identified 56 contracts and task orders that were active during fiscal year 2010 and the first three quarters of fiscal year 2011 under which contracting offices obligated roughly $35.2 million on Arlington's behalf. These contracts supported cemetery operations, construction and facility maintenance, and new efforts to enhance information-technology systems for the automation of burial operations. The Army has taken a number of steps since June 2010 at different levels to provide for more effective management and oversight of contracts, establishing new support relationships, formalizing policies and procedures, and increasing the use of dedicated contracting staff to manage and improve its acquisition processes. However, GAO found that ANCP does not maintain complete data on its contracts, responsibilities for contracting support are not yet fully defined, and dedicated contract staffing arrangements still need to be determined. The success of Arlington's acquisition outcomes will depend on continued management focus from ANCP and its contracting partners to ensure sustained attention to contract management and institutionalize progress made to date. GAO made three recommendations to continue improvements in contract management. The Department of Defense (DOD) partially concurred and noted actions in progress to address these areas. The Army has taken positive steps and implemented improvements to address other management deficiencies and to provide information and assistance to families. It has implemented improvements across a broad range of areas at Arlington, including developing procedures for ensuring accountability over remains and improving its capability to respond to the public and to families' inquiries. Nevertheless, the Army has remaining management challenges in several areas--managing information-technology investments, updating workforce plans, developing an organizational assessment program, coordinating with key partners, developing a strategic plan, and developing guidance for providing assistance to families. GAO made six recommendations to help address these areas. DOD concurred or partially concurred and has begun to take some corrective actions. A transfer of jurisdiction for the Army's two national cemeteries to VA is feasible based on historical precedent for the national cemeteries and examples of other reorganization efforts in the federal government. However, several factors may affect the advisability of making such a change, including the potential costs and benefits, potential transition challenges, and the potential effect on Arlington's unique characteristics. In addition, given that the Army has taken steps to address deficiencies at Arlington and has improved its management, it may be premature to move forward with a change in jurisdiction, particularly if other options for improvement exist that entail less disruption. GAO identified opportunities for enhancing collaboration between the Army and VA that could leverage their strengths and potentially lead to improvements at all national cemeteries. GAO recommended that the Army and VA develop a mechanism to formalize collaboration between these organizations. DOD and VA concurred with this recommendation. In the reports, GAO made several recommendations to help Arlington sustain progress made to date.
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Before I go into detail regarding the Department of Education's Year 2000 challenges, I would like to first discuss the Year 2000 issue in broader terms to put the department's efforts into perspective. As the world's most advanced and most dependent user of information technology, the United States possesses close to half of all computer capacity and 60 percent of Internet assets. Consequently, the upcoming change of century is a sweeping and urgent challenge for public-sector and private-sector organizations alike. For this reason we have designated the Year 2000 computing problem as a high-risk area for the federal government, and have published guidanceto help organizations successfully address the issue. To date, we have issued over 60 reports and testimony statements detailing specific findings and recommendations related to the Year 2000 readiness of a wide range of federal agencies. Our reviews of federal Year 2000 programs have found uneven progress, and our reports contain numerous recommendations, which the agencies have almost universally agreed to implement. Among them are the need to establish priorities, solidify data exchange agreements, and develop contingency plans. While progress has been made in addressing the federal government's Year 2000 readiness, serious vulnerabilities remain and many agencies are behind schedule. The Department of Education's mission is to ensure equal access to education and to promote educational excellence throughout the nation. To carry out this mission, it works with states, schools, communities, institutions of higher education, and financial institutions by providing grants to education agencies and institutions to strengthen teaching and student loans and grants to help pay the costs of postsecondary education; grants for literacy, employment, and self-sufficiency training for adults; enforcement of civil rights laws to ensure nondiscrimination by recipients of federal education funds; and support for research, development, evaluation, and dissemination of information to improve educational quality and effectiveness. The largest single federal elementary and secondary education grant program is title I of the Elementary and Secondary Education Act. This program serves educationally disadvantaged children through program-specific grants. The fiscal year 1997 appropriation for the disadvantaged was $7.3 billion. Student financial aid programs are administered by Education's Office of Postsecondary Education (OPE) under title IV of the Higher Education Act of 1965, as amended. The department is responsible for the collection of more than $150 billion in outstanding loans, and its data systems track approximately 93 million student loans and 15 million grants. Four major types of student aid are currently in use: the Federal Family Education Loan Program (FFELP), the Federal Direct Loan Program (FDLP), the Federal Pell Grant Program, and campus-based programs. These programs together will make available about $51 billion to about 9 million students during the 1999-2000 academic year. FFELP and FDLP are the two largest postsecondary student loan programs, and Pell is the largest postsecondary grant program. FFELP provides student loans, through private lending institutions, that are guaranteed against default by some 36 guaranty agencies and insured by the federal government, while FDLP provides student loans directly from the federal government. Pell provides grants to disadvantaged students. In many ways, Education's student financial aid delivery system is similar to functions performed in the banking industry, such as making loans, reporting account status, and collecting payments. As with the banks, the department faces a serious and complex challenge with the Year 2000 problem because of its heavy reliance on technology. The department currently maintains 11 major systems for administering student financial aid programs. These systems were developed independently over time by multiple contractors in response to new functions, programs, or mandates, resulting in a complex, highly heterogeneous systems environment. The systems range from legacy mainframes, several originally developed over 15 years ago, to recently developed client-server environments. The fiscal year 1998 budget to develop, operate, and maintain these systems is $311 million, and is expected to increase to $378 million in fiscal year 1999. According to Education's own assessments of the severity of Year 2000 failures, the student financial aid delivery process could experience major problems unless all systems are compliant in time. These include delays in disbursements, such that lenders might not receive timely interest and allowance payments, if external data exchanges fail; reduction in the department's ability to transfer payments, process applications for program benefits, or monitor program operations; risks that student financial aid programs may not function properly if they do not receive critical data for originating loans and for reporting payments and financial information; and risks that postsecondary education students may lack the ability to verify the current status of their loans or grants. To overcome these types of risks, Education must implement effective Year 2000 programs. An effective Year 2000 program requires the disciplined, coordinated application of scarce resources to an agencywide system conversion that must be completed by a fixed date, and an understanding of the wide range of dependencies among information systems. An organization can mitigate its risk of Year 2000 complications through a structured approach and rigorous program management. One generally accepted approach, presented in our Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14), has five phases: awareness -- defining the problem and gaining executive-level support; assessment -- inventorying and analyzing systems, and prioritizing their renovation -- converting, replacing, or eliminating selected systems; validation -- ensuring that all converted or replaced systems and interfaces will work in an operational environment; and implementation -- deploying Year 2000-compliant systems and components, and implementing contingency plans, if necessary. Education was very slow to establish a comprehensive, timely Year 2000 program. One key factor contributing to this delay was the instability of the department's Year 2000 project manager position, which suffered continual turnover. The department initially established the position in February 1995 to provide oversight and guidance to Education's Year 2000 activities. During the 19-month tenure of the first project manager, a high-level Year 2000 briefing document (dated May 1996) was developed in response to a request from a congressional committee. At that time, Education estimated that it would complete a Year 2000 program strategy document and corresponding management plan by August 1996. However, no strategy document or management plan was developed, either by that deadline or during the 14-month tenure of the second project manager, which ended in September 1997. The third Year 2000 project manager, who spent only 3 months in the position, contracted with consultants to assist the department in developing a draft Year 2000 management plan. The fourth manager, during his 4-month tenure, initiated many awareness and assessment activities. Finally, the fifth project manager was assigned on March 30 of this year, and has continued the progress started by her predecessor. The frequency of turnover in project managers delayed Education in completing basic awareness activities. These activities included dedicating staff to the Year 2000 effort, communicating with data exchange partners, holding regular steering committee meetings, and developing a management plan. Project office staff to help the department coordinate Year 2000 activities were not assigned until December 1997, when the fourth project manager was appointed. In addition, while a draft management plan was distributed for comment in mid-November 1997, it was not made final until April of this year. Education experienced a corresponding delay with basic assessment activities, which it did not report as completed until this past March--about 9 months after the Office of Management and Budget (OMB) milestone. These assessment activities included conducting an enterprisewide inventory of information systems and data interfaces, assessing and prioritizing systems, establishing Year 2000 project teams for business areas and major systems, and initiating contingency planning. Concurrent with its slowness in completing its assessment, Education's estimated costs have fluctuated widely. The initial cost estimate in May 1996 was $60 million, which decreased dramatically to $7 million in February 1997 but then rose again in February 1998 with an estimate of $23 million. Last month, the cost estimate increased further, to $38 million, as Education continued renovating and testing its systems. Prior to February 1998, little documentation existed supporting how these estimates were derived. Figure 1 highlights the wide variation in cost estimates over the past 2 years. With its slow start, Education has been playing catch up and working to accelerate its progress. Management staff have regular meetings to discuss progress on Year 2000 compliance, and principal office staff meet biweekly to discuss progress on individual mission-critical systems. The biweekly meetings include Education staff responsible for the particular system; the system contractor; Year 2000 program office staff; and contractor staff responsible for independently verifying and validating renovation, validation, and implementation activities. According to department officials, Year 2000 compliance has also now been given top priority in terms of in-house resources. Education's Year 2000 management plan established the Year 2000 project manager as the focal point for monitoring progress, providing support, and directing the plan. The project manager works with the program offices, which are responsible for assessing and renovating their systems, as well as tracking and reporting progress on compliance activities. Senior leadership of each program office is responsible for providing adequate support to its Year 2000 tasks and ensuring that Year 2000 compliance is achieved. The Department of Education has reported to OMB that it has 14 mission-critical systems, of which 11 are student financial aid systems. Table 1 summarizes the Year 2000 status of each mission-critical system as of this month. In brief, according to the department's September 10, 1998, report, four mission-critical systems have been implemented and are in operation, one is in the process of being implemented, five systems are being validated, and the remaining four are still being renovated. While there has been recent progress, the Department of Education must mitigate critical risks that affect its ability to award and track billions of dollars in student financial aid. Specifically, the department must address the need for adequate testing, the renovation and testing of data exchanges, and the development of business continuity and contingency plans. Unless these issues are effectively addressed, the ability of the department to deliver financial aid to students will be compromised. Complete and thorough Year 2000 testing is essential to providing reasonable assurance that new or modified systems process dates correctly and will not jeopardize an organization's ability to perform core business operations after the turn of the century. Moreover, since the Year 2000 computing problem is so pervasive, the requisite testing is generally extensive and expensive. Experience shows that Year 2000 testing is consuming between 50 and 70 percent of a project's time and resources. Agencies must not only test Year 2000 compliance of individual applications, but also the complex interactions among numerous converted or replaced computer platforms, operating systems, utilities, applications, databases, and interfaces. It is also important to work early and continually with an organization's data exchange partners so that end-to-end testing can be effectively planned and executed. The Society for Information Management Year 2000 Working Group has noted that because many enterprises do not have experience with testing at this order of magnitude, the results will often be significant cost overruns and missed commitments. Indeed, for Education, the task ahead is formidable--it requires a cooperative, coordinated, and thorough testing process across the disparate systems in the student financial aid delivery network. Because of Education's late start and the compression of its Year 2000 compliance schedule to meet the OMB deadline (mission-critical systems to be implemented by March 31, 1999), time available for key testing activities within the renovation, validation, and implementation phases for individual mission-critical systems is limited. In fact, in some cases, the schedule for Education's mission-critical systems has less time allocated for the renovation and validation phases than was spent on assessment. These are large, often complex systems encompassing hundreds of thousands and, in some cases, millions of lines of software code. Accordingly, the limited amount of time available raises concerns about Education's ability to complete essential testing in time. Department officials have acknowledged that completing testing activities within schedule will be difficult. Indeed, the schedule constraints placed on test activities for individual systems have already been shown to be unrealistic in several cases. For example, the schedule for 7 of the 14 mission-critical systems has recently been extended to allow more time for testing. Beyond the testing of individual mission-critical systems, Education will also have to devote a significant amount of time to end-to-end testing of its mission-critical business processes and supporting systems, such as those associated with student financial aid delivery. According to Education officials, the department plans to conduct such testing between January and March 1999, after all individual mission-critical systems have been certified as Year 2000 compliant. Tentatively from April to September 1999, external data exchange partners will have time periods available for testing their interfaces. However, no detailed plans currently exist for this testing. Education officials stated that they are working on these plans and intend to have them completed shortly, pending discussion with the student financial aid community. As 2000 approaches, organizations must be diligent in implementing measures to ensure that exchanging data across systems compromises neither the systems nor the data. Conflicting data exchange formats or data processed on noncompliant systems could introduce and propagate errors from one system to another. To mitigate this risk, organizations must inventory and assess their data exchanges, reach agreements with data exchange partners on how data will be exchanged, test and implement data exchange formats, develop and test bridges and filters to handle nonconforming data, and develop contingency plans in the event of failure. Education's student financial aid data exchange environment is massive and complex. It includes about 7,500 schools, 6,500 lenders, and 36 guaranty agencies, as well as other federal agencies. Figure 2 provides an overview of this environment. To address its data exchanges with schools, lenders, and guaranty agencies, Education has dictated how the data that these entities provide to the department should be formatted. Education handles this in one of two ways: it either provides software to the entity, such as EDExpress (which specifies the format--including dates--for data exchanges), or provides the technical specifications for the entity to use in developing the necessary interface. Education has followed up on this approach with its data exchange partners by (1) developing memorandums of understanding with each guaranty agency and federal agency and (2) conducting outreach on Year 2000 awareness with schools. Regarding its outreach to schools, Education has shared information through memoranda (i.e., "Dear Colleague" letters), presentations at conferences and training sessions, and over the Internet. The "Dear Colleague" letters provide an overview of the Year 2000 issue and summarize the department's approach for ensuring compliance of student financial aid systems. To further ensure that Education's data exchange partners have indeed made their interfaces compliant, the department will need to engage in end-to-end testing of its mission-critical business processes, including data exchanges. As noted earlier, Education has not completed these end-to-end test plans. Further complicating data exchange compliance is that Education will need to ensure that the data it is receiving from its partners are not just formatted correctly but are accurate. As we have previously reported, Education has experienced serious data integrity problems in the past. To assess how educational institutions are progressing with their Year 2000 programs, the department recently conducted a survey of the Year 2000 readiness of postsecondary schools participating in the Direct Loan Program. The preliminary results are not encouraging: up to one-third of the schools did not even have a compliance plan in place. Given the challenges Education faces in making sure that all of its mission-critical systems are adequately tested and in addressing the complexities of the massive number of data exchanges, it will be difficult for the department to enter the new century without some problems. Therefore, it is critical that Education initiate the development of realistic contingency plans to ensure continuity of core business processes in the event of Year 2000-induced failures. Business continuity and contingency plans should be formulated to respond to two types of failure: those that can be predicted (e.g., systems renovations that are already far behind schedule) and those that are unforeseen (e.g., systems that fail despite having been certified Year 2000 compliant, or those that cannot be corrected by January 1, 2000, despite appearing to be on schedule today). Moreover, contingency plans that focus only on agency systems are inadequate. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure. Thus, one weak link anywhere in the chain of critical dependencies can cause major disruption. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Our guide on ensuring business continuity and contingency planning, issued last month, provides further detail on this. This guide describes four phases supported by agency Year 2000 program management: initiation, business impact analysis, contingency planning, and testing. Each phase represents a major Year 2000 business continuity planning project activity or segment. Education initiated contingency planning activities in February 1998. According to department officials, Education is committed to developing business continuity and contingency plans for each mission-critical business process and supporting systems. As part of this commitment, Education recently appointed a senior executive to manage the development and testing of continuity and contingency plans for student financial aid operations. The department expects to complete these plans by March 31, 1999. In summary, Mr. Chairman, the Department of Education's endeavor to make its programs and supporting systems Year 2000 compliant is of urgent priority. Should critical student financial aid systems not be Year 2000 compliant in time, Education's ability to control the award process could be compromised, with cascading effects reaching schools, students, guaranty agencies, and lenders. While the department has made progress in preparing its systems for the year 2000, initial delays have left it with significant risks--risks that must be effectively managed. This concludes my statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have at this time. Year 2000 Computing Crisis: Severity of Problem Calls for Strong Leadership and Effective Partnerships (GAO/T-AIMD-98-278, September 3, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Partnerships Needed to Reduce Likelihood of Adverse Impact (GAO/T-AIMD-98-277, September 2, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Partnerships Needed to Mitigate Risks (GAO/T-AIMD-98-276, September 1, 1998). Year 2000 Computing Crisis: State Department Needs To Make Fundamental Improvements To Its Year 2000 Program (GAO/AIMD-98-162, August 28, 1998). Year 2000 Computing: EFT 99 Is Not Expected to Affect Year 2000 Remediation Efforts (GAO/AIMD-98-272R, August 28, 1998). Year 2000 Computing Crisis: Avoiding Major Disruptions Will Require Strong Leadership and Effective Partnerships (GAO/T-AIMD-98-267, August 19, 1998). Year 2000 Computing Crisis: Strong Leadership and Partnerships Needed to Address Risk of Major Disruptions (GAO/T-AIMD-98-266, August 17, 1998). Year 2000 Computing Crisis: Strong Leadership and Partnerships Needed to Mitigate Risk of Major Disruptions (GAO/T-AIMD-98-262, August 13, 1998). FAA Systems: Serious Challenges Remain in Resolving Year 2000 and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, August 1998). Internal Revenue Service: Impact of the IRS Restructuring and Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, August 4, 1998). Social Security Administration: Subcommittee Questions Concerning Information Technology Challenges Facing the Commissioner (GAO/AIMD-98-235R, July 10, 1998). Year 2000 Computing Crisis: Actions Needed on Electronic Data Exchanges (GAO/AIMD-98-124, July 1, 1998). Defense Computers: Year 2000 Computer Problems Put Navy Operations at Risk (GAO/AIMD-98-150, June 30, 1998). Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June 1998). Year 2000 Computing Crisis: Testing and Other Challenges Confronting Federal Agencies (GAO/T-AIMD-98-218, June 22, 1998). Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212, June 16, 1998). GAO Views on Year 2000 Testing Metrics (GAO/AIMD-98-217R, June 16, 1998). IRS' Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). Year 2000 Computing Crisis: Actions Must Be Taken Now to Address Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998). Defense Computers: Army Needs to Greatly Strengthen Its Year 2000 Program (GAO/AIMD-98-53, May 29, 1998). Year 2000 Computing Crisis: USDA Faces Tremendous Challenges in Ensuring That Vital Public Services Are Not Disrupted (GAO/T-AIMD-98-167, May 14, 1998). Securities Pricing: Actions Needed for Conversion to Decimals (GAO/T-GGD-98-121, May 8, 1998). Year 2000 Computing Crisis: Continuing Risks of Disruption to Social Security, Medicare, and Treasury Programs (GAO/T-AIMD-98-161, May 7, 1998). IRS' Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May 7, 1998). Air Traffic Control: FAA Plans to Replace Its Host Computer System Because Future Availability Cannot Be Assured (GAO/AIMD-98-138R, May 1, 1998). Year 2000 Computing Crisis: Potential for Widespread Disruption Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April 30, 1998). Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Department of the Interior: Year 2000 Computing Crisis Presents Risk of Disruption to Key Operations (GAO/T-AIMD-98-149, April 22, 1998). Tax Administration: IRS' Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision's Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation's Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC's Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation's Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems' Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration's Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time Is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computer Systems: Risks of VBA's Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed year 2000 (Y2K) computing crisis risks to the Department of Education, focusing on: (1) student financial aid systems; (2) actions the department has taken in recent months to address these risks; and (3) key issues the department must deal with if its systems are to be ready for the century change: testing of systems, exchanging data with internal and external partners, and developing business continuity and contingency plans. GAO noted that: (1) Education faces major risks that Y2K failures could severely disrupt the student financial aid delivery process, including delaying disbursements and application processing; (2) further, because of systems interdependencies, repercussions from Y2K-related problems could be felt throughout the student financial aid community--a network including students, institutions of higher educations, financial organizations, and other government agencies; (3) the department was very slow in implementing a comprehensive Y2K program to address these risks--basic awareness and assessment tasks were not completed until recently; (4) Education is now accelerating its program, but with the slow start, it remains in a position of playing catch up; (5) accordingly, the department has major challenges ahead but limited time remaining to adequately deal with them; and (6) therefore, it must also focus on developing appropriate contingency plans to ensure business continuity in the event of key systems failures.
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The United States' nuclear weapons stockpile comprises nine nuclear weapons types, all of which were designed during the Cold War. Two of these systems--the B61 and the W76--are currently being refurbished to extend their useful lives for up to 30 years through NNSA's Life Extension Program. In May 2008, we reported that, over the past few years, NNSA and DOD have considered a variety of scenarios for the future composition of the nuclear stockpile that would be based on different stockpile sizes and the degree to which the stockpile would incorporate new RRW designs. For example, NNSA and DOD have considered how large the stockpile needs to be in order to maintain a sufficiently robust and responsive manufacturing infrastructure to respond to future global geopolitical events. In addition, NNSA and DOD have considered the number of warheads that will need to be either refurbished or replaced in the coming decades. However, NNSA and DOD have not issued requirements defining the size and composition of the future stockpile. We discussed one effect of this lack of clear stockpile requirements in our May 2008 report on plutonium pit manufacturing. Specifically, we found that in October 2006, NNSA proposed building a new, consolidated plutonium center at an existing DOE site that would be able to manufacture pits at a production capacity of 125 pits per year. However, by December 2007, NNSA stated that instead of building a new, consolidated plutonium center, its preferred action was to upgrade the existing pit production building at LANL to produce up to 80 pits per year. Although DOD officials agreed to support NNSA's plan, these officials also stated that future changes to stockpile size, military requirements, and risk factors may ultimately lead to a revised, larger rate of production. This uncertainty has delayed NNSA in issuing final plans for its future pit manufacturing capability. Once a decision is made about the size and composition of the stockpile, NNSA should develop accurate estimates of the costs of transforming the nuclear weapons complex. In September 2007, a contractor provided NNSA with a range of cost estimates for over 10 different Complex Transformation alternatives. For example, the contractor estimated that the cost of NNSA's preferred action would be approximately $79 billion over the period 2007 through 2060. This option was also determined to be the least expensive. In contrast, the contractor's estimate for a consolidated nuclear production center--another alternative that would consolidate plutonium, uranium, and weapons assembly and disassembly at one site--totaled $80 billion over the same period. Although these estimates differ by only $1 billion over 53 years, they are based on significantly different assumptions. Specifically, NNSA's preferred action assumes a manufacturing capacity of up to 80 pits per year, and the alternative for a consolidated nuclear production center assumes a capacity of 125 pits per year. In addition, the contractor cautioned that because its cost analysis was not based on any specific conceptual designs for facilities such as the consolidated nuclear production center, it had not developed cost estimates for specific projects. As a result, the contractor stated that its estimates should not be used to predict a budget-level project cost. Historically, NNSA has had difficulty developing realistic, defensible cost estimates, especially for large, complex projects. For example, in March 2007, we found that 8 of the 12 major construction projects that DOE and NNSA were managing had exceeded their initial cost estimates. One project, the Highly Enriched Uranium Materials Facility nearing completion at the Y-12 Plant, has exceeded its original cost estimate by over 100 percent, or almost $300 million. We reported that the reasons for this cost increase included poor management and contractor oversight. In addition, NNSA's cost estimate for constructing the Chemistry and Metallurgy Research Replacement Facility has more than doubled--from $838 million to over $2 billion--since our April 2006 testimony. This revised cost estimate is so uncertain that NNSA did not include any annual cost estimates beyond fiscal year 2009 in its fiscal year 2009 budget request to the Congress. Finally, the preliminary results of our ongoing review of NNSA's Life Extension Program for this Subcommittee show that NNSA's cost estimate for refurbishing each B61 nuclear bomb has doubled since 2002. NNSA does not expect to issue a record of decision on Complex Transformation until later this year. As a result, we do not know the ultimate decision that NNSA will make--whether to modernize existing sites in the weapons complex or consolidate operations at new facilities. We expect that once NNSA makes this decision, NNSA will put forward a transformation plan with specific milestones to implement its decision. Without such a plan, NNSA will have no way to evaluate its progress, and the Congress will have no way to hold NNSA accountable. However, over the past decade, we have repeatedly documented problems with NNSA's process for planning and managing its activities. For example, in a December 2000 report, we found that NNSA needed to improve its planning process so that there were linkages between individual plans across the Stockpile Stewardship Program and that the milestones contained in NNSA's plans were reflected in contractors' performance criteria and evaluations. However, in February 2006, we reported similar problems with how NNSA is managing the implementation and reliability of the nuclear stockpile. Specifically, we found that NNSA planning documents did not contain clear, consistent milestones or a comprehensive list of the scientific research being conducted across the weapons complex in support of NNSA's Primary and Secondary Assessment Technologies programs. These programs are responsible for setting the requirements for the computer codes and experimental data needed to assess and certify the safety and reliability of nuclear warheads. We also found that NNSA had not established adequate performance measures to determine the progress of the weapons laboratories in developing and implementing this new methodology. As we noted in July 2003, one of the key practices for successfully transforming an organization is to ensure that top leadership sets the direction, pace, and tone for the transformation. One of the key problems that NNSA has experienced has been its inability to build an organization with clear lines of authority and responsibility. We also reported in January 2004 that NNSA, as a result of reorganizations, has shown that it can move from what was often called a "dysfunctional bureaucracy" to an organization with clearer lines of authority and responsibility. In this regard, we stated in our April 2006 testimony that NNSA's proposed Office of Transformation needed to be vested with the necessary authority and resources to set priorities, make timely decisions, and move quickly to implement those decisions. It was our view that the Office of Transformation should (1) report directly to the Administrator of NNSA; (2) be given sufficient authority to conduct its studies and implement its recommendations; and (3) be held accountable for creating real change within the weapons complex. In 2006, NNSA created an Office of Transformation to oversee its Complex Transformation efforts. This office has been involved in overseeing early activities associated with Complex Transformation, such as the issuance of the December 2007 draft report on the potential environmental impacts of alternative Complex Transformation actions. However, the Office of Transformation does not report directly to the Administrator of NNSA. Rather, the Office reports to the head of NNSA's Office of Defense Programs. In this respect, we are concerned that the Office of Transformation may not have sufficient authority to set transformation priorities for all of NNSA, specifically as they affect nuclear nonproliferation programs. Because NNSA's ultimate decision on the path forward for Complex Transformation has not yet been made, it remains to be seen whether the office has sufficient authority to enforce transformation decisions or whether it will be held accountable within NNSA for these decisions. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. For further information on 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. Ryan T. Coles, Assistant Director; Allison Bawden; Jason Holliday; Leland Cogliani; Marc Castellano; and Carol Herrnstadt Shulman 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. This 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 several years, a serious effort has begun to comprehensively reevaluate how the United States maintains its nuclear deterrent and what the nation's approach should be for transforming its aging nuclear weapons complex. The National Nuclear Security Administration (NNSA), a separately organized agency within the Department of Energy (DOE), is responsible for overseeing this weapons complex, which comprises three nuclear weapons design laboratories, four production plants, and the Nevada Test Site. In December 2007, NNSA issued a draft report on potential environmental impacts of alternative actions to transform the nuclear weapons complex, which NNSA refers to as Complex Transformation. NNSA's preferred action is to establish a number of "distributed centers of excellence" at sites within the existing nuclear weapons complex, including the Los Alamos National Laboratory for plutonium capabilities, the Y-12 Plant for uranium capabilities, and the Pantex Plant for weapons assembly, disassembly, and high explosives manufacturing. NNSA would continue to operate these facilities to maintain and refurbish the existing nuclear weapons stockpile as it makes the transition to a smaller, more responsive infrastructure. GAO was asked to discuss NNSA's Complex Transformation proposal. This testimony is based on previous GAO work. Transforming the nuclear weapons complex will be a daunting task. In April 2006 testimony before the Subcommittee on Energy and Water Development, House Committee on Appropriations, GAO identified four actions that, in its view, were critical to successfully achieving the transformation of the complex. On the basis of completed and ongoing GAO work on NNSA's management of the nuclear weapons complex, GAO remains concerned about NNSA's and the Department of Defense's (DOD) ability to carefully and fully implement these four actions. For this reason, GAO believes that the Congress must remain vigilant in its oversight of Complex Transformation. Specifically, NNSA and DOD have not established clear, long-term requirements for the nuclear weapons stockpile. While NNSA and DOD have considered a variety of scenarios for the future composition of the nuclear weapons stockpile, no requirements have been issued. It is GAO's view that NNSA will not be able to develop accurate cost estimates or plans for Complex Transformation until stockpile requirements are known. Further, recent GAO work found that the absence of stockpile requirements is affecting NNSA's plans for manufacturing a critical nuclear weapon component. NNSA has had difficulty developing realistic cost estimates for large, complex projects. In September 2007, a contractor provided NNSA with a range of cost estimates for over 10 different Complex Transformation alternatives. However, the contractor stated that (1) its analysis was based on rough order-of-magnitude estimates and (2) NNSA should not use its cost estimates to predict budget-level project costs. In addition, in March 2007 GAO reported that 8 of 12 major construction projects being managed by DOE and NNSA had exceeded their initial cost estimates. NNSA will need to develop a transformation plan with clear, realistic milestones. GAO expects that once NNSA decides the path forward for Complex Transformation later this year, NNSA will put forward such a plan. However, GAO has repeatedly documented problems with NNSA's ability to implement its plans. For example, in February 2006 GAO reported problems with the planning documents that NNSA was using to manage the implementation of its new approach for assessing and certifying the safety and reliability of the nuclear stockpile. Successful transformation requires strong leadership. In 2006, NNSA created an Office of Transformation to oversee its Complex Transformation activities. However, GAO is concerned that the Office of Transformation may not have sufficient authority to set transformation priorities for all of NNSA, specifically as they affect nuclear nonproliferation programs.
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To carry out its missions, DOE relies on contractors for the management, operation, maintenance, and support of its facilities. DOE headquarters and its field offices oversee 34 major contractors at DOE sites throughout the country. The activities that these contractors conduct serve a variety of DOE missions, such as managing environmental cleanup, including the safe treatment, storage, and final disposal of radioactive wastes; developing energy technologies for transportation systems, efficient building systems, and utilities; and maintaining the safety, security, and reliability of the U.S. nuclear weapons stockpile. In support of these activities, contractors' staff travel domestically and internationally to collaborate with officials in DOE programs, other federal programs, industry, academia, and foreign countries. All of these trips add up to hundreds of millions of dollars spent on airfare, hotels, meals, and other direct travel expenses. DOE contracts spell out the allowable costs that contractors can charge for travel expenses. Although these contracts vary, the five contractors that we reviewed are generally allowed to provide for employees the actual and reasonable costs for lodging and transportation and a maximum daily amount for meals. Air travel is to be via coach or the lowest discount fare available. However, airfare discounts available to federal government employees are generally not available to contractors. Concerned with the cost of travel in its programs, DOE included travel cost reductions in its 1995 Strategic Alignment and Downsizing Initiative. This initiative aimed to reduce Department-wide funding by $1.7 billion over a 5-year period beginning in fiscal year 1996. The initiative targeted a $175-million cost saving for travel over the same period. This saving would be achieved by maintaining travel costs at a level $35 million below the fiscal year 1995 level. DOE's fiscal year 1995 travel cost was $307 million, of which $261 million was for contractor travel and $46 million was for federal travel. DOE anticipated a $30 million saving each year from contractor travel and a $5 million annual saving from federal travel. According to DOE officials in the Office of the Chief Financial Officer, these reduction levels represented amounts that the Department believed to be reasonable and achievable savings goals. Travel costs incurred by DOE contractors were reduced in fiscal year 1996, but since then these costs have been increasing. Thirty-four DOE contractors reported that during the fiscal year 1996-98 period, they spent over $700 million on direct travel costs. Annual contractor travel costs were reduced to about $223 million in fiscal year 1996 but increased to about $241 million in fiscal year 1997 and to about $249 million in fiscal year 1998. More than half of the reported travel was incurred by five contractors at DOE's Oak Ridge, Sandia, Los Alamos, and Livermore facilities. The details on the cost of travel and the number of trips reported by each of the 34 contractors are contained in appendix I. The increase in DOE contractor travel costs since fiscal year 1996 is more dramatic when contrasted with other variables, such as the contractors' overall funding and staffing. For example, at the same time that travel costs were increasing, funding for contractors was decreasing. Specifically, travel costs increased 12 percent from fiscal year 1996 to fiscal year 1998, while overall funding to contractors decreased by about 1 percent. As a result, travel costs took a larger portion of the contractors' funding. For each $1,000 of contractor funding, the average amount needed for travel rose from $16.24 in fiscal year 1996 to $18.32 in fiscal year 1998. Similarly, while the number of trips taken remained fairly stable for this period, the number of contractor staff at the facilities decreased about 10 percent, increasing the average number of trips per person. Figure 1 illustrates the trends in travel costs, funding, staffing, and the number of trips over the past 3 fiscal years. The primary domestic and foreign destinations of DOE contractors were Washington, D.C., and Russia, respectively. Most of the travel conducted by contractors--96 percent--was to domestic locations. Trips to Washington, D.C., accounted for about 11 percent of all domestic trips. For fiscal year 1998 alone, 34 DOE contractor sites reported making over 20,000 trips to Washington, D.C., costing at least $20 million. More than percent of these trips were taken by five contractors. For example, Sandia National Laboratory reported taking over 4,500 trips to Washington, D.C., in fiscal year 1998 or the equivalent of about 87 trips each week. Albuquerque, New Mexico, which is the destination for such sites as Sandia and the DOE Albuquerque Operations Office, was the second most frequent domestic destination, accounting for 8 percent of the domestic trips taken. The remaining top destinations were Oakland/San Francisco, California; Las Vegas, Nevada; and Los Alamos, New Mexico. For foreign travel--accounting for 4 percent of the travel--contractors most frequently listed Russia as the top destination. For fiscal year 1996 to fiscal year 1998, DOE contractors took 3,829 trips to Russia, or about 15 percent of all foreign trips. The second most frequent foreign destination was the United Kingdom, which accounted for 6 percent of all foreign trips. The remaining top foreign destinations were Germany, France, and Japan. Costs are increasing for both domestic and foreign travel, but the greatest percent increase is occurring in foreign travel. Although foreign travel represents only 4 percent of the trips, it represents 11 percent of the travel cost. From fiscal year 1996 to fiscal year 1998, foreign travel costs increased by about 53 percent. More frequent trips to Russia have significantly contributed to this increase. The number of trips to Russia increased 107 percent from fiscal year 1996 to fiscal year 1998, and the cost of these trips has more than tripled. Costs increased from about $2.2 million in fiscal year 1996 to about $6.7 million in fiscal year 1998. According to contractor officials, one reason for the increase in foreign travel, particularly to Russia, was that there is a greater emphasis on nuclear nonproliferation work abroad. DOE contractors reported that most travel to domestic and foreign locations was for business purposes, that is, travel for purposes related to the mission of the facilities. This category accounted for about 70 percent of all travel for fiscal years 1996 through 1998. The next most frequent travel category was for attending conferences. The remaining trips were for training, recruitment, and other purposes. Figure 2 provides information on the major travel categories reported by DOE contractor sites. The largest category--business--covered a wide variety of activities. Our review of travel documentation showed that employees take trips to meet with DOE officials, perform field tests, conduct various reviews and inspections related to warhead components, or perform other activities directly related to accomplishing the contractor's mission. Some trips categorized as business had dual purposes, such as to attend a conference and to conduct meetings with industry. Although it was generally difficult to determine the reasonableness of such trips, we identified some business trips that were not directly related to or needed for accomplishing the facility's mission. For example, Los Alamos National Laboratory funded a number of trips for its employees to obtain a master of business administration degree, many of which were categorized as business trips. In fiscal year 1998, 24 laboratory employees were enrolled in courses held at the University of New Mexico's main campus in Albuquerque--about 100 miles from Los Alamos. These employees made at least 380 trips to attend class. Various expenses were incurred, including the cost of overnight hotel stays, rental cars, and meals. For example, one laboratory employee made 38 trips to Albuquerque in fiscal year 1998, spending about $5,321. We brought this practice to the attention of DOE officials, who subsequently determined that the cost of travel and per diem while attending these classes is not justified. These officials have determined that in the future, such costs for travel and per diem will not be allowable under the contract. Attending conferences accounts for the second most frequent travel category. For the 3-year period from fiscal year 1996 through fiscal year 1998, DOE contractors reported making 56,205 trips to conferences--about 15 percent of the categorized trips--costing about $59 million. However, this figure may be understated, since we found that for at least one contractor, some conference trips were categorized as business trips. The DOE Inspector General has raised concerns about the large number of attendees at individual conferences. In a December 1998 report, the DOE Inspector General concluded that some conferences were attended by many DOE contractor participants. The report cited a May 1997 particle accelerator conference in Vancouver, British Columbia, that was attended by 520 DOE contractor employees (as well as 5 DOE employees), resulting in travel costs of about $1 million. In another case, 176 DOE and DOE contractor participants attended a January 1996 human genome conference in Santa Fe, New Mexico. The Inspector General also reported that, contrary to government policy, DOE had no internal procedures to minimize the number of conference attendees. In response to the Inspector General's report, DOE issued requirements and responsibilities for conference management on March 22, 1999. Among other things, the requirements are intended to better ensure that the number of DOE and contractor employees attending conferences is minimized. DOE is aware of the high costs being incurred for travel and has developed cost-reduction goals to help limit these costs. A substantial amount of these reductions was projected to be obtained from the contractors. However, DOE has had limited success. Although DOE surpassed its goal in fiscal year 1996, it did not reach its annual goals in subsequent years because it did not achieve the travel cost savings that it anticipated from its contractors. To increase cost reductions in contractor travel, DOE and the contractors will have to take additional actions. These could include reducing the number of trips taken by contractor employees, obtaining lower airfares for contractors, and adopting best contractor practices for other allowable costs. DOE and the contractors have taken actions to reduce travel costs. In implementing its travel cost-savings initiative, DOE first set an overall cost-savings target and then allowed its contractors to establish their own cost-savings measures. According to DOE officials, the Department basically established an overall target--a reduction of about $35 million below the travel costs for fiscal year 1995--and conveyed to each contractors specific targets necessary to achieve the total reduction. However, DOE did not establish measures to enforce these targets, nor was it prescriptive as to how these cost reductions were to be achieved. DOE contractors reported to us that they initiated a number of efforts to reduce travel costs. These activities included greater use of videoconferencing to reduce the number of trips and efforts to reduce the costs of airline tickets. For example, some contractors made block purchases of discount airline tickets, increased the use of Saturday night stays for travelers when feasible, and negotiated discounts on airfares. Furthermore, the contractors consolidated travel services and negotiated discounts on hotel rooms. However, while all five contractors that we visited were undertaking some efforts to reduce travel costs, none could provide us with an overall strategy or plan to achieve the initiative's travel cost-savings targets. Instead, the level and type of effort taken varied by contractor. For example, one contractor reported that as travel costs neared the target, contractor officials directed programs to limit their travel so that their target would not be exceeded. Officials for another contractor told us that they basically do not follow the targets. The contractors have not done their part to meet the target of a $30 million annual reduction in their travel costs. They met the first year's reduction--achieving a $39 million, or 15-percent, reduction. Since then, however, contractor travel costs have risen each year, and by fiscal year 1998, travel costs were only $16 million--6 percent--below the levels for fiscal year 1995. However, DOE is on track to meet its overall cost-savings goals only because DOE's federal travel costs have been reduced significantly beyond the expected $5 million annually. Federal travel costs have been reduced each year, and for fiscal year 1998 represent a $15 million, or 32-percent, reduction from the level for fiscal year 1995. Figure 3 shows the amount of travel cost savings in both DOE federal and contractor travel, as compared with the expected savings targets. DOE contractors need to contribute a larger share of travel cost savings in order for DOE to meet its overall travel cost-reduction targets over the next 2 years. Cost savings opportunities could result from improvements in travel management--the overall management of travel and trips taken--and travel cost control--the reduction of costs incurred when on travel. Although some cost-reduction actions are occurring by contractors in these areas, additional efforts are needed to reduce the number of trips and expand best practices for controlling travel costs. The quickest and potentially easiest way to reduce travel costs is to reduce the number of trips taken. During fiscal years 1996-98, even though the number of contractor staff has dropped and some contractors reported that they increased the use of video and teleconferencing, the number of trips taken by DOE contractors had not been reduced. The number of trips was approximately the same for each of the 3 years--about 200,000--according to the data that we obtained from contractors that were able to provide the number of trips for that period. Furthermore, some individuals take many trips. Some contractor employees have taken up to 52 trips in a single year, have been on travel status for over 200 days in a year, and incurred travel costs as high as $96,000. To reduce the number of trips requires effective overall travel management. Yet, there are few contractor management controls over the number of trips taken, which may be reflected in the contractors' overall lack of success in reducing the number of trips. None of the facilities that we visited had established managerial controls over the extent of travel or set cost targets. In most instances, travel expenses were absorbed into a large program budget, limited only by each specific program's availability of funds. Although some managers whom we talked with said that they do review proposed travel to ensure that it has a programmatic purpose or limit attendance at conferences, they generally rely on their staffs to take trips only when necessary. In fact, the program managers responsible for approving travel told us that they were unaware of DOE's cost-reduction targets and therefore did not make specific efforts to reduce travel to meet them. Despite the contractors' reliance on their employees to limit the number of trips they take, individual travelers stated that they have little control over their travel. They said that much of their travel is dictated by the needs of the organizations providing the funding for their programs. Many staff whom we talked with stated that they had to take trips, particularly to Washington, D.C., that they felt were unnecessary. For example, one senior official from Lawrence Livermore told us that despite alternative options available, such as videoconferencing, he felt compelled to travel to Washington, D.C., 15 times in the past year to attend program meetings or risk a reduction in program funding. Another frequent traveler said that DOE officials ask him to travel to attend meetings, in the event that technical questions might be asked, and if no such questions are asked, he returns home without accomplishing much. In most cases, travelers felt that they had to attend these meetings because they view DOE as their customer and the sponsoring program in Washington wanted their attendance. Contractor staff added that DOE often requires them to travel so that DOE staff do not have to travel, thus reducing DOE's travel costs while at the same time increasing contractors' travel costs. In the area of cost control, the biggest single element of travel costs is airfare. For example, about one-half of the travel cost incurred by the contractor at Oak Ridge was for the purchase of airline tickets. In contrast, airfare cost for DOE federal employee travel is much lower--about 35 percent of travel costs. A major reason for this difference is the airfare discounts that the federal government obtains for federal employees. The General Services Administration negotiates and contracts for discount airfares with airlines and generally obtains discounted, unrestricted fares. These discounts, however, are not available to federal contractors, and the cost difference can be substantial. For example, a typical coach-fare flight from San Francisco to Washington, D.C. in September 1998 cost about $200 for a federal employee but about $1,300, on average, for a Lawrence Livermore employee. Efforts to get lower airfare rates have met with limited success. In the past, DOE contacted airlines and requested that they extend their federal discounts to DOE contractors. However, only one airline responded to DOE's request, and its proposal proved unfeasible. Currently, the General Services Administration is considering plans in 2000 to solicit proposals from airline carriers for airfare rates for government contractors. However, General Services Administration officials are not optimistic that, if a solicitation for contractor airfares is made, the airlines will respond favorably to it. We noted that contractors have had some success in this area. They are negotiating discounts directly with the airlines and have been successful in getting reductions from full-fare rates. Nevertheless, contractors could take additional actions to reduce the airfare costs they are incurring. The most significant action is obtaining nonrefundable tickets. A nonrefundable ticket is a ticket for which the purchase price will not be returned if the trip is canceled. However, the ticket can be exchanged for another for a small additional charge. Nonrefundable tickets are generally less expensive and although the savings will depend on the individual circumstances--such as destination, ticket availability, ticket class, and the number of days the ticket is purchased in advance--they can be substantial. An internal audit report at Pacific Northwest National Laboratory found that the savings on nonrefundable tickets were typically around 50 percent. Specific examples that we identified had also shown significant savings. For example, at Livermore one employee purchased a $1,602 refundable airline ticket to attend a conference while another employee purchased a $414 nonrefundable ticket the next day to the same conference. In another instance, an employee purchased a $473 refundable ticket, also to attend a conference, while another employee purchased a nonrefundable ticket a week later to go to the conference for $255. However, the usage of nonrefundable tickets varied greatly among contractors. For example, Livermore's travel data showed that about 75 percent of the tickets purchased by travelers were nonrefundable and Sandia estimated that about 65 percent of its tickets were purchased on a nonrefundable basis. However, the percentage for Los Alamos was significantly lower. Los Alamos estimated that its nonrefundable ticket usage at less than 5 percent. The contractors' travel management staff said that contractor employees are responsible for selecting the flights and tickets that they want to use and that the contractor encourages, but does not require, the use of nonrefundable tickets. They added that employees often do not like to use nonrefundable tickets because their travel plans frequently change or are canceled. Controlling other allowable travel costs that contractor employees incur could further reduce travel expenses. Consistent with its contract with DOE, each contractor has its own allowable rates or criteria for costs that its employees incur for hotels, meals, rental cars, and other incidental expenses. However, in certain instances, costs allowed by some contractors are more generous than those allowed by others, as illustrated below: The contractors at Oak Ridge and Pacific Northwest National Laboratory use federal per diem rates as a general standard for allowable hotel costs. However, Lawrence Livermore and Los Alamos do not and, instead, allow hotel rates that are deemed reasonable. These allowable rates can be significantly higher than the federal lodging rates. We found instances where Lawrence Livermore allowed hotel costs in Washington, D.C., that were $284 per night; in Orlando, Florida, that were $218 per night; in Monterey, California, that were $303 per night; and in Las Vegas, Nevada, that were $176 per night. In each instance, the federal hotel rate, which other contractors follow, would have been over 50 percent less. Both Lawrence Livermore and Los Alamos allow actual daily meal costs of up to $46 on any domestic trip. In contrast, the meal costs allowed by other contractors were up to the rate under federal travel regulations ($30 to $42 per day, depending on location) or, in the case of Oak Ridge, up to $35 per day. Although not all Livermore and Los Alamos employees use the full $46 allowance, we did note instances where the full $46 meal allowance was charged every day. One contractor established a policy that allows employees to stay in higher-priced hotels when attending conferences but does not then allow the travelers rental cars. However, we saw instances where other contractors allowed their employees to stay in higher-priced hotels for conferences and to obtain rental cars. We noted one instance in which two employees from one contractor both went to the same conference in Atlanta, stayed in a hotel costing up to $158 per night, and obtained rental cars. While some of these cost savings, when taken individually, may not be substantial, they could add up to considerable savings when taken together. For example, a reduction of just $100 on the average trip to Washington, D.C., would amount to total yearly savings of over $2 million. Other, more fundamental changes in allowable costs could result in greater travel savings. At least one contractor has established a policy for other allowable costs that resulted in lower rates than the federal per diem. The contractor at Pacific Northwest National Laboratory charged DOE the lower of the actual travel costs incurred by its employees or the federal per diem rate and shared with DOE any cost savings that the contractor obtained below federal per diem rates. During fiscal year 1998, the contractor continued to follow this policy even though this savings incentive program was not included in its contract with DOE. However, according to contractor officials, the fiscal year 1999 contract with DOE again does not provide for this program and it is therefore not being continued. DOE spends millions of dollars on the costs associated with management and operating contractor employees assigned temporarily or permanently to Washington, D.C. In fiscal year 1997, over 800 contractor employees were assigned to Washington, costing $76 million for the employees' salary, living allowance, relocation cost, and other related expenses. DOE's Office of Inspector General raised concerns about the Department's awareness of, and control over, these assignments, and DOE has taken actions to reduce the number of employees on assignments and plans to reduce it further. However, a concern remains about the payments that contractors are making to employees on long-term temporary assignments for their increased tax-related costs. Contractor employees are often assigned to Washington on a temporary--either short-term or long-term (more than 1 year)--or permanent basis to provide technical expertise associated with the stated mission of the employee's home facility. DOE requires that contractor staff assignments to Washington are not to be for providing administrative or management support, or performing functions reserved for federal employees. Currently, some contractor employees have been in Washington for over 5 years, and at least 14 contractor employees have been there for over 10 years. The costs of employees on assignments are paid by specific DOE programs or, in some cases, are a general administrative expense paid by DOE under the various contracts. The costs to DOE for a contractor employee assigned to work in Washington can be significant, ranging from $5,000 per month to $29,000 per month (or as much as $348,000 per year). The costs for assignments include not only the employee's salary and benefits and applicable contractor charges but also expenses for moving the employee to Washington and various living allowances provided for the employee while on assignment. The living allowances are provided for employees to offset the expenses that they incur during an assignment. Each contractor has its own formula or methodology for determining this compensation, but it is generally tied to per-diem rates for the Washington area. Under these formulas, the compensation can total $50,000 annually or more. Appendix III provides details on the additional compensation provided for employees on assignment for the five contractors we visited. Concerns about the cost and number of employees on assignment to Washington have been raised by DOE's Office of Inspector General. In December 1997, the Inspector General reported that DOE was spending at least $76 million annually for field contractor support in Washington, D.C.Furthermore, although the Department was required to maintain an inventory of these employees, it was unaware of the magnitude of contractor personnel in Washington. The Inspector General identified over 800 field contractor employees in Washington--almost twice the number listed in the DOE inventory. Moreover, the Inspector General determined that, contrary to DOE requirements, many contractor employees were providing support and administrative services. DOE has since taken actions to reduce the number of, and improve its controls over, contractor personnel assigned to Washington. The Department has established a policy limiting the use of field contractor employees in Washington and has reduced the number of contractor employees on assignment there. According to a January 1999 DOE report to the House Committee on Appropriations, the Department reduced the number of employees on assignment to Washington by 235 as of January 1998 through attrition, reductions, and reassignments, and by an additional 59 as of January 1999. According to DOE, this brings the level of contractor assignments down to 379. DOE expects to reduce the number of contractor employees assigned to Washington by another 10 percent by the end of fiscal year 1999. DOE is also drafting an order that revises the requirements for the use and management of contractor employees. Although DOE is addressing the issue of contractor employees in Washington, D.C., and reducing their number, concerns still remain about the amount of living allowance that employees are receiving during their assignment. At four of the five facilities we visited, the contractors have a two-tiered living allowance that pays a higher amount for employees on temporary assignments of 1 year or longer. This is because the living expenses provided for employees become taxable when the assignment is longer than 1 year. Consequently, the contractors provide higher additional compensation to offset the tax liability. For example, Los Alamos provides its employees on assignments to Washington, D.C., for longer than 1 year with (1) a basic living allowance of 80 percent of the federal lodging rate for the Washington area and (2) an additional 40 percent of the basic allowance, for a total of about $4,200 per month in fiscal year 1998. Only one contractor we visited--Battelle at DOE's Richland, Washington location--did not follow this practice. However, Battelle officials said that they are currently requesting that DOE approve a revised living allowance that would include a higher rate for employees on assignments that last longer than 1 year. The allowability of these additional payments, however, is unclear. A DOE Notice provides requirements on headquarters' use of contractor employees. A specific objective of the notice is to establish limitations on payments to employees whose assignments exceed 1 year. The notice states that, for any assignment that exceeds 365 days, payments to the affected employee for any additional tax burden caused by the long-term assignment is unallowable in accordance with the Department's acquisition regulations. However, the cited acquisition regulations relate to reimbursed relocation costs for permanent changes of duty--not long-term assignments. DOE's Office of General Counsel recognizes that the Department does not have a consistent and well-articulated position on allowing contractors to pay for employees' additional taxes caused by long-term assignments. According to an Office of General Counsel official, there are valid arguments on both sides of the issue. Much depends on (1) the interpretation of contract provisions, or the absence of such provisions, that would make the payments allowable or unallowable and (2) whether, after a certain period of time, a temporary assignment becomes tantamount to a permanent relocation and therefore the relocation rules should apply. According to the General Counsel official, the issue of long-term assignments of contractor employees to headquarters has top-level attention and concern within the Department and is being closely monitored by DOE management. The lack of substantial travel cost reductions from contractors stems largely from a lack of overall travel management by DOE and its contractors. In this regard, DOE has set targets for its contractors to achieve but has not enforced them or ensured that its overall contractor travel cost-savings target was met. For its part, DOE contractors were aware of the targets, but many contractors did not translate this into an overall strategy or plan to achieve lower travel costs. Furthermore, consistent practices for reducing costs have not been put into place. In our view, it is difficult to justify why some contractors allow their staff to stay in high priced hotels, purchase higher priced airline tickets, or charge higher meal costs when others take stronger actions to minimize such costs. Similarly, the payments that contractors are making to employees on long-term temporary assignments for their tax-related costs are also being implemented inconsistently, and the allowability of such costs has not been resolved. A number of relatively simple ways are available to achieve substantial cost reductions. However, a commitment--by both DOE and the contractors--will be required to reduce the number of trips, reduce the cost of airfares, and reduce other allowable travel costs. This means that DOE, as an organization, needs to make clear what cost reductions are expected, contractors need to improve both their travel management and travel cost control, and DOE program areas will have to lessen their travel demands on contractor staff. Furthermore, achieving cost reductions will require that DOE develop clear policies and guidance on the travel-related costs it will deem allowable. To reduce contractor travel costs, consistent with DOE's cost-reduction targets for travel, we recommend that the Secretary of Energy set travel cost targets for each contractor and require that contractors not exceed these targets. The target amounts should be conveyed to both the contractors and DOE program areas for a combined commitment to ensure that the cost reductions are achieved. Furthermore, to implement more consistent travel cost reimbursement practices, the Secretary should establish clear DOE policy on allowable costs--both travel costs and the reimbursement of tax-related costs--and, when new contracts are let, incorporate the policy into the contracts. DOE agreed that there are additional opportunities to achieve travel cost savings and generally concurred with the report's recommendations. With regard to the first recommendation, DOE stated that it will establish travel cost targets, in collaboration with program offices and contractors, to ensure a combined commitment to cost reductions. Furthermore, DOE will promote alternatives to travel and will heighten headquarters and field managers' awareness of the cost of contractor travel to headquarters. However, DOE did not specifically agree to require that contractors not exceed its travel cost targets. In our view, firm targets are necessary to provide DOE with the control needed to ensure that travel costs are effectively managed and that its savings objectives are achieved; consequently, we continue to recommend that DOE require that its contractors not exceed the targets that it establishes. In commenting on the second recommendation--to establish clear DOE policy on allowable travel costs--DOE said it will evaluate the merits of establishing standard rates, such as federal per diem rates, for the reimbursement of contractor travel. DOE also agreed to determine the appropriate treatment of the tax consequences of extended temporary assignments and promulgate departmental guidance, which will be incorporated into new contracts. The complete text of DOE's comments is included as appendix IV. To determine the amount of travel incurred by DOE contractors, the primary destinations of this travel, and the travel purposes, we collected data from the 34 management and operating contractors identified in DOE's Strategic Alignment and Downsizing Initiative. We requested data on the cost of travel and the number of trips taken in fiscal years 1996 to 1998, as well as the most frequent travel destinations in each of those fiscal years. We also requested information on the purpose of travel, as well as each contractors' staffing and funding levels during fiscal years 1996 to 1998. We did not independently verify the data that the contractors provided. We also compared the data with other information available at the five sites we visited--the Oak Ridge National Laboratory and Y-12 Plant in Oak Ridge, Tennessee; the Hanford Reservation in Richland, Washington; the Lawrence Livermore National Laboratory in Livermore, California; the Los Alamos National Laboratory in Los Alamos, New Mexico; and the Sandia National Laboratories in Albuquerque, New Mexico. Such information included contractors' internal self-assessments of their data and travel systems and internal audit reports. In general, we found that the data were reliable for the purpose for which they were used. At each of the facilities we visited, we reviewed pertinent contracts, regulations, and guidance that detailed the controls over travel costs and the allowability of such costs. We obtained and reviewed internal audit reports on travel costs and the propriety of these costs. We also judgmentally selected contractor employees' travel vouchers for review to determine if the costs for airfare, hotels, rental cars, and other expenses were appropriate. We met with travel officials at each facility and discussed with them the management of travel costs and the efforts being taken to reduce these costs. Finally, we interviewed travelers, supervisors, and managers to obtain their perspectives on the amount of and need for the travel taken and on the methods for reducing these costs. We obtained and reviewed documentation from DOE on its Strategic Alignment and Downsizing Initiative and its plans for achieving the initiative's cost-savings goals. We discussed with officials from the Office of the Chief Financial Officer and the Office of Management and Administration the Department's efforts to reduce contractor travel costs and obtained their viewpoints on the contractors' control of travel and efforts to meet the current cost-reduction targets. To examine the travel and other costs associated with contractor employees in Washington, D.C., we obtained information at each facility that we visited on the rationale and procedures for approving and conducting off-site assignments and obtained listings of the individuals on such assignments. We also obtained information on the additional compensation provided for employees while on assignments. Furthermore, we discussed contractor assignments to Washington, D.C., with DOE's Office of General Counsel and with DOE officials in the Office of Management and Administration who are responsible for maintaining the inventory of assignees and for developing management controls for contractor assignments. We obtained and reviewed relevant DOE documents and Inspector General audit reports that addressed the costs and controls over contractor assignments. We conducted our review from August 1998 through March 1999 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will provide copies of this report to Senator Ted Stevens, Chairman, Senate Committee on Appropriations; Senator Robert C. Byrd, Ranking Minority Member, Senate Committee on Appropriations; the Honorable Bill Richardson, Secretary of Energy; and the Honorable Jacob J. Lew, Director, Office of Management and Budget. We will make copies available to others on request. (continued) The table includes subcontractor travel reported to GAO. Universities Research Association, Inc. Fluor Daniel Hanford, Inc. Allied Signal Aerospace FM&T Babcock & Wilcox of Ohio Wackenhut Services, Inc. TRW Environmental Safety Systems, Inc. Lockheed Martin Energy Research Corporation Lockheed Martin Energy Systems, Inc. Wackenhut Services, Inc. Stanford Linear Accelerator Center Travel cost per $1000 funding (continued) West Valley Nuclear Services, Inc. Assignments greater than 1 year 55% of current federal travel regulations per diem rate Additional 10% of base pay field premium Additional 10% of base pay location allowance 100% of current federal travel regulations rate Additional 10% of base pay field premium Additional 10% of base pay location allowance 25% of base pay cost of living differential 55% of current federal travel regulations per diem rate 10% of base pay assignment allowance 100% of current federal travel regulations rate 10% of base pay assignment allowance $1,000 miscellaneous allowance 15%-18% of base pay living differential (declining to zero after 5 years) $1,000 miscellaneous allowance 55% of current federal travel regulations per diem rate 80% of current federal housing allowance 40% "plus-up" of housing allowance to cover additional tax liabilities 55% of current federal travel regulations rate for stays of 1 to 6 months Actual and reasonable costs for stays of 6 to 12 months $1,000 miscellaneous allowance Actual and reasonable costs, plus an additional allowance to cover additional tax liabilities $1,000 miscellaneous allowance $1,000 miscellaneous allowance 60%-85% of federal travel regulations lodging rate 60%-85% of federal travel regulations lodging rate 20% of base salary cost of living adjustment (declining to zero after 5 years) 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 provided information on the Department of Energy's (DOE) contractor travel costs, and DOE's efforts to reduce these costs, focusing on the: (1) travel costs incurred by DOE contractors and their primary destinations during fiscal years (FY) 1996 through 1998; (2) purpose of this travel; and (3) success that DOE has had in reducing contractor travel costs and additional actions available to reduce these costs further. GAO noted that: (1) travel costs incurred by DOE contractors were reduced from $261 million in FY 1995 to $223 million in FY 1996; (2) since then, travel costs have increased--to $249 million by FY 1998--even though funding to the contractors during this period had been decreasing; (3) about 96 percent of the contractors' travel was to domestic locations, the most frequent of these being Washington, D.C. and the sites of DOE's major laboratories and test facilities: Albuquerque, New Mexico; Oakland/San Francisco, California; Las Vegas, Nevada; and Los Alamos, New Mexico; (4) the most frequent foreign destinations were Russia, the United Kingdom, Germany, France, and Japan; (5) the purpose of most travel was reported as being for business reasons, that is, travel for purposes related to the mission of the facilities; (6) this category included trips to attend meetings or perform research; (7) GAO identified trips that were miscategorized or were of questionable value to DOE; (8) for example, business trips included travel to obtain advanced degrees; (9) the second most frequently cited travel purpose was for attending conferences; (10) according to DOE's Inspector General, the large number of conference attendees is a concern; (11) the Inspector General identified hundreds of DOE contractor staff attending a 1997 conference in Vancouver, British Columbia, resulting in travel costs of about $1 million; (12) DOE's success in reducing contractor travel costs has been limited; (13) although contractor travel costs have increased since FY 1996, they have remained below the FY 1995 level--the level that DOE established as a baseline for calculating contractor travel cost savings; (14) only in FY 1996 did DOE attain the expected $30 million savings in contractor travel by achieving a $38 million reduction in that year; (15) contractors did not continue to achieve such savings because DOE did not enforce its cost reduction targets and some contractors did not have an overall strategy or plan to achieve lower travel costs; (16) DOE spends millions of dollars on travel and other costs for contractor employees on temporary or permanent assignment to Washington, D.C.; (17) DOE has reduced the number of contractor employees in Washington and is planning on further reductions; and (18) however, concerns exist over the additional compensation that contractors are providing for employees on long-term temporary assignments to cover the tax liabilities on their living allowances.
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Substantial numbers of ground combat Army and Marine Corps servicemembers are exposed to combat experiences often associated with an increased risk of developing PTSD or other mental health conditions. Specifically, according to a 2004 study, more than half of Army or Marine Corps ground combat units in OEF or OIF report being shot at or receiving small-arms fire, seeing dead or seriously wounded Americans, or seeing ill or injured women or children who they were unable to help. More than half of Marine Corps servicemembers and almost half of Army servicemembers reported killing an enemy combatant in OIF. In addition to certain types of experiences, multiple deployments are also associated with mental health problems. For example, a 2006 Army mental health advisory team report found that Army servicemembers who had been deployed more than once were more likely to screen positive for PTSD, depression, or anxiety than those deployed only once. In a 2008 Army mental health advisory team report, 27 percent of Army male non- commissioned officers in their third or fourth deployment screened positive for PTSD, depression, or anxiety (compared to 12 percent of those on their first deployment). Servicemembers are also exposed to events such as blasts that increase their risk of experiencing a TBI. TBI occurs when a sudden trauma causes damage to the brain and can result in loss of consciousness, confusion, dizziness, trouble with concentration or memory, and seizures. Of particular concern are the after-effects of a mild TBI that may not have resulted in readily apparent symptoms at the time of the injury. A recent study found that mild TBI was associated with high combat intensity and multiple exposures to explosions in combat. Identification of mild TBI is important, as treatment has been shown to mitigate the injury's effects, which can include difficulty returning to work or completing routine daily activities. DVBIC has issued a screening tool called the Military Acute Concussion Evaluation (MACE), which is based on a screening tool widely used in sports medicine and is intended to evaluate a servicemember within 48 hours of the suspected injury. In June 2007, the Army required health care providers to document a servicemember's blast exposure in theater using the MACE. DVBIC also issued in December 2006 a CPG for the management of mild TBI in theater. The guidance contains a structured series of questions that include certain "red flags," such as worsening headaches or slurred speech, that should trigger further evaluation for a possible mild TBI. Treatments for mild TBI may include education, medication, and physical and psychiatric therapy. There are multiple opportunities during the deployment cycle for screening and assessing servicemembers' health status. Specifically, DOD requires three health assessments during the deployment cycle: the pre- deployment health assessment, the PDHA, and the PDHRA. In addition, DOD requires an annual periodic health assessment (PHA). These assessments and their associated forms are described in Table 1. DOD's Instruction on Deployment Health, which implements policies and prescribes procedures for deployment health activities, requires deploying servicemembers to complete the pre-deployment health assessment form, the DD 2795, within 60 days prior to the expected deployment date. The DD 2795 is a brief form for servicemembers to self-report general health information in order to identify any health concerns that may limit deployment or need to be addressed prior to deployment, and consists of eight questions that each servicemember must complete (see fig. 1). DOD's Instruction on Deployment Health states that after the servicemember completes the DD 2795, the form is to be reviewed by a health care provider, who can be a nurse, medical technician, medic, or corpsman. If the servicemember indicates a positive, or "yes," response to any one of certain questions (2, 3, 4, 7, or 8) the servicemember is to be referred for an interview by a trained health care provider such as a physician, physician assistant, nurse practitioner, or advanced practice nurse. The provider signs the form indicating whether the individual is medically ready for deployment, and a copy of the DD 2795 is placed in the servicemember's deployment health record. The deployment health record is a summary of the medical record that is to accompany the servicemember into theater. According to DOD's Instruction on Deployment Health, this record should also contain a record of the servicemember's blood type, allergies, corrective lens prescription, immunization record, and a summary sheet listing past and current medical conditions, screening tests, and prescriptions. DOD's Instruction on Deployment Health requires servicemembers returning from deployment to complete the post-deployment health assessment form, the DD 2796, within 30 days of leaving a combat theater or within 30 days of returning to home or a processing station. The DD 2796 is a form for servicemembers to self-report health concerns commonly associated with deployments. In January 2008, DOD released a new version of the DD 2796 that contains screening questions related to mental health, including questions used to screen for depression, suicidal thoughts, and PTSD. The screening questions for depression, suicidal thoughts, and alcohol abuse are more detailed on the new form than on the previous version of the DD 2796 (See appendix I for a copy of the new version of the DD 2796). The DD 2796 must be reviewed, completed, and signed by a health care provider. According to DOD's Instruction on Deployment Health, the health care provider conducting the assessment must be a physician, physician assistant, nurse practitioner, advanced practice nurse, independent duty medical technician or IDC, or Special Forces medical sergeant. According to DOD's Instruction on Deployment Health, the health care provider review is to take place in a face-to-face interview with the servicemember. The health care provider is to review the completed DD 2796 to identify any responses that may indicate a need for further medical evaluation. In addition, the new DD 2796 contains guidance intended to assist a provider in determining whether to make a referral for some mental health concerns. For example, the form prompts the provider to conduct a risk assessment for suicide depending on the servicemember's response to the suicide risk questions. Health care providers use a section of the DD 2796 to indicate when a servicemember needs a referral. The referral field specifies both the concern for which the servicemember is being referred, such as depression or PTSD symptoms, and the type of care or provider to whom the servicemember is being referred, such as primary care, mental health, specialty care, family support services, chaplains, or Military OneSource. DOD requires that the DD 2796 be placed in the servicemember's medical record. DOD requires an annual health assessment, the PHA, for all servicemembers. The PHA is designed to ensure servicemember medical readiness through monitoring servicemember health status and helps DOD provide preventive care, information, counseling, or treatment if necessary. In February 2006, DOD required the military services to begin administering the PHA, which includes servicemember self-reporting of health status, conditions, treatments, and medications; provider review of the medical record and identification of and referral for any health issues. The PHA also includes efforts to identify and manage preventive needs, occupational risk and exposure as well as identifying and recommending a plan to manage risks. DOD requires its providers to record the results of the PHA in servicemembers' medical records. DOD has created an online tool to capture self-reported information from the PHA. A draft of this form contains several mental health questions, including PTSD and depression screening questions that are similar to the current PTSD and depression questions on the DD 2796. While several DOD information systems contain servicemember medical information, the Composite Health Care System (CHCS) I and the Armed Forces Health Longitudinal Technology Application (AHLTA), formerly known as CHCS II, are the two electronic medical records systems generally used by DOD health care providers to make PDHA referrals. Although the military services currently employ both systems, there are several differences between the two. For example, CHCS I is a localized system, meaning information contained within CHCS I is only available to medical facilities on a particular military installation; information is not available to military treatment facilities (MTFs) on other installations. In contrast, information in AHLTA is available to medical facilities at different installations and to providers in theater. Another distinction is that CHCS I sends health care providers an email alert when a servicemember they refer makes, completes, or cancels an appointment. If servicemembers do not make appointments within 30 days, their referral is terminated from CHCS I and the health care provider is notified by email. AHLTA does not have this capability. DOD has been expanding AHLTA's capabilities and plans on replacing certain CHCS I functions, such as laboratory tests, with AHLTA. DOD has taken steps to meet the 2007 NDAA requirements for pre- deployment mental health standards and screening. As required by the 2007 NDAA, which was enacted in October 2006, DOD issued minimum mental health standards that servicemembers must meet in order to be deployed. In a policy issued in November 2006, DOD identified mental health disorders that would preclude a servicemember's deployment, including conditions such as bipolar disorder. DOD's policy also identified psychotropic medications that would limit or preclude deployment if used by servicemembers--including antipsychotic or anticonvulsant medications used to control bipolar symptoms and certain types of tranquilizers and stimulant medications. In addition to identifying the mental health conditions and medications that would preclude deployment, DOD's policy specified the circumstances under which servicemembers with other mental health conditions can be deployed. Specifically, according to DOD's policy, when a servicemember has been diagnosed with a mental health condition that does not preclude deployment, the servicemember should be free of "significant" symptoms associated with this condition for at least three months before he or she can be deployed. The policy also states that in making a deployability assessment, health care providers should consider the environmental and physical stresses of the deployment and whether continued treatment will be available in theater. Finally, the policy identified the pre-deployment health assessment as a mechanism for screening servicemembers for mental health conditions and for ensuring that the standards are utilized in making deployment determinations. The 2007 NDAA also required DOD to use the pre-deployment health assessment to identify those who are under treatment or have taken psychotropic medications for a mental health condition. The pre- deployment health assessment form, the DD 2795, includes a question asking servicemembers whether they have sought mental health counseling or mental health care in the past year. In a July 2007 report to Congress, DOD cited the pre-deployment health assessment in describing its implementation of the 2007 NDAA requirements for pre-deployment screening. The report also identified a medical record review as a component of the pre-deployment health assessment process to help meet these mental health screening requirements. According to a senior DOD official, because servicemembers may be reluctant to disclose symptoms or treatment that may prevent them from deploying, the provider review of the medical record should be done to verify the self-reported information on the DD 2795. While medical records are an important part in making deployment determinations, DOD's deployment policies are not consistent with respect to their review. DOD's November 2006 policy on minimum mental health standards for deployment states that the pre-deployment health assessment includes a medical record review as part of ensuring the standards are utilized, and DOD officials confirmed that the policy requires such a review. However, DOD's August 2006 Instruction on Deployment Health, which implements policies and prescribes procedures for deployment health activities, is silent on whether a review of medical records is required as part of the pre-deployment health assessment. This Instruction states only that the pre-deployment health assessment form, DD 2795, must be completed by each deploying servicemember and the responses reviewed by a health care provider. A health care provider following DOD's Instruction may not conduct the medical record review during the pre-deployment health assessment required by DOD's policy on minimum mental health standards for deployment. Because of DOD's inconsistent policies, providers determining if OEF and OIF servicemembers meet DOD's minimum mental health deployment standards may not have complete medical information. During our site visits, we found that practices varied with respect to pre- deployment mental health screening, and medical records were not routinely reviewed at the time of the pre-deployment health assessment by the provider reviewing the DD 2795. While a review of medical records can serve to validate information reported by servicemembers, the health care providers we spoke with during our site visits were unaware that it was required as part of the pre-deployment health assessment. At all three installations we visited, servicemembers completed the DD 2795 form. At two of the three installations all servicemembers were interviewed by a health care provider to review their responses on the DD 2795 and discuss any additional health concerns. At the third installation, providers interviewed servicemembers if they indicated any concerns on the DD 2795. While the deployment health record was available to providers at all three installations, the medical record was routinely reviewed by the provider at only one of the three installations during the pre-deployment health assessment. At the other two installations, providers told us the record was reviewed only if servicemembers identified concerns on the DD 2795 or during the interview. Health care providers at Fort Campbell and Camp Lejeune manually track whether servicemembers who receive mental heath referrals from the PDHA make or keep appointments for evaluations with mental health providers. DOD does not require that individual referrals from the PDHA be tracked; however, DOD has a quality assurance program that monitors the PDHA, including follow-up encounters. In addition, because Guard and Reserve servicemembers generally receive civilian care, which they do not have to disclose, and because servicemembers may be reluctant to disclose mental health encounters due to stigma concerns, Guard and Reserve referrals are difficult to track. While DOD health care providers generally make PDHA referrals using one of two DOD information technology systems, AHLTA or CHCS I, health care providers at military installations we visited have developed different manual systems to track whether referred servicemembers made or kept appointments with mental health providers. DOD does not require these referrals to be tracked. However, a Fort Campbell health care provider we spoke with said that the health care providers who make referrals from the PDHA may not have an ongoing relationship with the referred servicemembers and, therefore, manual systems have been created to track whether referred servicemembers completed their evaluations. According to installation health care providers, manually tracking referrals is labor-intensive and time-consuming, and necessary to ensure that referred servicemembers receive their evaluations. We found that health care providers at Fort Campbell and Camp Lejeune have developed manual tracking systems to ensure that servicemembers receive evaluations. At Fort Campbell, the installation's readiness processing manager, who is the health care provider who tracks PDHA referrals, created an Access database for this purpose. The manager checks CHCS I, the information technology system Fort Campbell healthcare providers use to make PDHA referrals, daily to obtain their status. Then, this individual manually enters the status of each referral into the Access database, which allows all PDHA referrals and their status to be viewed in one list. Servicemembers who fail to make or keep their appointments are contacted, and if a servicemember does not respond after two follow-up attempts, the unit commander is informed. At Camp Lejeune, health care providers track division servicemembers' PDHA mental health referrals to the division psychiatrist using hard-copy logbooks. Because the division psychiatrist's clinic does not have access to AHLTA or CHCS I, health care providers make referrals by phoning the division psychiatrist and follow-up with the psychiatrist every two weeks to track whether servicemembers kept their appointments. Camp Lejeune officials told us that, unlike the division, the air wing's and logistics group's PDHA mental health referral tracking is facilitated by having greater access to AHLTA, which allows providers to check the status of appointments scheduled at the MTF. We found that mental health PDHA referrals for Marine Reserve members who complete the PDHA at Camp Lejeune are tracked manually. Officials from the Marine Reserves' Deployment Support Group (DSG) at Camp Lejeune inform the home units of Reserve member referrals and track their status. According to a Fort Campbell health care provider, Army Reserve members are not processed through Fort Campbell following deployment and, therefore, do not complete the PDHA at this installation. According to Guard and Reserve officials, home units rely largely on servicemembers to disclose whether they receive care from a mental health provider. Tracking PDHA mental health referrals is challenging for the Guard and Reserves because their members generally receive civilian care. Military health care providers would be unaware of civilian care unless disclosed by the Guard and Reserve member. In addition, Military OneSource, which is operated by a vendor contracted by DOD, guarantees that it will not release the identity of servicemembers who receive counseling unless servicemembers are at risk of harming themselves or others. As a result, PDHA mental health referral tracking is challenging for Guard and Reserve units due to their reliance on servicemembers to disclose mental health encounters with civilian providers, which Guard and Reserve officials told us they may be reluctant to do because of stigma concerns. While DOD policy allows several types of health care providers to conduct the PDHA, health care providers at Fort Campbell and Camp Lejeune told us that health care providers actually conducting the assessments are generally physicians, physician assistants, or, in the case of the Marine Corps, IDCs. According to installation health care providers, most of the physicians conducting the assessments have specialties in primary care, which includes the specialties of family practice and internal medicine. The health care providers conducting these health assessments receive varying levels of training in mental health issues based on provider type during their basic medical education. For example, physician assistants complete a rotation in psychiatry and may elect an additional psychiatry rotation, while IDCs receive training in psychiatric disorders as part of a unit on medical diagnosis and treatment that covers several types of medical conditions. Physicians receive mental health training in medical school. DOD provides several types of guidance for health care providers to help them conduct mental health assessments and decide whether to make referrals for further evaluation. DOD maintains a Web site that contains CPGs and other guidance and training that can be accessed by health care providers conducting the assessments. For example, DOD provides a set of reference materials on the Web site that contains information on and steps to assess servicemembers for PTSD and major depressive disorder. According to DOD, hard copy versions of these reference materials were distributed to MTFs beginning in July 2004, and MTFs may order additional copies. We found that health care providers conducting the PDHA had varying familiarity with the CPGs and levels of comfort in conducting assessments. For example, at Camp Lejeune, some of the physicians and IDCs we interviewed about DOD's guidance were not familiar with the CPGs for depression and PTSD. Some physicians and IDCs cited resource constraints, in the form of limited access to computers and internet connectivity, as barriers to accessing these CPGs posted on the Web site. At Fort Campbell, a brigade surgeon we spoke to who supervises providers conducting the PDHA said that these providers have varying knowledge of the CPGs. He stated that the guidance is distributed to email accounts that some health care providers may not check regularly. In addition, health care providers varied in their level of comfort in making mental health assessments. At Camp Lejeune, eight of the 15 physicians and IDCs we interviewed were comfortable making mental health assessments, while the remaining seven were less comfortable making these assessments and expressed interest in receiving more training on making mental health assessments. At Fort Campbell, the division mental health providers we spoke with stated that while physician assistants, for example, could identify a servicemember with mental health concerns, these providers were generally not comfortable in assessing servicemembers for mental health issues. DOD and the military services have implemented and are in the process of implementing several new mental health training initiatives. DOD created the Center of Excellence for Psychological Health and Traumatic Brain Injury in November 2007 that will focus on research, education, and training related to mental health. According to DOD, the Center will develop and distribute a core mental health curriculum for health care providers, as well as implement policies to direct training in the curriculum across the services. DOD plans to begin training primary care providers in July 2008. The Army has created a program, RESPECT-MIL, that trains primary care providers in identifying and treating servicemembers with depression and PTSD. By the end of 2008, the Army plans to train providers at 15 installations. The Army also directed all servicemembers, including health care providers, to participate in a training program that includes information on PTSD by October 18, 2007. The training focused on the causes and physical and psychological effects of PTSD and provided information on how to seek subsequent treatment for this condition. As of January 31, 2008, 93 percent of Army servicemembers had received the training. The Army also requires commanders to include PTSD awareness and response training in pre- and post-deployment briefings. The Marine Corps has a training program for non-mental health providers, including those that conduct the PDHA, that includes training on PTSD. This training began in January 2008 and is scheduled to train 669 health care providers at 12 sites by August 2008. The Marine Corps also requires pre- and post-deployment briefings on identifying and managing combat stress for all Marine Corps servicemembers and unit leaders. In response to the 2007 NDAA, DOD added TBI screening questions to the PDHA in January 2008 and plans in July 2008 to begin screening all servicemembers prior to deployment. Prior to these TBI screening efforts required by DOD, several installations had already implemented efforts to screen servicemembers before or after their deployments. To help health care providers screen servicemembers for mild TBI and issue referrals, DOD has issued guidance and provided various forms of training. In response to the 2007 NDAA requirement for pre-and post-deployment screening for TBI, DOD has added TBI screening questions to the PDHA, and plans to require screening of all servicemembers beginning in July 2008 for mild TBI prior to deployment. These screening questions are similar to the screening questions on the PDHA. The questions are included in a cognitive assessment tool that will provide a baseline of cognitive function in areas such as memory and reaction time. In January 2008, DOD released a new version of the post-deployment health assessment form, the DD 2796, that contains screening questions for TBI (See appendix I for a copy of the new version of the DD 2796). The TBI screening questions added to the PDHA are designed to be completed by the servicemember in four series. The sequence of questions specifically assesses (a) events that may have increased the risk of a TBI, (b) immediate symptoms following the event, (c) new or worsening symptoms following the event, and (d) current symptoms. (See appendix I.) If there is a positive response to any question in the first series, the servicemember completes the second and third series; if there is a positive response to any question in the third series, the servicemember completes the fourth series about current symptoms. The DD 2796 directs the health care provider to refer the servicemember based on the servicemember's current symptoms. See figure 2 for a description of these screening questions. DOD is planning to require screening of all servicemembers for mild TBI prior to deployment using questions similar to those on the PDHA. This screening is planned to begin in July 2008 and these screening questions are included in a cognitive assessment, the Automated Neuropsychological Assessment Metrics (ANAM). The ANAM will provide a baseline assessment of cognitive function in areas such as memory and reaction time, which may be affected by a mild TBI. If a servicemember experiences an event in theater, the ANAM can be administered again and the differences in function assessed. Because the ANAM does not distinguish between impairments in cognitive function caused by events such as blasts and those caused by other factors such as fatigue, the ANAM needs to be used with screening questions to identify the event that may have caused a TBI. However, the ANAM can be used to identify changes in baseline cognitive function that may warrant further evaluation. According to an Army official, since August 2007 about 50,000 Army servicemembers have been assessed using the ANAM. Prior to DOD's plans to screen all servicemembers on the PDHA and prior to deployment, several installations had implemented, as early as 2000, initiatives for mild TBI screening to be used before or after units from those locations deployed. Generally, servicemembers participating in these initiatives are screened using a three-question screen developed by the DVBIC called the Brief Traumatic Brain Injury Screen (BTBIS). The BTBIS is designed to identify servicemembers who may have had a mild TBI, and includes questions about events and symptoms that are similar to those used on DOD's PDHA. The first of these initiatives began at Fort Bragg, North Carolina in 2000. Since then, Fort Carson, Colorado; Fort Irwin, California; Fort McCoy, Wisconsin and Camp Pendleton, California have initiated screening for mild TBI either pre-deployment, post- deployment, or both. A DVBIC official told us that these initiatives would probably be replaced by the DOD-wide screening. DOD issued guidance for health care providers on the identification of mild TBI, trained some health care providers on identifying mild TBI, and plans additional health care provider training initiatives. In October 2007 DOD released guidance on identifying mild TBI for providers screening, assessing, and treating servicemembers outside the combat theater. The guidance contains information to help health care providers conducting the PDHA, including follow-up questions that the provider can ask a servicemember based on the servicemember's responses to the TBI screening questions on the PDHA. The guidance contains structured series of questions that include certain "red flags," such as double vision or confusion, that suggest a need for referral for further evaluation for a possible mild TBI. The guidance recommends assessments and treatments for servicemembers with symptoms such as irritability and includes screening tools to help health care providers assess the severity of these symptoms. According to a DOD official, DOD also plans to provide the military services with guidance on using the new TBI screening questions on the PDHA. In addition to issuing guidance, DOD and the military services also trained health care providers on identifying possible mild TBI. In September 2007 DOD held a tri-service conference in which more than 800 health care providers were trained. According to DVBIC officials, DVBIC staff provide training through workshops for health care providers at its 14 sites and travel to other installations to train health care providers. In addition, DOD's planned Defense Center of Excellence for Psychological Health and Traumatic Brain Injury, which began initial operations on November 30, 2007, and is expected to be fully functional by October 2009, will develop a national collaborative network to advance and disseminate TBI knowledge, enhance clinical and management approaches, and facilitate services for those dealing with TBI, according to DOD. According to Army officials, the Army is also initiating several health care provider training efforts for the summer of 2008 designed to train primary care providers on mild TBI. According to these officials, primary care providers are generally uncomfortable with treating mild TBI, preferring instead to refer these cases to specialty care. The Marine Corps' training program for non-mental health care providers, including those conducting the PDHA, also includes material on diagnosing mild TBI. With respect to the ANAM, DVBIC officials told us that wherever this assessment tool is used, DVBIC officials and officials responsible for the implementation of the ANAM train health care providers in its use. DOD has taken positive steps to implement provisions of the 2007 NDAA related to screening servicemembers for TBI and mental health. For example, DOD has added mild TBI screening to its PDHA and will require screening prior to deployment. With respect to mental health, we found that health care providers' familiarity with DOD's CPGs and comfort in making mental health assessments varied. However, DOD and the military services have implemented or are implementing training initiatives, some of which are specifically aimed at the primary care providers who generally conduct the PDHA. Furthermore, the installations we visited had developed manual systems for tracking those servicemembers who were referred from the PDHA to ensure that they made or completed their appointments. Referral tracking is difficult for the Guard and Reserves because their servicemembers generally receive civilian care. DOD has taken steps to meet 2007 NDAA requirements related to mental health standards and screening, including issuing a policy on minimum mental health standards for deployment. A key component of DOD's efforts to meet these requirements is a review of medical records, and we agree that this should be done to verify information in a screening process that depends on self-reported information. Unfortunately, DOD's policies for reviewing medical records during the pre-deployment health assessment are inconsistent. During our site visits we found that health care providers were unaware a medical record review was required and that medical records were not always reviewed by providers conducting the pre-deployment health assessment. A health care provider following DOD's Instruction on Deployment Health, which is silent on whether medical record review is required during the pre-deployment health assessment, may not conduct the medical record review required by DOD's policy on minimum mental health standards for deployment. Until DOD resolves the inconsistency between its policies, its health care providers may not have complete mental health information when screening servicemembers prior to deployment. In order to address the inconsistency in DOD's policies related to the review of medical record information and to assure that health care providers have reviewed the medical record when screening servicemembers prior to deployment, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to revise DOD's Instruction on Deployment Health to require a review of medical records as part of the pre-deployment health assessment. In commenting on a draft of this report, DOD stated that our concerns regarding provider review of medical records are well-taken and that an assessment is only complete when it includes a medical record review. While DOD concurred with our recommendation and said that it will update its Instruction on Deployment Health to require a medical record review at the time of the pre-deployment health assessment, DOD is limiting this medical record review requirement to servicemembers who have a significant change in health status since their most recent periodic health assessment. According to a senior DOD health official, it is anticipated that the updated Instruction will be published in one year. However, DOD does not explain how providers will be able to identify the subset of servicemembers who have had a significant change in health status. As a result, its response does not fully eliminate the inconsistency between its policy and current Instruction. To fully eliminate the inconsistency, as we recommended, DOD should require a medical record review for all servicemembers as part of the pre-deployment health assessment in its updated Instruction. We also encourage DOD to update its Instruction as quickly as possible so that providers have the complete information that we and DOD agree they need to make pre-deployment decisions. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, the Air Force, and the Navy; the Commandant of the Marine Corps; and appropriate congressional committees and addressees. We will also provide copies to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In addition to the contact named above, Marcia Mann, Assistant Director; Eric Anderson; Krister Friday; Lori Fritz; Adrienne Griffin; Amanda Pusey; and Jessica Cobert Smith made key contributions to this report. VA Health Care: Mild Traumatic Brain Injury Screening and Evaluation Implemented for OEF/OIF Veterans, but Challenges Remain. GAO-08-276. Washington, D.C.: February 8, 2008. VA and DOD Health Care: Administration of DOD's Post-Deployment Health Reassessment to National Guard and Reserve Servicemembers and VA's Interaction with DOD. GAO-08-181R. Washington, D.C.: January 25, 2008. Defense Health Care: Comprehensive Oversight Framework Needed to Help Ensure Effective Implementation of a Deployment Health Quality Assurance Program. GAO-07-831. Washington, D.C.: June 22, 2007. Post-Traumatic Stress Disorder: DOD Needs to Identify the Factors Its Providers Use to Make Mental Health Evaluation Referrals for Servicemembers. GAO-06-397. Washington, D.C.: May 11, 2006. Military Personnel: Top Management Attention Is Needed to Address Long-standing Problems with Determining Medical and Physical Fitness of the Reserve Force. GAO-06-105. Washington, D.C.: October 27, 2005. Defense Health Care: Occupational and Environmental Health Surveillance Conducted during Deployments Needs Improvement. GAO-05-903T. Washington, D.C.: July 19, 2005. Defense Health Care: Improvements Needed in Occupational and Environmental Health Surveillance during Deployments to Address Immediate and Long-term Health Issues. GAO-05-632. Washington, D.C.: July 14, 2005. VA Health Care: VA Should Expedite the Implementation of Recommendations Needed to Improve Post-Traumatic Stress Disorder Services. GAO-05-287. Washington, D.C.: February 14, 2005. Defense Health Care: Force Health Protection and Surveillance Policy Compliance Was Mixed, but Appears Better for Recent Deployments. GAO-05-120. Washington, D.C.: November 12, 2004. VA and Defense Health Care: More Information Needed to Determine If VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder Services. GAO-04-1069. Washington, D.C.: September 20, 2004.
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The John Warner National Defense Authorization Act for Fiscal Year 2007 included provisions regarding mental health concerns and traumatic brain injury (TBI). GAO addressed these issues as required by the Act. In this report GAO discusses (1) DOD efforts to implement pre-deployment mental health screening; (2) how post-deployment mental health referrals are tracked; and (3) screening requirements for mild TBI. GAO selected the Army, Marine Corps, and Army National Guard for the review. GAO reviewed documents and interviewed DOD officials and conducted site visits to three military installations where the pre-deployment health assessment was being conducted. DOD has taken positive steps to implement mental health standards for deployment and pre-deployment mental health screening. However, DOD's policies for providers to review medical records are inconsistent. DOD issued minimum mental health standards that servicemembers must meet in order to be deployed to a combat theater and identified the pre-deployment health assessment as a mechanism for ensuring their use in making deployment decisions. DOD's November 2006 policy implementing these deployment standards requires a review of servicemember medical records during the pre-deployment health assessment. However, DOD's August 2006 Instruction on Deployment Health, which implements policy and prescribes procedures for conducting pre-deployment health assessments, is silent on whether such a review is required. Because of this inconsistency, providers determining if Operation Enduring Freedom and Operation Iraqi Freedom servicemembers meet DOD's mental health deployment standards may not have complete medical information. Health care providers at the installations GAO visited where the post-deployment health assessment (PDHA) is conducted manually track whether servicemembers who receive mental health referrals from the PDHA make or complete appointments with mental heath providers. Because health care providers conducting the PDHA and making referrals from the PDHA may not have an ongoing relationship with referred servicemembers, health care providers responsible for tracking referrals at these installations have developed manual systems to track servicemembers to ensure that they made or kept their appointments for evaluations. Tracking is more challenging for Guard and Reserve units because their servicemembers generally receive civilian care. Guard and Reserve units do not know if servicemembers used civilian care to complete their PDHA referrals unless disclosed by the servicemembers, which they may be reluctant to do because of stigma concerns. DOD is addressing the TBI requirement through implementing screening for mild TBI in its PDHA and prior to deployment. DOD has also provided guidance and training for health care providers. DOD in January 2008 added TBI screening to the PDHA, and plans to require screening of all servicemembers for mild TBI prior to deployment beginning in July 2008. The TBI screening questions on the PDHA assess the servicemember's exposure to events that may have increased the risk of a TBI and the servicemember's symptoms. The TBI screening questions to be used prior to deployment are similar to those on the PDHA. Prior to DOD's screening efforts, several installations had been screening servicemembers for mild TBI before or after deployment. An official from the Defense and Veterans Brain Injury Center told GAO that these initiatives would probably be replaced by the DOD-wide screening.
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Hospitals' budgets for medical devices and other goods are substantial. Many hospitals buy medical devices and other supplies through GPOs, which are generally owned by member hospitals and vary in size and scope of services. GPOs are expected to use volume purchasing as leverage in negotiating prices with vendors. In exchange for administrative services and the ability to sell through a GPO to its member hospitals, vendors pay administrative fees to a GPO based on the hospitals' purchases made using that GPO's contract. These fees, sanctioned under Medicare law, cover the GPO's costs; GPOs often distribute surplus fees to their owners. Federal antitrust guidelines help a GPO determine whether its business practices and market share are likely to be questioned as anticompetitive by enforcement agencies. According to an American Hospital Association (AHA) survey, roughly 4,900 nonfederal community hospitals spent an estimated $173 billion on nonlabor supplies, services, and capital in 2000. A significant share of hospitals' nonlabor costs include such goods as pharmaceuticals and medical devices. Hospitals buy these goods through their own purchasing departments, and many hospitals--in addition to contracting on their own with vendors--use GPO-negotiated contracts for at least some of their purchasing. Some hospitals have large or more sophisticated purchasing operations, but even hospitals belonging to large chains or health systems often do at least some purchasing through a GPO. The proportion of hospitals belonging to at least one GPO is substantial: estimates range from 68 percent to 98 percent. Medical devices that hospitals buy span a wide array of products, such as pacemakers, implantable defibrillators, and infusion pumps. Some device manufacturers are small companies that offer one product or a few closely related products while others are large firms that offer many, often unrelated, products. The Medical Device Manufacturers Association estimates that some devices become obsolete within 2 to 3 years--when the next generation of a particular device becomes available. Manufacturers market medical devices in medical journals and trade shows but place considerable value on having access to clinicians in hospitals as well as to hospital purchasing departments, which make the final buying decisions. According to the Health Industry Group Purchasing Association, hundreds of GPOs operate today, but only about 30 negotiate sizeable contracts on behalf of their members. The emergence of these large GPOs in part stems from GPO mergers in the mid-1990s. Joint ventures and mergers created the two largest GPOs, Novation and Premier, which have annual purchases by member facilities using their contracts of $17.6 billion and $14 billion, respectively. Other GPOs in our pilot study have less than $6 billion in annual purchases by member facilities. (See appendix I for purchasing volumes of GPOs in our pilot study.) In addition to differences in size, GPOs differ in scope. Some negotiate national contracts and offer many services beyond purchasing, such as programs emphasizing the gains in safety and economic value resulting from standardization, or specialized software to help ensure that hospitals are not overcharged. Others serve regional or local hospital markets and provide fewer additional services. GPOs differ in their corporate structures and their relationships with member hospitals. All large GPOs and many smaller GPOs are for-profit entities, some of which are owned by not-for-profit hospitals. Other GPOs have shareholders independent of the member hospitals, which themselves do not necessarily hold an ownership stake. An example of a for-profit GPO owned by not-for-profit hospitals is Premier. Premier is owned by 203 not-for-profit health care organizations that operate approximately 900 hospitals. Other for-profit GPOs are owned by investors that are not member hospitals; for example, InSource is owned by MedAssets, a private purchasing and contract services company. Broadlane's owners consist of individual investors as well as for-profit and not-for-profit organizations including Tenet Healthcare, a nationwide provider of health care services. Some GPOs are jointly owned. For example, both Novation and Healthcare Purchasing Partners International (HPPI) are owned by the same two networks of hospitals and physicians. Network members purchase using Novation contracts. However, non-network members purchase using HPPI contracts, which are negotiated by Novation. Some GPOs, such as HealthTrust, require that members do not belong to other GPOs. In addition, some GPOs, such as Novation and Amerinet, contract with manufacturers to supply products sold under the GPO's own "private-label" brand name. (See appendix I for a summary of characteristics of GPOs in our pilot.) According to officials of GPOs and a GPO trade organization, benefits that GPOs provide to member hospitals include, in addition to lower prices, reduced costs due to hospitals being able to reduce the size of purchasing departments, as well as assistance with product-comparison analysis and standardization of products. Benefits that GPOs say they provide to manufacturers with which they contract include, in addition to access to hospital decisionmakers, cost savings due to reducing manufacturers' contracting, marketing, and sales activities. According to representatives of some manufacturers, many GPOs act as gatekeepers to hospital purchasing decisionmakers and charge the manufacturers administrative fees as the price of access to their member hospitals. In order to sell to hospitals through GPO contracts, vendors generally submit proposals to a GPO--in response to Requests for Proposals (RFP)--that are then evaluated. Based on these evaluations, the GPO enters into negotiations with select vendors to determine prices and, in some cases, administrative fees that vendors pay to the GPO. Hospitals then buy directly from the manufacturer for a price specified in a GPO contract. Often prices through a GPO-negotiated contract vary based on each hospital's volume of purchases and the extent to which the member hospital delivers on its "commitment" to buy an agreed-upon share of its purchases of a certain product from a particular manufacturer. The more of a product that a hospital purchases, the lower the price per unit it may pay the manufacturer. A hospital's price may also vary depending upon the share of a product it purchases from a manufacturer. For example, a hospital that buys only 25 percent of its cardiac stents from one manufacturer may pay nearly three times more per stent than one that purchases all its stents from that manufacturer. Member hospitals may have an additional financial incentive to use the GPO contract. The extent to which a hospital buys using the GPO's contracts may affect the share of the administrative fees that the GPO returns to the hospital. Although GPOs provide services to hospitals and are often organized by hospitals, many finance their operations primarily through the administrative fees paid by manufacturers and other vendors. These fees are typically calculated as a percentage of each hospital's purchases from a vendor. The Social Security Act, as amended in 1986, allows these fees, which would otherwise be considered 'kickbacks' or other illegal payments to the GPO. Regulations establishing appropriate administrative fees, enforced by the Office of Inspector General in the Department of Health and Human Services, state that the fee structure must be disclosed in an agreement between the GPO and each participating member. The agreement must state that fees are to be 3 percent or less of the purchase price, or if not fixed at 3 percent or less, the amount or maximum amount that each vendor will pay. The GPO must also disclose in writing to each member, at least annually, the amount received from each vendor with respect to purchases made by or on behalf of the member. The fees tend to be higher on purchases by hospitals that buy most or all of an item from one vendor. In addition to covering their operating expenses with these fees, GPOs, with the approval of their boards of directors, often distribute surplus fees to member hospitals but may also use administrative fees to finance new ventures, such as electronic commerce, that are outside their core business. (See fig. 1.) The complex financial flows among vendors, GPOs, and hospitals have raised concerns that GPOs' interests may diverge from those of hospitals. According to some small manufacturers, GPOs have an incentive not to seek the lowest price because higher prices yield higher administrative fees. These manufacturers further suggest that GPOs, by relying on vendors' fees, become agents of manufacturers and assist them in limiting competition. By contrast, according to some GPOs, they act as an extension of hospitals and GPO members have input into the GPOs' product selections. GPOs acknowledge that a manufacturer dominant in a product line may contract with a GPO, or agree to a favorable contract, to preserve its market share and exclude competitors. However, GPOs assert that this selective contracting is part of a competitive process allowing the GPO to negotiate lower prices. GPOs also emphasize that participation in a GPO is voluntary, so the GPO must reflect what the hospitals want if it is to retain their business. Recognizing that joint purchasing arrangements among hospitals may enable members to achieve efficiencies that will benefit consumers but may, in some cases, pose risks of harming consumers by reducing competition, DOJ and the Federal Trade Commission (FTC) issued in 1993 a guideline to help GPOs and others gauge whether a particular GPO arrangement is likely to raise antitrust problems. This guideline sets forth an "antitrust safety zone" for GPOs that meet a two-part test, under which the agencies, absent extraordinary circumstances, will not challenge the arrangement as anticompetitive. Essentially, the two-part test is as follows: 1. Purchases through a GPO must account for less than 35 percent of the total sales of the product or service in question (such as pacemakers) in the relevant market. This part of the test addresses whether the GPO accounts for such a large share of the purchases of the product or service that it can effectively exercise increased market power as a buyer. If the GPO's buying power drives the price of the product or service below competitive levels, consumers could be harmed if suppliers respond by reducing output, quality, or innovation. 2. The cost of purchases through a GPO by each member hospital that competes with other members must amount to less than 20 percent of each hospital's total revenues. This second part of the test looks at whether the GPO purchases constitute such a large share of the revenues of competing member hospitals that they could result in standardizing the hospitals' costs enough to make it easier to fix or coordinate prices. However, the guideline states that a purchasing arrangement is not necessarily in violation of the antitrust laws simply because it falls outside the safety zone. Likewise, the guideline suggests that even a purchasing arrangement that falls within the safety zone might still raise antitrust concerns under "extraordinary circumstances." Each arrangement has to be examined according to its particular facts. In this regard, the guideline also describes factors that reduce antitrust concerns with purchasing arrangements that fall outside the safety zone. GPOs did not always obtain better prices for member hospitals. The advantage or disadvantage of GPO prices varied by the model purchased and size of hospital--but lacked a clear relationship to size of GPO. In our pilot study, we compared median GPO and median non-GPO prices for purchases by hospitals and found the following: Among hospitals of all sizes, hospitals using GPO-negotiated contracts to buy pacemakers and safety needles often paid more than hospitals negotiating on their own. This finding also held for hospitals using large GPOs, compared to hospitals negotiating on their own. Between hospitals of different sizes, small and medium-sized hospitals buying pacemakers were more likely than large hospitals to save money when using GPO-negotiated contracts. We also compared prices between large GPOs and smaller GPOs: Hospitals of all sizes using a large GPO's contracts almost always saved money on safety needles but often paid more for pacemakers, compared to those using smaller GPOs' contracts. Large GPOs would be expected to achieve price savings consistently. In all these comparisons, the price savings or additional cost that hospitals realized--for example, by using a GPO or by negotiating on their own--often varied widely from model to model. Purchasing with GPO contracts did not ensure that hospitals saved money. Among hospitals of all sizes in our study market, those using GPO- negotiated contracts for pacemakers and safety needles often paid more than those negotiating on their own. The median GPO-negotiated price was higher than the median price hospitals paid on their own for all six safety needles models and over three-fifths of the 41 pacemaker models that could be compared. Similarly, the use of a large GPO--one with an annual purchase volume greater than $6 billion--did not guarantee price savings. Hospitals using contracts negotiated by a large GPO paid more than hospitals purchasing on their own for the six safety needle models and roughly half of the 22 pacemaker models that could be compared. The price savings or additional costs that hospitals obtained using GPO- negotiated contracts varied by model. For different safety needle models, median GPO-negotiated prices exceeded prices negotiated by a hospital buying on its own by from 1 percent to 5 percent. For different pacemaker models, the variation was much greater: median GPO-negotiated prices ranged from 26 percent less to 39 percent more than the median price paid by hospitals purchasing on their own. (See fig. 2.) We examined how hospitals of different sizes using GPOs fared relative to their peers purchasing pacemakers on their own and found that whether there were savings depended on the size of the hospital. The 4 small hospitals (those with fewer than 200 beds) always did better with a GPO contract. The 11 medium-sized hospitals (those with 200 to 499 beds) did better with a GPO contract for 40 percent of the models (see fig. 3), and the 3 large hospitals rarely did better with a GPO contract--compared with their respective peers purchasing on their own (see fig. 4). Even though small hospitals buying on their own generally paid higher prices than the small hospitals using GPOs, the GPO-negotiated price was not much lower--from 1 to 6 percent--than what they paid on their own. As figures 3 and 4 show, the range of price savings or additional costs associated with GPO contracts was considerable. For example, for medium-sized hospitals, the median GPO-negotiated price was 39 percent lower for model 1 and 25 percent higher for model 25 than the median price paid by these hospitals purchasing on their own. The size of a GPO was not related consistently to whether a hospital, when using a GPO contract, obtained a better price. Whether use of large GPOs offered price savings varied by type of device: for safety needles, they were more likely to obtain better prices and for pacemakers, they were less likely to do so. Specifically, the median price paid by hospitals using a large GPO's contract to purchase safety-needles was nearly always lower--for 18 of the 19 types of needles we could compare--than the median price paid by hospitals using a smaller GPO's contract. For pacemakers, a large GPO's contract infrequently yielded better prices than smaller GPOs' contracts-- for only 5 of the 18 pacemakers we could compare. In this case, the higher prices associated with most of these pacemaker purchases run counter to the expectation that large GPOs yield substantial price advantages. (See fig. 5.) Figure 5 shows that, as with the previous comparisons, the range of price savings or additional costs associated with large GPOs was wide. For hospitals using large GPOs' contracts to buy pacemakers, the median price paid ranged from 20 percent less for one model to 26 percent more for another, compared with the median price paid by hospitals using smaller GPOs' contracts. Regardless of whether a GPO contract was used, hospitals bought pacemakers and safety needles predominantly from large manufacturers. In our study, 5 of the 16 manufacturers from which hospitals purchased were small; however, purchases from these 5 represented a small minority of the models bought (1 of 121 pacemaker models and 22 of 196 safety needle models). Almost all purchases from small manufacturers in our pilot were made by hospitals buying on their own; only one hospital purchased from a small manufacturer using a GPO contract. We could not determine the extent to which hospitals' reliance on large manufacturers of these two devices reflected hospital preference or the effects of GPOs' contracting practices, because almost all hospitals in our sample belonged to GPOs. Representatives from small manufacturers whom we interviewed stated that some incentives in GPO contracts penalize hospitals purchasing off-contract. However, hospital personnel whom we interviewed emphasized different factors as influencing their purchasing decisions, including clinical considerations for pacemakers and cost for safety needles. Seventy-one percent of hospitals purchased a pacemaker and 15 percent a safety needle outside of their GPO contracts. While this is a pilot study based on one market, the data raise questions about one of the intended benefits from having large GPOs. In our study market, GPOs of different sizes realized comparable savings for member hospitals. Buying through a large GPO did not guarantee a hospital the lowest prices. In fact, there were several instances in which individual hospitals using a large GPO's contracts paid prices that were at least 25 percent higher than prices negotiated by hospitals on their own, and smaller GPOs also sometimes offered better prices. Clearly, more evidence on GPOs and their effects is needed, since our data pertain to one urban market, two types of medical devices, eight GPOs, and 18 hospitals. To assist the Subcommittee, we plan to obtain data from a broader array of geographic areas and for other devices, hospitals, and GPOs. Gathering additional information on GPOs' benefits and possible drawbacks could inform an examination of antitrust policy toward GPOs. For more information regarding this statement, please contact Janet Heinrich at (202) 512-7114 or Jon Ratner at (202) 512-7107. JoAnne R. Bailey, Hannah F. Fein, Kelly L. Klemstine, and Michael L. Rose made key contributions to this statement. The information in this appendix illustrates how GPOs in our study market vary in size, ownership structure, and profit status. The appendix contains information obtained both from GPO Web sites during April 2002 and through telephone interviews. We did not independently verify the information in this appendix. (See table 1.)
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This testimony discusses group purchasing organizations (GPO) for medical devices and supplies used in hospitals. By pooling the purchases of their member hospitals, these specialized firms negotiate lower prices from vendors. GAO found that a hospital's use of a GPO contract did not guarantee that the hospital saved money: GPOs' prices were not always lower and were often higher than prices paid by hospitals negotiating directly with vendors. GAO studied price savings with respect to: (1) whether hospitals using GPO contracts received better prices than hospitals that did their own contracting, (2) the size of the hospital, and (3) size of the GPO. This data raises questions about whether GPOs, specially large GPOs, achieve consistent price savings.
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About 19,600 communities have joined the flood insurance program. Under the program, flood insurance rate maps (FIRM) were prepared to identify special flood hazard areas. In order for a community to join the program, any structures built within a special flood hazard area after the FIRM was completed were required to be built according to the program's building standards that are aimed at minimizing flood losses. Special flood hazard areas, also known as the 100-year floodplains, are areas subject to a 1-percent or greater chance of experiencing flooding in a given year. A key component of the program's building standards, that must be followed by communities participating in the program, is a requirement that the lowest floor of the structure be elevated to or above the base flood level--the elevation at which there is a 1-percent chance of flooding in a given year. To encourage communities to join the program, thereby promoting floodplain management and the widespread purchasing of flood insurance, the Congress authorized FEMA to make subsidized flood insurance rates available to owners of structures built before a community's FIRM was prepared. These pre-FIRM structures are generally more flood-prone than later built structures because they were not built according to the program's building standards. Owners of post-FIRM structures pay actuarial rates for national flood insurance. The average annual premium for a subsidized policy is currently $610, and the average annual premium for an actuarial policy is currently $310. The higher average premium for a subsidized policy reflects the significantly greater risk of flood-prone pre- FIRM properties. The $610 average annual premium for a subsidized policy represents about 38 percent of the true risk premium for these properties. From 1968 until the adoption of the Flood Disaster Protection Act of 1973, the purchase of flood insurance was voluntary. The 1973 act required the mandatory purchase of flood insurance to cover structures in special flood hazard areas of communities participating in the program if (1) any federal loans or grants were used to acquire or build the structures and (2) the loans were secured by improved properties and were made by lending institutions regulated by the federal government. The owners of properties with no mortgages or properties with mortgages held by unregulated lenders were not, and still are not, required to buy flood insurance, even if the properties are in special flood hazard areas. The National Flood Insurance Reform Act of 1994 reinforces the objective of using insurance as the preferred mechanism for disaster assistance by (1) expanding the role of federal agency lenders and regulators to enforce the mandatory flood insurance purchase requirements and (2) prohibiting further flood disaster assistance for any property where flood insurance is not maintained, even though flood insurance was mandated as a condition for receiving disaster assistance. Regarding the prohibition on further flood disaster assistance, the act requires borrowers who have received certain disaster assistance and then failed to obtain flood coverage to be barred from receiving future disaster aid. Other forms of flood disaster assistance include low-interest loans from the Small Business Administration to flood victims who are creditworthy. In addition, a flood victim who cannot obtain a Small Business Administration loan may apply for an individual and family FEMA grant of up to $14,400 or the amount of the loss, whichever is less. Annual operating losses or net revenues from the National Flood Insurance Program's operations have varied significantly from year to year. While revenues exceeded program costs in some years, cumulative program costs exceeded income by about $843 million during the period October 1, 1992, through September 30, 2000. As seen in Figure 1, during the 8-year period from fiscal years 1993 through 2000, the program incurred operating losses in 5 of these years and experienced net income in the 3 remaining years. During fiscal years 1993 through 1998, the first 6 years of the 8-year period, the flood insurance program generally experienced operating losses. This occurred because losses from flood claims were greater than premium income collected from the program's policyholders. The program's annual losses during this period ranged from about $600,000 in fiscal year 1998 to $602 million in fiscal year 1993. Cumulative operating losses experienced by the program totaled about $1.56 billion during the 6-year period. To help finance these losses, the Administration borrowed from the U.S. Treasury during the 6-year period. According to FEMA, as of August 31, 1999, the debt owed by the program to the U.S. Treasury totaled $541 million. Since fiscal year 1995, losses experienced by the program annually have gradually declined, and in fiscal years 1999 and 2000 program revenues exceeded program costs by a total of about $720 million. As a result, the Administration was able to repay its debt owed the U.S. Treasury, and, as of June 30, 2001, the program owes no debt to the U.S. Treasury. The financial improvement experienced by the program since fiscal year 1995 was primarily due to three reasons. First, claims and related expenses declined. Second, the number of policyholders covered by the program increased about 31 percent from 3.3 million policies in force in fiscal year 1995 to 4.3 million policies in force by fiscal year 2000. Accordingly, earned premium revenue on these policies increased during the period. Third, according to Administration officials, the proportion of generally more flood-prone pre-FIRM subsidized policies insured by the program has declined, resulting in a less risky portfolio of policies in force. The percentage of program policies that are subsidized has declined over time as newer properties have joined the program and are charged actuarial rates. While 41 percent of the 2.7 million policies in force in fiscal year 1993 were subsidized, 30 percent of the 4.3 million policies in force in fiscal year 2000 were subsidized, according to an Administration official. While the program incurred operating losses during the 8-year period, it should be recognized that the value of the program in reducing federal expenditures on disaster assistance should not be measured by net federal expenditures alone. For example, the Administration estimated that the program's standards for new construction are now saving about $1 billion annually in flood damage avoided. Also, from October 1, 1968, through September 30, 2000, the program paid about $10 billion in insurance claims, primarily from policyholder premiums that otherwise would, to some extent, have increased taxpayer-funded disaster relief. The program is not actuarially sound because about 30 percent of the 4.3 million policies in force are subsidized, according to an Administration official. For a single-family pre-FIRM property, subsidized rates are available for the first $35,000 of coverage, although any insurance coverage above that amount must be purchased at actuarial rates. Administration officials estimated that total premium income from subsidized policyholders is currently about $500 million less than it would be if these rates had been actuarially based and participation had remained the same. Pre-FIRM structures that are within an identified 100-year floodplain and are covered by subsidized policies are, on average, not as elevated as the post-FIRM structures in comparison with the base flood level. Administration officials told us that, on average, pre-FIRM structures not built to the program's standards are three and a half to four times more likely to suffer a flood loss. When these structures suffer a loss, the damage sustained is, on average, about 40 percent greater than the damage to flooded post-FIRM structures. According to the Administration, when these two factors are combined, pre-FIRM structures suffer, on average, about five times more damage than post-FIRM structures. As an alternative to actuarial soundness, the Administration developed a financial goal for the program to collect sufficient revenues to at least meet the expected losses and expenses of the average historical loss year, as well as to cover all non-loss-related program expenses, such as the program's administration. However, the average historical loss year is based only on the program's experiences since 1978. Since then, no catastrophic year ($5.5 billion to $6 billion in claims losses) has occurred, and many years in the 1980s were characterized by fairly low actual loss levels as compared to the historical average losses experienced in other years. Therefore, the historical average loss year involves fewer losses from claims than the expected annual claims losses in future years. As a result, collecting premiums to meet the historical average loss year does not realize the collections necessary to build reserves for potential catastrophic years in the future. For the program to be actuarially sound, its rate-setting process would have to consider the monetary risk exposure of the program or the dollar value of expected flood losses over the long run. Since the magnitude of flood damage varies considerably from year to year, income from premiums in many years would exceed actual losses. This circumstance would enable the program to build reserves toward a possible catastrophic year in the future. As we reported in March 1994, increasing the premiums charged to subsidized policyholders (thereby decreasing the subsidy) to improve the program's financial health could have an adverse impact on other federal disaster-related relief costs. Increasing the rates of subsidized policyholders would likely cause some policyholders to cancel their flood insurance, and, if flooded in the future, these people might apply for Small Business Administration loans or FEMA disaster assistance grants. Because they were built before the program's building standards became applicable, pre-FIRM structures are generally not as elevated as post-FIRM structures, and, if their owners were to be charged true actuarial rates, these rates would be much higher than current subsidized rates. For example, if the subsidy on pre-FIRM structures were eliminated, insurance rates on currently subsidized policies would need to rise, on average, approximately a little more than twofold, according to an Administration official. This increase would result in an annual average premium of about $1,300 for these pre-FIRM structures. Significant rate increases for subsidized policies, including charging actuarial rates, would likely cause some pre-FIRM property owners to cancel their flood insurance. If owners of pre-FIRM structures, which suffer the greatest flood loss, canceled their insurance policies, the federal government would likely face increased costs, as the result of future floods, in the form of low- interest loans from the Small Business Administration or grants from FEMA. The effect on total federal disaster assistance costs of phasing out subsidized rates would depend on the number of the program's current policyholders who would cancel their policies. Thus, it is difficult to estimate if the increased costs of other federal disaster relief programs would be less than, or more than, the cost of the program's current subsidy. On the other hand, expanding participation in the program by increasing the rate of compliance with the mandatory purchase requirement, or by extending the mandatory purchase requirement to property owners not now covered, will likely increase the number of both subsidized and unsubsidized policies. Although greater participation in the program is likely to reduce the cost of FEMA grants and Small Business Administration loans, the resulting increase in subsidized policyholders will put greater financial stress on the flood insurance program, because the premiums received from subsidized policyholders are not sufficient to meet the future estimated losses on these policies. Repetitive loss properties have a major disproportionate impact on the National Flood Insurance Program, according to FEMA's fiscal year 2000 performance report. About 38 percent of all program claims historically (currently about $200 million annually) represent repetitive losses, even though repetitive-loss structures make up a small percentage of all program policies. About 45,000 buildings currently insured under the program have been flooded on more than one occasion and have received flood insurance claims payments of $1,000 or more for each loss. Over the years, the total cost of these multiple-loss properties to the program has been about $3.8 billion. A 1998 study by the National Wildlife Federation noted that repetitive loss properties represent only 2 percent of all properties insured by the program, but they tend to have damage claims that exceed the value of the house and most are concentrated in special flood hazard areas. For example, nearly one out of every ten repetitive loss homes has had cumulative flood loss claims that exceeded the value of the house. Furthermore, over half of all nationwide repetitive loss property insurance payments have been made in Louisiana and Texas. About 15 states account for 90 percent of the total payments made for repetitive loss properties. We, as well as FEMA's Office of Inspector General, have identified improving the financial condition of the National Flood Insurance Program as one of FEMA's major management challenges. In our July report on FEMA's performance under the Government Performance and Results Act, we outlined FEMA's accomplishments and plans to reduce the losses it sustains from repetitive loss properties. Among other things, FEMA has under way actions or plans aimed at (1) identifying target repetitive loss properties and transferring their servicing to a special servicing facility designed to better oversee claims and coordinate and facilitate insurance and mitigation actions and (2) developing and implementing proposals to reduce the subsidy provided to pre-FIRM repetitive loss properties. In fiscal year 2000, FEMA implemented a repetitive loss initiative to target the 10,000 worst repetitive loss properties, those currently insured properties that had four or more losses, or two to three losses where the cumulative flood insurance claims payments exceeded the building's value. According to FEMA, the initiative is designed to eliminate or short- circuit the cycle of flooding and rebuilding for properties suffering multiple losses due to flooding. The initiative includes identifying repetitive loss properties and transferring their insurance policies to a central, special servicing facility designed to better oversee claims. FEMA believes that this special servicing will help coordinate insurance activities and mitigation grant programs. FEMA reported that it had identified repetitive loss properties and would make this information available to state and local governments to help them target repetitive loss properties for mitigation actions. FEMA also reported that it planned to mitigate 1,938 target properties over the next 4 years. In addition, in its fiscal year 2002 annual performance plan, FEMA outlined several strategies to reduce the subsidy provided to repetitive loss properties as well as several business improvement process actions to reduce the program's costs. FEMA stated it would use Flood Mitigation Assistance funds and Hazard Mitigation Grants Program funds in conjunction with flood insurance program funds to acquire properties, relocate residents, or otherwise mitigate future losses. FEMA also plans to provide incentives to communities to reduce repetitive flood losses. In its fiscal year 2002 budget proposal, FEMA requested to transfer $20 million in fees from the National Flood Insurance Program to increase the number of buyouts of properties that suffer repetitive losses. This proposal also includes a proposal for two major reforms to the flood insurance program. FEMA proposes to terminate flood insurance coverage for the worst offending repetitive loss properties. FEMA also proposes to eliminate subsidized premiums for vacation homes, rental properties, and other nonprimary properties that experienced repetitive losses. FEMA estimates these two reforms will generate savings of about $12 million in fiscal year 2002 and additional funds in subsequent years. - - - - - In closing, Madam Chairwoman, the Administration is helping the nation avoid the costs of flood damage through the premiums it collects from, and the claim payments it makes to, program policyholders as well as the building standards it has promoted for new construction that minimize flood damage. However, at times, heavy flooding has produced annual flood insurance losses that exceeded the premiums collected from policyholders. As a result, the program has had to borrow funds from the U.S. Treasury to cover its operating losses, which it subsequently repaid. Two major factors underlie these financial difficulties--the program, by design, is not actuarially sound and it experiences repetitive losses. These factors are not easy to overcome because they have been an integral part of the program since its inception, and they are related to the promotion of floodplain management and widespread purchasing of flood insurance. Madam Chairwoman, this completes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee might have. For further information on this testimony, please contact Mr. Stanley Czerwinski at (202) 512-2834. Mark Abraham, Martha Chow, Kerry Hawranek, Signora May, Lisa Moore, and Robert Procaccini made key contributions to this testimony. Federal Emergency Management Agency: Status of Achieving Key Outcomes and Addressing Major Management Challenges (GAO-01-832, July 9, 2001). Flood Insurance: Emerging Opportunity to Better Measure Certain Results of the National Flood Insurance Program (GAO-01-736T, May 16, 2001). Disaster Assistance: Issues Related to the Development of FEMA's Insurance Requirements (GAO/GGD/OGC-00-62, Feb. 25, 2000). Flood Insurance: Information on Financial Aspects of the National Flood Insurance Program (GAO/T-RCED-00-23, Oct. 27, 1999). Flood Insurance: Information on Financial Aspects of the National Flood Insurance Program (GAO/T-RCED-99-280, Aug. 25, 1999). Disaster Assistance: Opportunities to Improve Cost-Effectiveness Determinations for Mitigation Grants (GAO/RCED-99-236, Aug. 4, 1999). Disaster Assistance: FEMA Can Improve Its Cost-Effectiveness Determinations for Mitigation Grants (GAO/T-RCED-99-274, Aug. 4, 1999). Disaster Assistance: Improvements Needed in Determining Eligibility for Public Assistance (GAO/RCED-96-113, May 23, 1996). Flood Insurance: Financial Resources May Not Be Sufficient to Meet Future Expected Losses (GAO/RCED-94-80, Mar. 21, 1994).
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Floods have been, and continue to be, the most destructive natural hazard in terms of economic loss to the nation, according to the Federal Emergency Management Agency. From fiscal years 1969 through 2000, the National Flood Insurance Program--a major federal effort to provide flood disaster assistance paid about $10 billion in insurance claims, primarily from premiums collected from program policy holders. This testimony discusses (1) the financial results of the program's operations since fiscal year 1993, (2) the actuarial soundness of the program, and (3) the impact of repetitive losses and FEMA's strategies for reducing those losses.
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The SAB provides a mechanism for EPA to receive peer review and other advice in the use of science at EPA. The SAB is authorized to, among other things, review the adequacy of the scientific and technical basis of EPA's proposed regulations. The SAB and its subcommittees or panels focus on a formal set of charge questions on environmental science received from the agency. Depending on the nature of the agency's request, the entire advisory process from the initial discussion on charge questions with EPA offices and regions to the delivery of the final SAB report generally takes from 4 to 12 months. Under the Clean Air Act, air quality criteria must accurately reflect the latest scientific knowledge useful in indicating the kind and extent of all identifiable effects on public health or welfare, which may be expected from the presence of certain air pollutants in the ambient air. economic, or energy effects that may result from various strategies for attainment and maintenance of the NAAQS. CASAC's advisory process is similar to the SAB's process, including the option of establishing subcommittees and panels that send their reports and recommendations to CASAC. As federal advisory committees, the SAB and CASAC are subject to FACA, which broadly requires balance, independence, and transparency. FACA was enacted, in part, out of concern that certain special interests had too much influence over federal agency decision makers. The head of each agency that uses federal advisory committees is responsible for exercising certain controls over those advisory committees. For example, the agency head is responsible for establishing administrative guidelines and management controls that apply to all of the agency's advisory committees, and for appointing a Designated Federal Officer (DFO) for each advisory committee. Advisory committee meetings may not occur in the absence of the DFO, who is also responsible for calling meetings, approving meeting agendas, and adjourning meetings. As required by FACA, the SAB and CASAC operate under charters that include information on their objectives, scope of activities, and the officials to whom they report. Federal advisory committee charters must be renewed every 2 years, but they can be revised before they are due for renewal in consultation with the General Services Administration (GSA). Unlike CASAC, which was established by amendments to the Clean Air Act, the SAB was established under ERDDAA, and since 1980, has been required to provide scientific advice to designated congressional committees when requested. According to SAB staff office officials, until recently, the SAB has responded to general congressional questions and concerns. However, in 2013, representatives of a congressional committee formally requested advice from the SAB regarding two reviews the SAB was conducting. According to EPA officials, this was the first time representatives of a congressional committee formally requested advice from the SAB. Both requests were addressed and submitted directly to the SAB Chair and the Chair of the relevant SAB panel and sent concurrently to the SAB staff office and EPA Administrator. While ERDDAA does not specify a role for EPA in mediating responses from the SAB to the designated congressional committees, EPA identifies such a role for itself under FACA. Specifically, EPA points to the DFO's responsibility to manage the agenda of an advisory committee. Also, under FACA, EPA is responsible for issuing and implementing controls applicable to its advisory committees. Responses to the committee's requests for scientific advice were handled by the SAB staff office and EPA's OCIR. The SAB staff office and, later, OCIR responded to the committee's first request for advice, and OCIR responded to the committee's second request for advice. See table 1 for more information on these requests. Our preliminary observations indicate that EPA's procedures for processing congressional requests for scientific advice from the SAB do not ensure compliance with ERDDAA because the procedures are incomplete and do not fully account for the statutory access designated congressional committees have to the SAB. Specifically, EPA policy documents do not clearly outline how the EPA Administrator, the SAB staff office, and members of the SAB panel are to handle a congressional committee's request for advice from the SAB. In addition, EPA policy documents do not acknowledge that the SAB must provide scientific advice when requested by select congressional committees. EPA's written procedures for processing congressional committee requests to the SAB are found in the SAB charter and in the following two documents that establish general policies for how EPA's federal advisory committees are to interact with outside parties: EPA Policy Regarding Communication Between Members of Federal Advisory Committee Act Committees and Parties Outside of the EPA (the April 2014 policy), and Clarifying EPA Policy Regarding Communications Between Members of Scientific and Technical Federal Advisory Committees and Outside Parties (the November 2014 policy clarification). Collectively, the SAB's charter, EPA's April 2014 policy, and EPA's November 2014 policy clarification provide direction for how EPA and the SAB are to process requests from congressional committees. However, these documents do not clearly outline procedures for the EPA Administrator, the SAB staff office, and members of the SAB panel to use in processing such requests. At the time of the House committee's two requests to the SAB in 2013, the SAB charter was the only EPA document that contained written policy relating to congressional committee requests under ERDDAA. The SAB charter briefly noted how congressional committees could access SAB advice, stating; "While the SAB reports to the EPA Administrator, congressional committees specified in ERDDAA may ask the EPA Administrator to have SAB provide advice on a particular issue." (GAO italics) Beyond what the charter states, however, no EPA policy specified a process the Administrator should use to have the SAB review a congressional request and provide advice. In response to a request from the SAB staff office that EPA clarify the procedures for handling congressional committee requests, EPA, through an April 4, 2014, memorandum informed the SAB that committee members themselves and the federal advisory committees as a whole should refrain from directly responding to these external requests. Attached to the memorandum was the April 2014 policy that stated: "if a FACA committee member receives a request relating to the committee's work from members of Congress or their staff, or congressional committees, the member should notify the DFO, who will refer the request to the EPA OCIR. OCIR will determine the agency's response to the inquiry, after consulting with the relevant program office and the DFO." This policy, however, did not provide more specific details on processing requests from congressional committees under ERDDAA. In November 2014, EPA issued a clarification to the April 2014 policy, specifying that SAB members who receive congressional requests pursuant to ERDDAA should acknowledge receipt of the request and indicate that EPA will provide a response. The November 2014 policy clarification does not identify the SAB as having to provide the response. The November 2014 policy clarification also stated that the request should be forwarded to the appropriate DFO and that decisions on who and how best to respond to the requests would be made by EPA on a case-by-case basis. While the November 2014 policy clarification provides greater specificity about processing requests, it is not consistent with the SAB charter because the policy indicates that congressional committee requests should be handled through the DFO, whereas the charter indicates that they should be handled through the EPA Administrator and provides no further information. A senior EPA official stated that the agency considered that the charter and the November 2014 policy clarification differed in the level of detail, but not in the broad principle that the agency is the point of contact for congressional requests to the SAB (and SAB responses to those requests). However, under the agencies are to clearly document federal standards of internal control,internal controls and the documentation is to appear in management directives, administrative policies, or operating manuals. While EPA has documented its policies, they are not clear because the charter and the November 2014 policy clarification are not consistent about which office should process congressional requests. Agency officials said that the SAB charter is up for renewal in 2015. By modifying the charter when it is renewed to reflect the language in the November 2014 policy clarification--that congressional requests should be forwarded to the appropriate DFO--EPA can better ensure that its staff process congressional committee requests consistently when the agency receives such a request. Moreover, neither the April 2014 policy nor the November 2014 policy clarification clearly documents EPA's procedures for reviewing congressional committee requests to determine which questions would be taken up by the SAB, consistent with the federal standards of internal control. Because EPA's procedures for reviewing congressional committee requests are not documented, it will be difficult for EPA to provide reasonable assurance that its staff is appropriately applying criteria when determining which questions the SAB will address. EPA officials told us that internal deliberations in response to a congressional request follow those that the agency would apply to internal requests for charges to the SAB. Specifically, officials told us that EPA considers whether the questions are science or policy driven, whether they are important to science and the agency, and whether the SAB has already undertaken a similar review. However, these criteria are not documented. In addition, under ERDDAA, the SAB is required to provide requested scientific advice to select committees, regardless of EPA's judgment. As EPA has not fully responded to the committee's two 2013 requests to the SAB, by clearly documenting its procedures for reviewing congressional requests to determine which questions should be taken up by the SAB and criteria for evaluating requests, the agency can provide reasonable assurance that its staff process these and other congressional committee requests consistently and in accordance with both FACA and ERDDAA. Furthermore, the charter states that, when scientific advice is requested by one of the committees specified in ERDDAA, the Administrator will, when appropriate, forward the SAB's advice to the requesting congressional committee. Neither the charter nor the April 2014 policy and November 2014 policy clarification specify when it would be "appropriate" for the EPA Administrator to forward the SAB's advice to the requesting committee. Such specificity would be consistent with federal standards of internal control that call for clearly documenting internal controls. Without such specification, the perception could be created that EPA is withholding information from Congress that the SAB is required to provide under ERDDAA. EPA officials stated that the EPA Administrator does not attempt to determine whether advice of the SAB contained in written reports should be forwarded to the requesting committee and that all written reports are publically available on the SAB website at the same time the report is sent to the EPA Administrator. By modifying the charter or other policy documents to reflect when it is and when it is not appropriate for the EPA Administrator to forward the advice to the requesting committee, EPA can better ensure transparency in its process. In general, under FACA, as a federal advisory committee, the SAB's agenda is controlled by its host agency, EPA. As such, the SAB generally responds only to charge questions put to it by EPA although, under ERDDAA, the SAB is specifically charged with providing advice to its host agency as well as to designated congressional committees. In addition, it is EPA's responsibility under GSA regulations for implementing FACA to ensure that advisory committee members and staff understand agency-specific statutes and regulations that may affect them, but nothing in the SAB charter, the April 2014 policy, or the November 2014 policy clarification communicates that, ultimately, SAB must provide scientific advice when requested by congressional committees. For example, we found no mechanism in EPA policy for the SAB to respond on its own initiative to a congressional committee request for scientific advice unrelated to an existing EPA charge question. A written policy for how the SAB should respond to a congressional committee request that does not overlap with charge questions from EPA would be consistent with federal internal control standards. Moreover, such a policy would better position the SAB to provide the advice it is obligated to provide under ERDDAA and for EPA to provide direction consistent with GSA regulations for implementing FACA. We will continue to monitor these issues and, as we finalize our work in this area, we will consider making recommendations, as appropriate. We plan to issue our final results in June 2015. CASAC has provided certain types of advice related to the review of NAAQS. The Clean Air Act requires CASAC to review air quality criteria and existing NAAQS every 5 years and advise EPA of any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of NAAQS. According to a senior EPA official, CASAC has carried out its role in reviewing the air quality criteria and the NAAQS but has never provided advice on adverse social, economic, or energy effects of strategies to implement the NAAQS because EPA has never asked it to. This is in part because NAAQS are to be based on public health and welfare criteria, so information on the social, economic, or energy effects of NAAQS are not specifically relevant to setting NAAQS. In a June 2014 letter to the EPA Administrator, CASAC indicated that, at the agency's request, it would review the impacts (e.g., the economic or energy impacts) of strategies for attaining or maintaining the NAAQS but stressed that such a review would be separate from reviews of the scientific bases of NAAQS. In response to such a request, the letter stated that an ad hoc CASAC panel would be formed to obtain the full expertise necessary to conduct such a review. According to a senior EPA official, the agency has no plans to ask CASAC to provide advice on adverse effects. Chairman Rounds, Ranking Member Markey, and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. Information from EPA-requested reviews could be useful for the states, which implement the strategies necessary to achieve the NAAQS. EPA is required to provide states, after consultation with appropriate advisory committees, with information on air pollution control techniques, including the cost to implement such techniques. 42 U.S.C. SS 7408(b)(1) (2015). According to a senior-level EPA official, EPA collects this information from other federal advisory committees, the National Academy of Sciences, and state air agencies, among others, and EPA fulfills this obligation by issuing Control Techniques Guidelines and other implementation guidance. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. GAO staff who made key contributions to this testimony are Janet Frisch (Assistant Director), Antoinette Capaccio, and Greg Carroll. 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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EPA formulates rules to protect the environment and public health. To enhance the quality and credibility of such rules, EPA obtains advice and recommendations from the SAB and CASAC--two federal advisory committees that review the scientific and technical basis for EPA decision making. ERDDAA requires the SAB to provide both the EPA Administrator and designated congressional committees with scientific advice as requested. Amendments to the Clean Air Act established CASAC to, among other things, provide advice to the Administrator on NAAQS. This testimony reflects GAO's preliminary observations from its ongoing review that examines (1) the extent to which EPA procedures for processing congressional requests to the SAB ensure compliance with ERDDAA and (2) the extent to which CASAC has provided advice related to NAAQS. GAO reviewed relevant federal regulations and agency documents, and interviewed EPA, SAB, and other relevant officials. GAO is not making any recommendations in this testimony, but as it finalizes its work in this area, GAO will consider making recommendations, as appropriate. The Environmental Protection Agency's (EPA) procedures for processing congressional requests for scientific advice from the Science Advisory Board (SAB) do not ensure compliance with the Environmental Research, Development, and Demonstration Authorization Act of 1978 (ERDDAA) because these procedures are incomplete. For example, they do not clearly outline how the EPA Administrator, the SAB staff office, and others are to handle a congressional committee's request. While the procedures reflect EPA's responsibility to exercise general management controls over the SAB and all its federal advisory committees under the Federal Advisory Committee Act (FACA), including keeping such committees free from outside influence, they do not fully account for the specific access that designated congressional committees have to the SAB under ERDDAA. For example, EPA's policy documents do not establish how EPA will determine which questions would be taken up by the SAB. EPA officials told GAO that, in responding to congressional requests, EPA follows the same process that it would apply to internal requests for questions to the SAB, including considering whether the questions are science or policy driven or are important to science and the agency. However, EPA has not documented these criteria. Under the federal standards of internal control, agencies are to clearly document internal controls. Moreover, under ERDDAA, the SAB is required to provide requested scientific advice to select committees. By clearly documenting how to process congressional requests received under ERDDAA, including which criteria to use, EPA can provide reasonable assurance that its staff process responses consistently and in accordance with law. Furthermore, EPA's charter states that, when scientific advice is requested by one of the committees specified in ERDDAA, the Administrator will, when appropriate forward the SAB's advice to the requesting congressional committee. EPA policy does not specify when it would be "appropriate" for the EPA Administrator to take this action. Such specificity would be consistent with clearly documenting internal controls. GAO will continue to monitor these issues and plans to issue a report with its final results in June 2015. The Clean Air Scientific Advisory Committee (CASAC) has provided certain types of advice related to the review of national ambient air quality standards (NAAQS), but has not provided advice on adverse social, economic, or energy effects related to NAAQs. Under the Clean Air Act, CASAC is to review air quality criteria and existing NAAQS every 5 years and advise EPA of any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of NAAQS. An EPA official stated that CASAC has carried out its role in reviewing the air quality criteria and the NAAQS, but CASAC has never provided advice on adverse social, economic, or energy effects related to NAAQS because EPA has never asked CASAC to do so. In a June 2014 letter to the EPA Administrator, CASAC indicated it would review such effects at the agency's request. According to a senior EPA official, the agency has no plans to ask CASAC to provide advice on such adverse effects.
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According to FPS officials, the agency has required its guards to receive training on how to respond to an active-shooter scenario since 2010. However, as our 2013 report shows, FPS faces challenges providing active-shooter response training to all of its guards. We were unable to determine the extent to which FPS's guards have received active-shooter response training, in part, because FPS lacks a comprehensive and reliable system for guard oversight (as discussed below). When we asked officials from 16 of the 31 contract guard companies we contacted if their guards had received training on how to respond during active-shooter incidents, responses varied.companies we interviewed about this topic: For example, of the 16 contract guard officials from eight guard companies stated that their guards had received active-shooter scenario training during FPS orientation; officials from five guard companies stated that FPS had not provided active-shooter scenario training to their guards during the FPS- provided orientation training; and officials from three guard companies stated that FPS had not provided active-shooter scenario training to their guards during the FPS- provided orientation training, but that the topic was covered at some other time. Without ensuring that all guards receive training on how to respond to active-shooter incidents, FPS has limited assurance that its guards are prepared for this threat. According to FPS officials, the agency provides guards with information on how they should respond during an active-shooter incident as part of the 8-hour FPS-provided orientation training. FPS officials were not able to specify how much time is devoted to this training, but said that it is a small portion of the 2-hour special situations training. According to FPS's training documents, this training includes instructions on how to notify law enforcement personnel, secure the guard's area of responsibility, and direct building occupants according to emergency plans as well as the appropriate use of force. As part of their 120 hours of FPS-required training, guards must receive 8 hours of screener training from FPS on how to use x-ray and magnetometer equipment. However, in our September 2013 report, we found that FPS has not provided required screener training to all guards. Screener training is important because many guards control access points at federal facilities and thus must be able to properly operate x-ray and magnetometer machines and understand their results. In 2009 and 2010, we reported that FPS had not provided screener training to 1,500 contract guards in one FPS region. In response to those reports, FPS stated that it planned to implement a program to train its inspectors to provide screener training to all its contract guards by September 2015. Information from guard companies we contacted indicate that guards who have never received this screener training continue to be deployed to federal facilities. An official at one contract guard company stated that 133 of its approximately 350 guards (about 38 percent) on three separate FPS contracts (awarded in 2009) have never received their initial x-ray and magnetometer training from FPS. The official stated that some of these guards are working at screening posts. Officials at another contract guard company in a different FPS region stated that, according to their records, 78 of 295 (about 26 percent) guards deployed under their contract have never received FPS's x-ray and magnetometer training. These officials stated that FPS's regional officials were informed of the problem, but allowed guards to continue to work under this contract, despite not having completed required training. Because FPS is responsible for this training, according to guard company officials, no action was taken against the company. Consequently, some guards deployed to federal facilities may be using x- ray and magnetometer equipment that they are not qualified to use-thus raising questions about the ability of some guards to execute a primary responsibility to properly screen access control points at federal facilities. In our September 2013 report, we found that FPS continues to lack effective management controls to ensure that guards have met training and certification requirements. For example, although FPS agreed with our 2012 recommendations to develop a comprehensive and reliable system to oversee contract guards, it still has not established such a system. Without a comprehensive guard management system, FPS has no independent means of ensuring that its contract guard companies have met contract requirements, such as providing qualified guards to federal facilities. Instead, FPS requires its guard companies to maintain files containing guard-training and certification information. The companies are then required to provide FPS with this information each month. In our September 2013 report, we found that 23 percent of the 276 guard files we reviewed (maintained by 11 of the 31 guard companies we interviewed) lacked required training and certification documentation. As shown in table 1, some guard files lacked documentation of basic training, semi-annual firearms qualifications, screener training, the 40-hour refresher training (required every 3 years), and CPR certification. FPS has also identified guard files that did not contain required documentation. FPS's primary tool for ensuring that guard companies comply with contractual requirements for guards' training, certifications, and qualifications is to review guard companies' guard files each month. From March 2012 through March 2013, FPS reviewed more than 23,000 guard files. It found that a majority of the guard files had the required documentation but more than 800 (about 3 percent) did not. FPS's file reviews for that period showed files missing, for example, documentation for screener training, initial weapons training, CPR certification, and firearms qualifications. As our September 2013 report explains, however, FPS's process for conducting monthly file reviews does not include requirements for reviewing and verifying the results, and we identified instances in which FPS's monthly review results did not accurately reflect the contents of guard files. For instance, FPS's review indicated that required documentation was present for some guard files, but for some of those files we were not able to find (for example) documentation of training and certification, such as initial weapons training, DHS orientation, and pre- employment drug screenings. As a result of the lack of management controls, FPS is not able to provide reasonable assurance that guards have met training and certification requirements. We found in 2012 that FPS did not assess risks at the 9,600 facilities under the control and custody of GSA in a manner consistent with federal standards, although federal agencies paid FPS millions of dollars to assess risk at their facilities. Our March 2014 report examining risk assessments at federal facilities found that this is still a challenge for FPS and several other federal agencies. Federal standards such as the National Infrastructure Protection Plan's (NIPP) risk management framework and ISC's RMP call for a risk assessment to include a threat, vulnerability, and consequence assessment. Risk assessments help decision-makers identify and evaluate security risk and implement protective measures to mitigate risk. Moreover, risk assessments play a critical role in helping agencies tailor protective measures to reflect their facilities' unique circumstances and enable them to allocate security resources effectively. Instead of conducting risk assessments, FPS uses an interim vulnerability assessment tool, referred to as the Modified Infrastructure Survey Tool (MIST), with which it assesses federal facilities until it develops a longer- term solution. According to FPS, MIST allows it to resume assessing federal facilities' vulnerabilities and recommend countermeasures-- something FPS has not done consistently for several years. MIST has some limitations. Most notably, it does not assess consequence (the level, duration, and nature of potential loss resulting from an undesirable event). Three of the four risk assessment experts we spoke with generally agreed that a tool that does not estimate consequences does not allow an agency to fully assess risks. FPS officials stated that it intends to eventually incorporate consequence into its risk assessment methodology and is exploring ways to do so. MIST was also not designed to compare risks across federal facilities. Consequently, FPS does not have the ability to comprehensively manage risk across its portfolio of 9,600 facilities and recommend countermeasures to federal tenant agencies. As of April 2014, according to an FPS official, FPS had used MIST to complete vulnerability assessments of approximately 1,200 federal facilities in fiscal year 2014 and have presented approximately 985 of them to the facility security committees. The remaining 215 assessments were under review by FPS. FPS has begun several initiatives that, once fully implemented, should enhance its ability to protect the more than 1 million federal employees and members of the public who visit federal facilities each year. Since fiscal year 2010, we have made 31 recommendations to help FPS address its challenges with risk management, oversight of its contract guard workforce, and its fee-based funding structure. DHS and FPS have generally agreed with these recommendations. As of May 2014, as shown in table 2, FPS had implemented 6 recommendations, and was in the process of addressing 10 others, although none of the 10 have been fully implemented. The remaining 15 have not been implemented. According to FPS officials, the agency has faced difficulty in implementing many of our recommendations because of changes in its leadership, organization, funding, and staffing levels. For further information on this testimony, please contact Mark Goldstein at (202) 512-2834 or by email at [email protected]. Individuals making key contributions to this testimony include Tammy Conquest, Assistant Director; Geoff Hamilton; Jennifer DuBord; and SaraAnn Moessbauer. Federal Facility Security: Additional Actions Needed to Help Agencies Comply with Risk Assessment Methodology Standards. GAO-14-86. Washington, D.C.: March 5, 2014. Homeland Security: Federal Protective Service Continues to Face Challenges with Contract Guards and Risk Assessments at Federal Facilities. GAO-14-235T. Washington, D.C.: December 17, 2013. Homeland Security: Challenges Associated with Federal Protective Service's Contract Guards and Risk Assessments at Federal Facilities. GAO-14-128T. Washington, D.C.: October 30, 2013. Federal Protective Service: Challenges with Oversight of Contract Guard Program Still Exist, and Additional Management Controls Are Needed. GAO-13-694. Washington, D.C.: September 17, 2013. Facility Security: Greater Outreach by DHS on Standards and Management Practices Could Benefit Federal Agencies. GAO-13-222. Washington, D.C.: January 24, 2013. Federal Protective Service: Actions Needed to Assess Risk and Better Manage Contract Guards at Federal Facilities. GAO-12-739. Washington, D.C.: August 10, 2012. Federal Protective Service: Actions Needed to Resolve Delays and Inadequate Oversight Issues with FPS's Risk Assessment and Management Program. GAO-11-705R. Washington, D.C.: July 15, 2011. Federal Protective Service: Progress Made but Improved Schedule and Cost Estimate Needed to Complete Transition. GAO-11-554. Washington, D.C.: July 15, 2011. Homeland Security: Protecting Federal Facilities Remains a Challenge for the Department of Homeland Security's Federal Protective Service. GAO-11-813T. Washington, D.C.: July 13, 2011. Federal Facility Security: Staffing Approaches Used by Selected Agencies. GAO-11-601. Washington, D.C.: June 30, 2011. Budget Issues: Better Fee Design Would Improve Federal Protective Service's and Federal Agencies' Planning and Budgeting for Security, GAO-11-492. Washington, D.C.: May 20, 2011. Homeland Security: Addressing Weaknesses with Facility Security Committees Would Enhance Protection of Federal Facilities, GAO-10-901. Washington, D.C.: August 5, 2010. Homeland Security: Preliminary Observations on the Federal Protective Service's Workforce Analysis and Planning Efforts. GAO-10-802R. Washington, D.C.: June 14, 2010. Homeland Security: Federal Protective Service's Use of Contract Guards Requires Reassessment and More Oversight. GAO-10-614T. Washington, D.C.: April 14, 2010. Homeland Security: Federal Protective Service's Contract Guard Program Requires More Oversight and Reassessment of Use of Contract Guards. GAO-10-341. Washington, D.C.: April 13, 2010. Homeland Security: Ongoing Challenges Impact the Federal Protective Service's Ability to Protect Federal Facilities. GAO-10-506T. Washington, D.C.: March 16, 2010. Homeland Security: Greater Attention to Key Practices Would Improve the Federal Protective Service's Approach to Facility Protection. GAO-10-142. Washington, D.C.: October 23, 2009. Homeland Security: Preliminary Results Show Federal Protective Service's Ability to Protect Federal Facilities Is Hampered by Weaknesses in Its Contract Security Guard Program, GAO-09-859T. Washington, D.C.: July 8, 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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Recent incidents at federal facilities demonstrate their continued vulnerability to attacks or other acts of violence. As part of the Department of Homeland Security (DHS), FPS is responsible for protecting federal employees and visitors in approximately 9,600 federal facilities under the control and custody the General Services Administration (GSA). To help accomplish its mission, FPS conducts facility security assessments and has approximately 13,500 contract security guards deployed to federal facilities. FPS charges fees for its security services to federal tenant agencies. This testimony discusses challenges FPS faces in (1) ensuring contract security guards deployed to federal facilities are properly trained and certified and (2) conducting risk assessments at federal facilities. It is based on GAO reports issued from 2009 through 2014 on FPS's contract guard and risk assessment programs. To perform this work, GAO reviewed FPS and guard company data and interviewed officials about oversight of guards. GAO compared FPS's and eight federal agencies' risk assessment methodologies to ISC standards that federal agencies must use. GAO selected these agencies based on their missions and types of facilities. GAO also interviewed agency officials and 4 risk management experts about risk assessments. The Federal Protective Service continues to face challenges ensuring that contract guards have been properly trained and certified before being deployed to federal facilities around the country. In September 2013, for example, GAO reported that providing training for active shooter scenarios and screening access to federal facilities poses a challenge for FPS. According to officials at five guard companies, their contract guards have not received training on how to respond during incidents involving an active shooter. Without ensuring that all guards receive training on how to respond to active-shooter incidents at federal facilities, FPS has limited assurance that its guards are prepared for this threat. Similarly, an official from one of FPS's contract guard companies stated that 133 (about 38 percent) of its approximately 350 guards have never received screener training. As a result, guards deployed to federal facilities may be using x-ray and magnetometer equipment that they are not qualified to use raising questions about their ability to fulfill a primary responsibility of screening access control points at federal facilities. GAO was unable to determine the extent to which FPS's guards have received active-shooter response and screener training, in part, because FPS lacks a comprehensive and reliable system for guard oversight. GAO also found that FPS continues to lack effective management controls to ensure its guards have met its training and certification requirements. For instance, although FPS agreed with GAO's 2012 recommendations that it develop a comprehensive and reliable system for managing information on guards' training, certifications, and qualifications, it still does not have such a system. Additionally, 23 percent of the 276 contract guard files GAO reviewed did not have required training and certification documentation. For example, some files were missing items such as documentation of screener training, CPR certifications, and firearms qualifications. Assessing risk at federal facilities remains a challenge for FPS. GAO found in 2012 that federal agencies pay FPS millions of dollars to assess risk at their facilities, but FPS is not assessing risks in a manner consistent with federal standards. In March 2014, GAO found that this is still a challenge for FPS and several other agencies. The Interagency Security Committee's (ISC) Risk Management Process for Federal Facilities standard requires federal agencies to develop risk assessment methodologies that, among other things, assess the threat, vulnerability, and consequence to undesirable events. Risk assessments help decision-makers identify and evaluate security risks and implement protective measures. Instead of conducting risk assessments, FPS uses an interim vulnerability assessment tool, referred to as the Modified Infrastructure Survey Tool (MIST) to assess federal facilities until it develops a longer-term solution. However, MIST does not assess consequence (the level, duration, and nature of potential loss resulting from an undesirable event). Three of the four risk assessment experts GAO spoke with generally agreed that a tool that does not estimate consequences does not allow an agency to fully assess risks. Thus, FPS has limited knowledge of the risks facing about 9,600 federal facilities around the country. FPS officials stated that consequence information in MIST was not part of the original design, but they are exploring ways to incorporate it. Since fiscal year 2010, GAO has made 31 recommendations to improve FPS's contract guard and risk assessment processes, of which 6 were implemented, 10 are in process, and 15 have not been implemented.
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E/M office visits are frequently performed services during which a physician or other provider assesses a patient's health and begins managing his or her care. These services are predominantly performed in two settings--physician offices and HOPDs. Medicare FFS paid for approximately 250 million E/M office visits in 2013. Under Medicare's payment policy, Medicare's total payment rate is higher when an E/M office visit is provided in an HOPD rather than in a physician office. When the service is provided in a physician office, Medicare makes a single payment to the physician at Medicare's physician fee schedule non-facility rate. When the service is provided in an HOPD, Medicare makes two payments--one payment at the physician fee schedule facility rate and another payment to the hospital, typically at the hospital outpatient prospective payment system (OPPS) rate. The total of these two payment rates is higher than Medicare's total payment rate when the service is provided in a physician office. For example, in 2013, the total Medicare payment rate for a mid-level E/M office visit for an established patient--billed under Healthcare Common Procedure Coding System (HCPCS) code 99213--was $51 higher when the service was performed in an HOPD instead of a physician office (see table 1). While CMS modified the manner in which Medicare pays for E/M office visits after 2013, large differences in total payment rates continue to exist for E/M office visits. Beginning in 2014, CMS made the OPPS payment rate the same for all the HCPCS codes for E/M office visits. However, the new uniform OPPS payment rate combined with the physician fee schedule facility payment rate for E/M office visits provided in HOPDs continues to exceed the payment rate for the same services performed in physician offices. For example, in 2015, Medicare's total payment rate for E/M office visits ranged from $58 to $86 higher when performed in an HOPD compared to a physician office, depending on the specific HCPCS code billed. Many other services, such as imaging and surgical services, are also reimbursed at a higher rate by Medicare when performed in HOPDs versus other settings. For example, Medicare's total payment rate for magnetic resonance imaging of the lumbar spine without dye (HCPCS code 72148) was about $29 higher when performed in an HOPD compared to a physician office in 2013. Furthermore, Medicare's total payment rate for cataract surgery (HCPCS code 66984) was about $760 higher when performed in an HOPD compared to an ambulatory surgical center in 2013. Some industry groups argue that higher payment rates for services performed in HOPDs are justified because hospitals treat sicker patients, incur higher costs due to the need to furnish emergency services, and provide services that are unavailable elsewhere in the community for vulnerable populations, such as those dually eligible for Medicare and Medicaid. However, in separate reports, MedPAC and the Department of Health and Human Services (HHS) Office of Inspector General have recommended or suggested that Congress eliminate or reduce differences in Medicare total payment rates across settings for various services, including E/M office visits, imaging services, and surgical services. To date, legislation fully addressing these recommendations has not been enacted. Recent research suggests that hospitals and physicians are increasingly vertically consolidated, which allows services to shift from physician offices to HOPDs. When hospitals and physicians vertically consolidate, the hospital-owned practice must meet certain criteria to gain what is known as provider-based status, which allows the hospital to bill the HOPD rate, thereby increasing Medicare's total payment rate for the same service. For example, the physician practice and hospital must be financially and clinically integrated. Further, although exceptions exist, physician practices are generally required to be within 35 miles of the hospital to gain provider-based status. If a practice meets these conditions, Medicare's total payment rate for the same service can be substantially higher despite the fact that the practice's location, the physicians who practice there, and the beneficiaries served could be the same as before consolidation occurred. Our analysis of AHA survey data shows that from 2007 through 2013, the number of vertically consolidated hospitals increased by 21 percent. Specifically, out of the approximately 4,700 surveyed hospitals included in our study, 1,408 or 30 percent of the hospitals reported having a vertical consolidation arrangement with physicians in 2007. This number increased to 1,707 or 36 percent in 2013--an average annual increase of 3.3 percent (see fig. 1). In addition, AHA survey data also show that the number of vertically consolidated physicians nearly doubled between 2007 and 2013, with faster growth toward the end of this time period. Specifically, the number of these physicians increased from over 95,000 in 2007 to almost 182,000 in 2013--an average annual increase of 11.3 percent (see fig. 1). From 2010 to 2013, the number of vertically consolidated physicians grew at an average annual rate of 13.9 percent, compared to a rate of 8.8 percent from 2007 to 2010. Although the increase in the number of vertically consolidated physicians occurred across a broad range of hospitals from 2007 through 2013, relatively few hospitals accounted for a large number of these physicians. AHA's survey data show that the number of vertically consolidated physicians increased across all regions of the country; in both urban and rural areas; and among hospitals of different sizes. However, relatively few hospitals accounted for a large number of vertically consolidated physicians. For example, the 372 out of 1,707 vertically consolidated hospitals that had more than 100 vertically consolidated physicians accounted for 84 percent of all vertically consolidated physicians but only 22 percent of vertically consolidated hospitals in 2013 (see fig. 2). Researchers and industry representatives whom we interviewed offered numerous potential explanations for the recent increases in vertical consolidation. Some stated that the trend could partially be explained by higher Medicare payment rates for services performed in HOPDs compared to other settings, the desire among some hospitals to gain market share, and changes in health care payment and delivery systems. For example, accountable care organizations, bundled payment models, and Medicare's Hospital Readmissions Reduction Program--which penalizes hospitals for high rates of readmissions--provide incentives to vertically consolidate in order to improve care for beneficiaries, maximize payments, and minimize penalties. Researchers and industry representatives whom we interviewed also mentioned that the increasing challenges associated with managing a private physician practice, including financial and regulatory burdens, could also explain some of the increase in vertical consolidation. Some of these researchers and representatives added that hospitals and physicians may be vertically consolidating to enhance care coordination and improve efficiency. The percentage of E/M office visits--as well as the number of E/M office visits per beneficiary--performed in HOPDs, rather than physician offices, was generally higher in counties with higher levels of vertical consolidation in 2007 through 2013. The beneficiaries from counties with relatively high levels of vertical consolidation were not sicker, on average, than beneficiaries in counties with lower levels of consolidation. Our analysis of AHA and Medicare claims data shows that the percentage of E/M office visits performed in HOPDs was generally higher in counties with higher levels of vertical consolidation in 2013. Specifically, after dividing counties into five equal groups based on their 2013 level of consolidation, we found that the median percentage of E/M office visits performed in HOPDs in the group of counties with the lowest levels of vertical consolidation was 4.1 percent. In contrast, this rate was 14.1 percent for the counties with the highest levels of consolidation (see fig. 3). For years 2007 to 2012, the percentage of E/M office visits performed in HOPDs was also generally higher in counties with higher levels of vertical consolidation, though the association was weaker compared to 2013. For example, the median percentage of E/M office visits performed in HOPDs in the group of counties with the lowest level of vertical consolidation was 3.9 percent in 2007, compared to a median of 7.3 percent in the counties with the highest levels of consolidation. As part of our analysis, we also calculated the number of E/M office visits in each county on a per beneficiary basis. We found that the number of E/M office visits performed in HOPDs per 100 Medicare beneficiaries was also generally higher in counties with higher levels of vertical consolidation each year from 2007 through 2013. For example, in 2013 the number of E/M office visits performed in HOPDs per 100 beneficiaries was 26 for the counties with low levels of vertical consolidation, whereas the number was substantially higher--82 services per 100 beneficiaries-- in counties with the highest level of vertical consolidation. We found similar correlations in 2007 through 2012. (See app. III for additional analyses of the number of E/M office visits performed in HOPDs in counties with different levels of vertical consolidation from 2007 through 2013.) The association we found between higher levels of vertical consolidation and higher utilization of E/M office visits in HOPDs remained even after controlling for differences in county-level characteristics and other market factors that could affect the setting in which E/M office visits are performed. Specifically, we developed a regression model that controlled for county characteristics that do not change over relatively short periods of time, such as whether a county is urban or rural, and county characteristics that could change over time, such as the level of competition among hospitals and physicians within counties. Our regression model's results were similar to our initial results: the level of vertical consolidation in a county was significantly and positively associated with a higher number and percentage of E/M office visits performed in HOPDs--that is, as vertical consolidation increased in a given county, the number and percentage of E/M office visits performed in HOPDs in that county also tended to be higher. (See app. I and app. II for more information on our regression model and results.) Beneficiaries from counties with higher levels of vertical consolidation were not sicker, on average, than beneficiaries from counties with lower levels of consolidation. Specifically, beneficiaries from counties with higher levels of vertical consolidation tended to have either similar or slightly lower median risk scores, death rates, rates of end-stage renal disease, and rates of disability compared to those from counties with lower levels of consolidation (see table 2). Further, counties with higher levels of consolidation had a lower percentage of beneficiaries dually eligible for Medicaid, who tend to be sicker and have higher Medicare spending than Medicare beneficiaries who are not dually eligible for Medicaid. This suggests that areas with higher E/M office visit utilization in HOPDs are not composed of sicker than average beneficiaries. As we previously stated, the extent of vertical consolidation grew from 2007 through 2013. Coinciding with that growth, we found that E/M office visits were performed more frequently in the higher paid HOPD setting in counties with higher levels of vertical consolidation. Such excess payments are inconsistent with Medicare's role as an efficient purchaser of health care services. According to CMS, the agency does not have the statutory authority to equalize total payment rates between HOPDs and physician offices. Further, CMS lacks the authority to return the associated savings to the Medicare program. Therefore, absent legislative intervention, the Medicare program will likely pay more than necessary for E/M office visits. From 2007 through 2013, the number of vertically consolidated physicians nearly doubled, with faster growth in more recent years. Regardless of what has driven hospitals and physicians to vertically consolidate, paying substantially more for the same service when performed in an HOPD rather than a physician office provides an incentive to shift services that were once performed in physician offices to HOPDs after consolidation has occurred. Our findings suggest that providers responded to this financial incentive: E/M office visits were more frequently performed in HOPDs in counties with higher levels of vertical consolidation. We found this association in both our analysis of E/M office visit utilization in counties with varying levels of vertical consolidation and in our regression analyses. Further, our analysis of 2013 health status data suggests that beneficiaries from counties with higher levels of vertical consolidation, where we found more E/M office visits performed in HOPDs, were not sicker, on average, than beneficiaries who lived in counties with lower levels of consolidation, where we found fewer E/M office visits performed in HOPDs. While vertical consolidation has potential benefits, we found that the rise in vertical consolidation exacerbates a financial vulnerability in Medicare's payment policy: Medicare pays different rates for the same service, depending on where the service is performed. Although Medicare aims to be an efficient purchaser of health care services, CMS has stated that the agency currently lacks the authority to equalize payment rates between settings. Further, CMS lacks the authority to return the associated savings to the Medicare program. Until the disparity in payment rates for E/M office visits is addressed, Medicare could be expending more resources than is necessary. In order to prevent the shift of services from physician offices to HOPDs from increasing costs for the Medicare program and beneficiaries, Congress should consider directing the Secretary of HHS to equalize payment rates between settings for E/M office visits--and other services that the Secretary deems appropriate--and to return the associated savings to the Medicare program. HHS provided technical comments on a draft of this report, which we incorporated where appropriate. In addition, we provided two organizations--the American Medical Association and AHA--the opportunity to review our draft because these organizations represent the types of providers and care settings that were the main focus of our report. The American Medical Association had no comments. AHA did not comment on the main finding of our report--that higher levels of vertical consolidation were associated with more E/M office visits being performed in HOPDs instead of physician offices. Further, AHA noted several reasons why, in their opinion, a service performed in an HOPD should receive a higher Medicare reimbursement compared to when the same service is performed in other settings. AHA did comment on two specific aspects of our report--our characterization of beneficiary health status and reasons why vertical consolidation occurs. A summary of these comments and our response are below. AHA gave several reasons why a service performed in an HOPD should receive a higher Medicare reimbursement compared to when the same service is performed in other settings, such as physician offices. For example, AHA commented that HOPD payment rates are based on audited cost reports and should not be based on physician payment rates. We acknowledge that it might be inappropriate to equalize the total Medicare payment rate for all services. However, Medicare aims to be a prudent purchaser of health care services, and that goal is not achieved if Medicare's total payment rate for certain services--such as E/M office visits--is substantially higher simply because hospitals have acquired physician practices. Other entities such as MedPAC have also suggested that Medicare base its payments for services on the lowest cost, clinically appropriate setting. AHA stated that it disagreed with what it interpreted our report to show-- that overall, patients treated at HOPDs are not sicker than those treated at physician offices. Our report does not make such an assertion, but does include our finding that beneficiaries residing in counties with higher levels of vertical consolidation were not sicker, on average, than beneficiaries residing in counties with lower levels of consolidation. Given that counties with higher levels of vertical consolidation had more E/M office visits performed in HOPDs, our evidence suggests that areas with higher E/M office visit utilization in HOPDs were not composed of sicker than average beneficiaries. AHA commented that vertical integration--what our report terms vertical consolidation--is an essential ingredient for successful implementation of the Patient Protection and Affordable Care Act and that we failed to adequately account for reasons other than payment differentials that drive vertical consolidation. Our report notes multiple reasons, identified by the researchers and industry experts we interviewed, as to why hospitals and physicians might vertically consolidate. These potential reasons include certain payment and delivery changes associated with the Patient Protection and Affordable Care Act. While we identified multiple factors that may be contributing to increases in vertical consolidation, a full analysis of the causes or the appropriateness of vertical consolidation between hospitals and physicians was outside the scope of our work. We are sending copies of this report to the appropriate congressional committees, the Secretary of HHS, and the CMS administrator. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This appendix describes the scope and methodology used to examine our two objectives: (1) trends in vertical consolidation between physicians and hospitals from 2007 through 2013 and (2) the extent to which higher levels of vertical consolidation were associated with more evaluation & management (E/M) office visits being performed in hospital outpatient departments (HOPD) instead of physician offices from 2007 through 2013. To examine trends in vertical consolidation between hospitals and physicians, we used survey data from the American Hospital Association (AHA) Annual Survey Database,TM in which hospitals report what types of relationships they have with physicians and the number of physicians in those relationships, and Medicare Provider Analysis and Review (MedPAR) files, which contain information on Medicare inpatient discharges for short-term acute care hospitals, from 2007 through 2013. First, we used MedPAR data to identify hospitals that served at least one Medicare beneficiary from 2007 through 2013. We then took that list of hospitals--which are identified using their Centers for Medicare & Medicaid Services Certification Number--and, using the AHA Annual Survey Database,TM determined whether each hospital was vertically consolidated with physicians in each year from 2007 through 2013. Similar to previous research on vertical consolidation, we considered a hospital to be vertically consolidated if it had one of three types of relationships with physicians--an integrated salary, foundation, or equity model. (See table 3 for a description of these three arrangements.) To identify the number of vertically consolidated hospitals, we counted the number of hospitals with any one of these three types of relationships. To identify the number of vertically consolidated physicians, we implemented edits to modify reported counts of vertically consolidated physicians that we believed were likely duplicative and then summed the number of physicians. We identified duplicative survey responses as those where hospitals reported more than 10 vertically consolidated physicians and also reported the same number of vertically consolidated physicians as another hospital in the same hospital system. In such instances, we assumed that the total number of vertically consolidated physicians associated with a hospital system was reported multiple times by more than one hospital. Additionally, based on a review of pertinent literature, we identified and interviewed industry representatives and academic researchers. To better understand hospitals' perspectives on vertical consolidation, we interviewed officials from AHA. Similarly for physicians, we interviewed the American Medical Association and Medical Group Management Association. We also interviewed numerous academic researchers to better understand issues such as the various types of hospital-physician relationships, possible data sources to track vertical consolidation, and health care system policies that could be driving consolidation. To attribute E/M office visits to a given county, we used the beneficiary county of residence that was listed on the Carrier and Outpatient file claims. To determine the total number of E/M office visits that were performed in a given county, we combined the number of E/M office visits from the Carrier file and the number of E/M office visits associated with professional claims in the Medicare Outpatient file. To determine the number of E/M office visits performed in HOPDs in a given county, we summed the number of services billed in the Medicare Outpatient file, including services provided by critical access hospitals. The number of E/M office visits performed in physician offices was calculated by subtracting the number of HOPD services from the total number of services. To calculate the number of services per Medicare beneficiary in a given county, we used the Medicare Denominator file to identify fee-for- service (FFS) beneficiaries. To calculate the level of vertical consolidation in each county, we used the AHA Annual Survey DatabaseTM and MedPAR claims. First, we calculated the share of MedPAR services that were delivered by vertically consolidated hospitals in each zip code in which a beneficiary received at least one service. We then created a weighted average hospital level vertical consolidation measure using all the zip codes a hospital served in a year. Finally, we created a weighted average county level vertical consolidation measure based on the hospitals that served each county. To calculate control variables for our regression analyses, we used a similar process. Specifically, we calculated variables for profit status, public vs. private ownership, hospital size, teaching status, whether a hospital belonged to a system, and Herfindahl-Hirschman Indexes (HHI) for hospital and physician market concentration. To determine how the level of vertical consolidation in a county was associated with the setting in which E/M office visits were provided before controlling for other factors, we conducted a bivariate analysis for every year from 2007 through 2013. Specifically, we ranked counties into quintiles based on the level of consolidation in each county in 2013. In the bottom quintile were the 20 percent of counties with the lowest levels of vertical consolidation; such counties were considered to have low levels of vertical consolidation. In order, the next four quintiles were considered to have medium-low, medium, medium-high, and high levels of vertical consolidation. For 2007 through 2012, we used the same thresholds to sort counties into the five levels of consolidation. Within each of the five county groups for each year, we then calculated the 1) median and mean percentage of E/M office visits that were performed in HOPDs and physician offices and 2) the median and mean number of E/M office visits per beneficiary performed in HOPDs, physician offices, and in total. To determine whether counties with higher levels of vertical consolidation had sicker or healthier beneficiaries, we calculated descriptive statistics for beneficiaries who lived in a given county in 2013 using the Medicare denominator file. Specifically, for each county, we calculated the mean and median risk score, age, and the percentage of beneficiaries that died, had end-stage renal disease, were disabled, and were dually eligible for Medicare and Medicaid. Similar to the bivariate analysis described above, we then we ranked counties into quintiles based on the level of vertical consolidation in 2013. Within the quintiles, we calculated the median and mean values for each of the variables. We developed an econometric model to analyze the effect of vertical consolidation on the setting where beneficiaries received E/M office visits from 2007 through 2013. Specifically, we analyzed how the level of vertical consolidation affected 1) the percentage of E/M office visits performed in HOPDs, 2) the number of E/M office visits performed in HOPDs per beneficiary, and 3) the total number of E/M office visits per beneficiary. Our analysis used data for 3,121 U.S. counties from 2007 through 2013. Yit=log (rit/(1-rit)) Where rit represents the proportion of E/M office visits that were provided in an HOPD, and the i and t subscripts represent the county and year, respectively. This formulation has the advantage of allowing the dependent variable to range over all values for any value of r between zero and one. For our models analyzing the number of E/M office visits performed in HOPDs per beneficiary and the total number of E/M office visits per beneficiary, our dependent variables were the logarithm of the number of services per beneficiary. Our key explanatory variable was the level of vertical consolidation. Our hypothesis was that higher levels of vertical consolidation would be associated with a higher percentage and number of E/M office visits being performed in HOPDs. Our model controlled for horizontal physician and horizontal hospital concentration, using HHIs. We hypothesized that greater concentration of market power among physicians would lead to E/M office visits being provided in physician offices rather than HOPDs, all else being equal. In contrast, we hypothesized that greater concentration of market power among hospitals would lead to E/M office visits being provided in HOPDs rather than physician offices, all else being equal. Our model included hospital characteristic variables to account for possible differences in hospital size and institutional arrangements. Specifically, our model included variables for the following hospital characteristics: profit status, public vs. private ownership, hospital size, teaching status, and whether a hospital belonged to a system. Our model included time fixed effects (a dummy variable for each year in the analysis). In addition, we included county fixed effects (a dummy variable for each of the 3,121 counties in the analysis). These county fixed effects assist in controlling for unobserved heterogeneity. The regression analysis used a panel data model for 3,121 U.S. counties for the years 2007 through 2013 as follows: Yit is the dependent variable for county i in year t. For the model analyzing the percentage of E/M office visits performed in HOPDs, the dependent variable is the logit transformation of the percentage of is the percentage of E/M office visits in an HOPD. For our models analyzing the number of E/M office visits performed in HOPDs per beneficiary and the total number of E/M office visits per beneficiary, services in an HOPD setting--that is, Yit=log (rit/(1-rit)), where ri t, Yit=log (sit), where sit, is the number of services per Medicare beneficiary. c is a fixed effect or dummy variable for county i. fis a fixed effect or dummy variable for year t. are the hospital-characteristic variables and market structure variables, such as horizontal physician HHI, horizontal hospital HHI, and vertical consolidation, associated with county i at time t, and a are the parameters associated with each of these variables. eit are the error terms. We used xtivreg2 in STATA to estimate our models. Our parameter estimates are consistent given the assumptions of our model. Our standard errors are robust to heteroskedasticity and clustering at the county level. The hospital characteristics, the horizontal hospital HHI, and the vertical consolidation measures were calculated using MedPAR data, while the dependent variable was calculated using Outpatient and Carrier file data. This separation reduced the likelihood that these market characteristics were correlated with unobserved determinants of the setting where beneficiaries received E/M office visits. However, the physician HHI measure was calculated using Carrier file data, so we tested this variable for endogeneity. Our study has some limitations. While the response rate for the AHA Annual Survey DatabaseTM was high for each year--about 76 percent-- the data on vertical consolidation was self-reported by hospitals. In the process of examining the AHA Annual Survey Database,TM we identified responses that we believe were likely duplicative. However, our ability to identify and fix duplicative responses is limited because we were not able to directly contact survey respondents based on our data licensing agreement. Second, because the AHA Annual Survey DatabaseTM does not contain identifying information for vertically consolidated physicians, we used hospital inpatient markets to proxy vertically consolidated physician markets. Although this is a limitation, we conducted a sensitivity analysis with HOPD markets, and our results held. Further, we believe there are several reasons why vertically consolidated physician markets should substantially overlap with hospital inpatient markets. For example, physician practices generally must be located within 35 miles of its parent hospital to bill as an HOPD, and many payment reforms--such as accountable care organizations, bundled payments, and Medicare's Hospital Readmissions Reduction Program--reward hospitals for managing their patients across inpatient and outpatient settings. Third, vertically consolidated hospitals varied widely in terms of the number of vertically consolidated physicians associated with them. While our bivariate and regression analyses only consider a hospital vertically consolidated if it has more than 10 vertically consolidated physicians, we were unable to make our measure of vertical consolidation reflect the intensity of vertical consolidation relationships--that is, the number of vertically consolidated physicians per hospital--because of data limitations. Finally, time lags may occur between vertical consolidation and our measures of how often E/M office visits are performed in an HOPD. A hospital can purchase physician practices and not convert them to HOPDs immediately or ever. Consequently, these lags may be long and variable, and we have no systematic data to measure the timing of these possible effects. We took several steps to ensure that the data used to produce this report were sufficiently reliable. Specifically, we assessed the reliability of the Centers for Medicare & Medicaid Services data and the AHA Annual Survey DatabaseTM we used by interviewing officials responsible for overseeing these data sources. We also reviewed relevant documentation and examined the data for obvious errors, such as missing values and values outside of expected ranges. We determined that the data were sufficiently reliable for the purposes of this report. We conducted this performance audit from February 2014 through December 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix provides more detailed results for the models we used to analyze the effect of vertical consolidation on the setting where beneficiaries received E/M office visits from 2007 through 2013. Counties with higher levels of vertical consolidation were significantly more likely to have a higher proportion of their E/M office visits performed in HOPDs. These counties also had a significantly higher rate of utilization of E/M office visits in HOPDs. However, those same counties also had a significantly lower rate of overall utilization of E/M office visits, although the size of this negative association was smaller. Specifically, all else being equal, our models predict that a county with no vertical consolidation going to completely consolidated would experience: an increase in the percent of E/M office visits performed in HOPDs of 2.7 percentage points on average; an increase in the number of E/M office visits per beneficiary being performed in HOPDs of approximately 30 percent on average; and a decrease in the total number of E/M office visits per beneficiary of less than 2 percent on average. We used a set of medical service supply variables from the Area Health Resource Files as instruments: the number of federal and non- federal active MDs as a percentage of the total population, total hospital beds per capita, and whether the area was designated as a health care professional shortage area for primary care physicians. In our models of the percentage of E/M office visits performed in HOPDs and total number of E/M office visits per beneficiary, the C-test accepted the null hypothesis of exogeneity of the physician horizontal Herfindahl-Hirschman Index (HHI) variable, and the Hansen J-statistic accepted the null hypothesis that our instruments were valid. The Sanderson-Windmeijer test also supported our use of these instruments, by rejecting the null hypothesis of weak instruments. In our model of the number of E/M office visits performed in HOPDs, the Hansen J-statistic accepted the null hypothesis that our instruments were valid, and the Sanderson-Windmeijer test rejected the null hypothesis of weak instruments. However, the C- test rejected the null hypothesis of exogeneity of the physician horizontal HHI variable, so we report our instrumental variable estimates for our log of utilization of E/M office visits performed in HOPDs. A full set of results is provided in table 4. The percentage of E/M office visits--as well as the number of E/M office visits per 100 beneficiaries--performed in HOPDs was generally higher in counties with higher levels of vertical consolidation from 2007 through 2013 (see tables 5 - 11). To examine whether vertical consolidation affected total utilization, we examined the association between vertical consolidation in a county and the total number of evaluation & management (E/M) office visits per beneficiary and found mixed results. Specifically, while counties with the lowest level of vertical consolidation had higher total utilization of E/M office visits compared to counties with the highest levels of vertical consolidation, total utilization of E/M office visits neither increases nor decreases consistently as the level of vertical consolidation increases in a county in our bivariate analysis. For example, in 2013, the median number of total E/M office visits per 100 beneficiaries decreased from 658 among the counties with the lowest levels of vertical consolidation to 580 among counties with a medium level of vertical consolidation; however, among counties with high levels of vertical consolidation, the number increased to 601. Furthermore, unlike our results examining the setting in which E/M office visits were performed, our results changed when we tested an alternative measure of vertical consolidation. For example, using the alternative specification, the median number of total E/M office visits per 100 beneficiaries in counties with the highest level of vertical consolidation was at least 10 services per 100 beneficiaries higher than in counties with the lowest level of consolidation in 4 out of 7 years from 2007 through 2013. In addition to the contact above, Jessica Farb, Assistant Director; Todd Anderson; Krister Friday; Michael Kendix; Richard Lipinski; Brian O'Donnell; Dan Ries; Said Sariolghalam; Eric Wedum; and Jennifer Whitworth made key contributions to this report.
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Medicare expenditures for HOPD services have grown rapidly in recent years. Some policymakers have raised questions about whether this growth may be attributed to services that were typically performed in physician offices shifting to HOPDs. GAO was asked to examine trends in vertical consolidation and its effects on Medicare. This report examines, for years 2007 through 2013, (1) trends in vertical consolidation between hospitals and physicians and (2) the extent to which higher levels of vertical consolidation were associated with more E/M office visits being performed in HOPDs. GAO analyzed, using various methods including regression analyses, the most recent available claims data from CMS and survey data from the American Hospital Association, in which hospitals report the types of financial arrangements they have with physicians. Vertical consolidation is a financial arrangement that occurs when a hospital acquires a physician practice and/or hires physicians to work as salaried employees. The number of vertically consolidated hospitals and physicians increased from 2007 through 2013. Specifically, the number of vertically consolidated hospitals increased from about 1,400 to 1,700, while the number of vertically consolidated physicians nearly doubled from about 96,000 to 182,000. This growth occurred across all regions and hospital sizes, but was more rapid in recent years. After hospitals and physicians vertically consolidate, services performed in physician offices, such as evaluation & management (E/M) office visits, can be classified as being performed in hospital outpatient departments (HOPD). Medicare often pays providers at a higher rate when the same service is performed in an HOPD rather than in a physician office. For example, in 2013, the total Medicare payment rate for a mid-level E/M office visit for an established patient was $51 higher when the service was performed in an HOPD instead of a physician office. The percentage of E/M office visits--as well as the number of E/M office visits per beneficiary--performed in HOPDs, rather than in physician offices, was generally higher in counties with higher levels of vertical consolidation in 2007 through 2013. For example, the median percentage of E/M office visits performed in HOPDs in counties with the lowest levels of vertical consolidation was 4.1 percent in 2013. In contrast, this rate was 14.1 percent for counties with the highest levels of consolidation. GAO's findings suggest that Medicare will likely pay more than necessary for E/M office visits. Such excess payments are inconsistent with Medicare's role as an efficient purchaser of health care services. However, the Centers for Medicare & Medicaid Services (CMS)--the agency that is responsible for the Medicare program--lacks the statutory authority to equalize total payment rates between HOPDs and physician offices and achieve Medicare savings. In order to prevent the shift of services from lower paid settings to the higher paid HOPD setting from increasing costs for the Medicare program and beneficiaries, Congress should consider directing the Secretary of the Department of Health and Human Services (HHS) to equalize payment rates between settings for E/M office visits--and other services that the Secretary deems appropriate--and to return the associated savings to the Medicare program. HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate.
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Our review of medical records for a sample of newly enrolled veterans at six VA medical centers found several problems in medical centers' processing of veterans' requests that VA contact them to schedule appointments, and thus not all newly enrolled veterans were able to access primary care. For the 60 newly enrolled veterans in our review who requested care but had not been seen by primary care providers, we found that 29 did not receive appointments due to the following problems in the appointment scheduling process: Veterans did not appear on VHA's New Enrollee Appointment Request (NEAR) list. We found that although 17 newly enrolled veterans in our review requested that VA contact them to schedule appointments, medical center officials said that schedulers did not contact the veterans because they had not appeared on the NEAR list. According to VHA policy, as outlined in its July 2014 interim scheduling guidance, VA medical center staff should contact newly enrolled veterans to schedule appointments within 7 days from the date they were placed on the NEAR list. Medical center officials were not aware that this problem was occurring, and could not definitively tell us why these veterans never appeared on the NEAR list. VA medical center staff did not follow VHA scheduling policy. We found that VA medical centers did not follow VHA policies for contacting newly enrolled veterans for 12 veterans in our review. VHA policy states that medical centers should document three attempts to contact each newly enrolled veteran by phone, and if unsuccessful, send the veteran a letter. However, for 5 of 12 newly enrolled veterans, our review of their medical records revealed no attempts to contact them, and medical center officials could not tell us whether the veterans had ever been contacted to schedule appointments. Medical center staff attempted to contact the other 7 veterans at least once each, but failed to reach out to them with the frequency required by VHA policy. For the remaining 31 of 60 newly enrolled veterans included in our review who did not have a primary care appointment: 24 were unable to be contacted to schedule appointments or upon contact, declined care, according to VA medical center officials. These officials said that in some cases they were unable to contact veterans due to incorrect or incomplete contact information in veterans' enrollment applications; in other cases, they said veterans were seeking a VA identification card, for example, and did not want to be seen by a provider at the time they were contacted. 7 had appointments scheduled but had not been seen by primary care providers at the time of our review. Four of those veterans had initial appointments that needed to be rescheduled, which had not yet been done at the time of our review. Appointments for the remaining 3 veterans were scheduled after VHA provided us with a list of veterans who had requested care. For the 120 newly enrolled veterans across the six VA medical centers in our review who requested care and were seen by primary care providers, we found the average number of days between newly enrolled veterans' initial requests that VA contact them to schedule appointments and the dates the veterans were seen by primary care providers ranged from 22 days to 71 days. Slightly more than half of the 120 veterans in our sample were seen by providers in less than 30 days; however, veterans' experiences varied widely, even within the same medical center, and 12 of the 120 veterans in our review waited more than 90 days to be seen by a provider. We found that two factors generally impacted newly enrolled veterans' experiences regarding the number of days it took to be seen by primary care providers: 1. Appointments were not always available when veterans wanted to be seen, which contributed to delays in receiving care. For example, one veteran was contacted within 7 days of being placed on the NEAR list, but no appointment was available until 73 days after the veteran's preferred appointment date, and a total of 94 days elapsed before the veteran was seen by a provider. In another example, a veteran wanted to be seen as soon as possible, but no appointment was available for 63 days. Officials at each of the six medical centers in our review told us that they have difficulty keeping up with the demand for primary care appointments for new patients because of shortages in the number of providers, or lack of space due to rapid growth in the demand for these services. 2. Weaknesses in VA medical center scheduling practices may have impacted the amount of time it took for veterans to see primary care providers and contributed to unnecessary delays. Staff at the medical centers in our review did not always contact veterans to schedule appointments in accordance with VHA policy, which states that attempts to contact newly enrolled veterans to schedule appointments must be made within 7 days of their addition to the NEAR list. Among the 120 veterans included in our review that were seen by primary care providers, 37 (31 percent) were not contacted within 7 days to schedule an appointment; compliance varied across medical centers. As a result of these findings, we recommended that VHA review its processes for identifying and documenting newly enrolled veterans requesting appointments and revise as appropriate, to ensure that all veterans requesting appointments are contacted in a timely manner to schedule them. VHA concurred with this recommendation, and indicated that by December 31, 2016, it plans to review and revise the process from enrollment to scheduling to ensure that newly enrolled veterans requesting appointments are contacted in a timely manner. VHA also indicated that it will implement internal controls to ensure its medical centers are appropriately implementing the process. VHA's oversight of veterans' access to primary care is hindered, in part, by data weaknesses and the lack of a comprehensive scheduling policy, both of which are inconsistent with federal internal control standards. These standards call for agencies to have reliable data and effective policies to achieve their objectives, and for information to be recorded and communicated to the entity's management and others who need it to carry out their responsibilities. A key component of VHA's oversight of veterans' access to primary care, particularly for newly enrolled veterans, relies on monitoring appointment wait times. However, VHA monitors only a portion of the overall time it takes newly enrolled veterans to access primary care. For newly enrolled veterans, VHA calculates primary care appointment wait times starting from veterans' preferred dates, rather than the dates veterans initially requested that VA contact them to schedule appointments. (A preferred date is the date that is established when a scheduler contacts the veteran to determine when he or she wants to be seen.) Therefore, these data do not capture the time veterans wait prior to being contacted by schedulers, making it difficult for officials to identify and remedy scheduling problems that may arise prior to making contact with veterans. (See fig. 1.) Our review of medical records for 120 newly enrolled veterans found that, on average, the total amount of time it took to be seen by primary care providers was much longer when measured from the dates veterans initially requested VA contact them to schedule appointments than it was when using appointment wait times calculated using veterans' preferred dates as the starting point. For example, we found one veteran applied for VHA health care benefits in December 2014, which included a request to be contacted for an initial appointment. The VA medical center contacted the veteran to schedule a primary care appointment 43 days later. When making the appointment, the medical center recorded the veteran's preferred date as March 1, 2015, and the veteran saw a provider on March 3, 2015. Although the medical center's data showed the veteran waited 2 days to see a provider, the total amount of time that elapsed from the veteran's request until the veteran was seen was actually 76 days. Further, ongoing scheduling errors, such as incorrectly revising preferred dates when rescheduling appointments, understated the amount of time veterans waited to see providers. For example, during our review of appointment scheduling for 120 newly enrolled veterans, we found that schedulers in three of the six VA medical centers included in our review had made errors in recording veterans' preferred dates when making appointments. For example, in some cases primary care clinics cancelled appointments, and when those appointments were re-scheduled, schedulers did not always maintain the original preferred dates in the system, but updated them to reflect new preferred dates recorded when the appointments were rescheduled. We found 15 appointments for which schedulers had incorrectly revised the preferred dates. In these cases, we recalculated the appointment wait time based on what should have been the correct preferred dates, according to VHA policy, and found the wait- time data contained in the scheduling system were understated. Officials attributed these errors to confusion by schedulers resulting from the lack of an updated standardized scheduling directive, which VHA rescinded and replaced with an interim directive in July 2014. As in our previous work, we continue to find scheduling errors that affect the reliability of wait-time data used for oversight, which make it difficult to effectively oversee newly enrolled veterans' access to primary care. As a result of these findings, we recommended that VHA monitor the full amount of time newly enrolled veterans wait to receive primary care, and issue an updated scheduling directive. VHA concurred with both of these recommendations, and indicated that by December 31, 2016, it plans to begin monitoring the full amount of time newly enrolled veterans wait to be seen by primary care providers. It also indicated that it plans to submit a revised scheduling directive for VHA-wide internal review by May 1, 2016. This most recent work on veterans' access to primary care expands further the litany of VA health care deficiencies and weaknesses that we have identified over the years, particularly since 2010. As of April 1, 2016, there were about 90 GAO recommendations regarding veterans' health care awaiting action by VHA. These include more than a dozen recommendations to address weaknesses in the provision and oversight of veterans' access to timely primary and specialty care, including mental health care. Until VHA can make meaningful progress in addressing these and other recommendations, which underscore a system in need of major transformation, the quality and safety of health care for our nation's veterans is at risk. Chairman Miller, Ranking Member Brown, and Members of the Committee, 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 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 statement. Other individuals who made key contributions are Janina Austin, Assistant Director; Jennie F. Apter; Emily Binek; David Lichtenfeld; Vikki L. Porter; Brienne Tierney; and Emily Wilson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony summarizes the information contained in GAO's March 2016 report, entitled VA Health Care: Actions Needed to Improve Newly Enrolled Veterans' Access to Primary Care , GAO-16-328 . GAO found that not all newly enrolled veterans were able to access primary care from the Department of Veterans Affairs' (VA) Veterans Health Administration (VHA), and others experienced wide variation in the amount of time they waited for care. Sixty of the 180 newly enrolled veterans in GAO's review had not been seen by providers at the time of the review; nearly half were unable to access primary care because VA medical center staff did not schedule appointments for these veterans in accordance with VHA policy. The 120 newly enrolled veterans in GAO's review who were seen by providers waited from 22 days to 71 days from their requests that VA contact them to schedule appointments to when they were seen, according to GAO's analysis. These time frames were impacted by limited appointment availability and weaknesses in medical center scheduling practices, which contributed to unnecessary delays. VHA's oversight of veterans' access to primary care is hindered, in part, by data weaknesses and the lack of a comprehensive scheduling policy. This is inconsistent with federal internal control standards, which call for agencies to have reliable data and effective policies to achieve their objectives. For newly enrolled veterans, VHA calculates primary care appointment wait times starting from the veterans' preferred dates (the dates veterans want to be seen), rather than the dates veterans initially requested VA contact them to schedule appointments. Therefore, these data do not capture the time these veterans wait prior to being contacted by schedulers, making it difficult for officials to identify and remedy scheduling problems that arise prior to making contact with veterans. Further, ongoing scheduling errors, such as incorrectly revising preferred dates when rescheduling appointments, understated the amount of time veterans waited to see providers. Officials attributed these errors to confusion by schedulers, resulting from the lack of an updated standardized scheduling policy. These errors continue to affect the reliability of wait-time data used for oversight, which makes it more difficult to effectively oversee newly enrolled veterans' access to primary care.
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The tens of thousands of individuals who responded to the September 11, 2001, attack on the WTC experienced the emotional trauma of the disaster and were exposed to a noxious mixture of dust, debris, smoke, and potentially toxic contaminants, such as pulverized concrete, fibrous glass, particulate matter, and asbestos. A wide variety of health effects have been experienced by responders to the WTC attack, including injuries and respiratory conditions such as sinusitis, asthma, and a new syndrome called WTC cough, which consists of persistent coughing accompanied by severe respiratory symptoms. Commonly reported mental health effects among responders and other affected individuals included symptoms associated with post-traumatic stress disorder, depression, and anxiety. Behavioral health effects such as alcohol and tobacco use have also been reported. There are six key programs that currently receive federal funding to provide voluntary health screening, monitoring, or treatment at no cost to responders. The six WTC health programs, shown in table 1, are (1) the FDNY WTC Medical Monitoring and Treatment Program; (2) the New York/New Jersey (NY/NJ) WTC Consortium, which comprises five clinical centers in the NY/NJ area; (3) the WTC Federal Responder Screening Program; (4) the WTC Health Registry; (5) Project COPE; and (6) the Police Organization Providing Peer Assistance (POPPA) program. The programs vary in aspects such as the HHS administering agency or component responsible for administering the funding; the implementing agency, component, or organization responsible for providing program services; eligibility requirements; and services. The WTC health programs that are providing screening and monitoring are tracking thousands of individuals who were affected by the WTC disaster. As of June 2007, the FDNY WTC program had screened about 14,500 responders and had conducted follow-up examinations for about 13,500 of these responders, while the NY/NJ WTC Consortium had screened about 20,000 responders and had conducted follow-up examinations for about 8,000 of these responders. Some of the responders include nonfederal responders residing outside the NYC metropolitan area. As of June 2007, the WTC Federal Responder Screening Program had screened 1,305 federal responders and referred 281 responders for employee assistance program services or specialty diagnostic services. In addition, the WTC Health Registry, a monitoring program that consists of periodic surveys of self-reported health status and related studies but does not provide in- person screening or monitoring, collected baseline health data from over 71,000 people who enrolled in the registry. In the winter of 2006, the registry began its first adult follow-up survey, and as of June 2007 over 36,000 individuals had completed the follow-up survey. In addition to providing medical examinations, FDNY's WTC program and the NY/NJ WTC Consortium have collected information for use in scientific research to better understand the health effects of the WTC attack and other disasters. The WTC Health Registry is also collecting information to assess the long-term public health consequences of the disaster. In February 2006, the Secretary of HHS designated the Director of NIOSH to take the lead in ensuring that the WTC health programs are well coordinated, and in September 2006 the Secretary established the WTC Task Force to advise him on federal policies and funding issues related to responders' health conditions. The chair of the task force is HHS's Assistant Secretary for Health, and the vice chair is the Director of NIOSH. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area, although it has taken steps toward expanding the availability of these services. Initially, NIOSH made two efforts to provide screening and monitoring services for these responders, the exact number of whom is unknown. The first effort began in late 2002 when NIOSH awarded a contract for about $306,000 to the Mount Sinai School of Medicine to provide screening services for nonfederal responders residing outside the NYC metropolitan area and directed it to establish a subcontract with AOEC. AOEC then subcontracted with 32 of its member clinics across the country to provide screening services. From February 2003 to July 2004, the 32 AOEC member clinics screened 588 nonfederal responders nationwide. AOEC experienced challenges in providing these screening services. For example, many nonfederal responders did not enroll in the program because they did not live near an AOEC clinic, and the administration of the program required substantial coordination among AOEC, AOEC member clinics, and Mount Sinai. Mount Sinai's subcontract with AOEC ended in July 2004, and from August 2004 until June 2005 NIOSH did not fund any organization to provide services to nonfederal responders outside the NYC metropolitan area. During this period, NIOSH focused on providing screening and monitoring services for nonfederal responders in the NYC metropolitan area. In June 2005, NIOSH began its second effort by awarding $776,000 to the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide both screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. In June 2006, NIOSH awarded an additional $788,000 to DCC to provide screening and monitoring services for these responders. NIOSH officials told us that they assigned DCC the task of providing screening and monitoring services to nonfederal responders outside the NYC metropolitan area because the task was consistent with DCC's responsibilities for the NY/NJ WTC Consortium, which include data monitoring and coordination. DCC, however, had difficulty establishing a network of providers that could serve nonfederal responders residing throughout the country--ultimately contracting with only 10 clinics in seven states to provide screening and monitoring services. DCC officials said that as of June 2007 the 10 clinics were monitoring 180 responders. In early 2006, NIOSH began exploring how to establish a national program that would expand the network of providers to provide screening and monitoring services, as well as treatment services, for nonfederal responders residing outside the NYC metropolitan area. According to NIOSH, there have been several challenges involved in expanding a network of providers to screen and monitor nonfederal responders nationwide. These include establishing contracts with clinics that have the occupational health expertise to provide services nationwide, establishing patient data transfer systems that comply with applicable privacy laws, navigating the institutional review board process for a large provider network, and establishing payment systems with clinics participating in a national network of providers. On March 15, 2007, NIOSH issued a formal request for information from organizations that have an interest in and the capability of developing a national program for responders residing outside the NYC metropolitan area. In this request, NIOSH described the scope of a national program as offering screening, monitoring, and treatment services to about 3,000 nonfederal responders through a national network of occupational health facilities. NIOSH also specified that the program's facilities should be located within reasonable driving distance to responders and that participating facilities must provide copies of examination records to DCC. In May 2007, NIOSH approved a request from DCC to redirect about $125,000 from the June 2006 award to establish a contract with a company to provide screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. Subsequently, DCC contracted with QTC Management, Inc., one of the four organizations that had responded to NIOSH's request for information. DCC's contract with QTC does not include treatment services, and NIOSH officials are still exploring how to provide and pay for treatment services for nonfederal responders residing outside the NYC metropolitan area. QTC has a network of providers in all 50 states and the District of Columbia and can use internal medicine and occupational medicine doctors in its network to provide these services. In addition, DCC and QTC have agreed that QTC will identify and subcontract with providers outside of its network to screen and monitor nonfederal responders who do not reside within 25 miles of a QTC provider. In June 2007, NIOSH awarded $800,600 to DCC for coordinating the provision of screening and monitoring examinations, and QTC was to receive a portion of this award from DCC to provide about 1,000 screening and monitoring examinations through May 2008. According to a NIOSH official, QTC's providers began conducting screening examinations in summer 2007. Screening and monitoring the health of the people who responded to the September 11, 2001, attack on the World Trade Center are critical for identifying health effects already experienced by responders or those that may emerge in the future. In addition, collecting and analyzing information produced by screening and monitoring responders can give health care providers information that could help them better diagnose and treat responders and others who experience similar health effects. While many responders have been able to obtain screening and follow-up physical and mental health examinations through the federally funded WTC health programs, other responders may not always find these services available. Specifically, many responders who reside outside the NYC metropolitan area have not been able to obtain screening and monitoring services because available services are too distant. Moreover, HHS has repeatedly interrupted its efforts to provide services outside the NYC area, resulting in periods when no such services were available. HHS continues to fund and coordinate the WTC health programs and has key federal responsibility for ensuring the availability of services to responders. HHS and its agencies have taken steps to move toward providing screening and monitoring services to nonfederal responders living outside of the NYC area. However, these efforts are not complete, and the stop-and-start history of the department's efforts to serve these responders does not provide assurance that the latest efforts to extend screening and monitoring services to them will be successful and will be sustained over time. Therefore we recommended in July 2007 that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the attack on the WTC, regardless of where they reside. As of January 2008, the department has not responded to this recommendation. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this testimony, please contact Cynthia A. Bascetta at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Helene F. Toiv, Assistant Director; Hernan Bozzolo; Frederick Caison; Anne Dievler; Anne Hopewell; and Roseanne Price made key contributions to this statement. September 11: Improvements Needed in Availability of Health Screening and Monitoring Services for Responders. GAO-07-1229T. Washington, D.C.: September 10, 2007. September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders. GAO-07-892. Washington, D.C.: July 23, 2007. September 11: HHS Has Screened Additional Federal Responders for World Trade Center Health Effects, but Plans for Awarding Funds for Treatment Are Incomplete. GAO-06-1092T. Washington, D.C.: September 8, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Program for Federal Responders Lags Behind. GAO-06-481T. Washington, D.C.: February 28, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Not for Federal Responders. GAO-05-1020T. Washington, D.C.: September 10, 2005. September 11: Health Effects in the Aftermath of the World Trade Center Attack. GAO-04-1068T. Washington, D.C.: September 8, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Six years after the attack on the World Trade Center (WTC), concerns persist about health effects experienced by WTC responders and the availability of health care services for those affected. Several federally funded programs provide screening, monitoring, or treatment services to responders. GAO has previously reported on the progress made and implementation problems faced by these WTC health programs. This testimony is based primarily on GAO's testimony, September 11: Improvements Needed in Availability of Health Screening and Monitoring Services for Responders ( GAO-07-1229T , Sept. 10, 2007), which updated GAO's report, September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders ( GAO-07-892 , July 23, 2007). In this testimony, GAO discusses efforts by the Centers for Disease Control and Prevention's National Institute for Occupational Safety and Health (NIOSH) to provide services for nonfederal responders residing outside the New York City (NYC) area. For the July 2007 report, GAO reviewed program documents and interviewed Department of Health and Human Services (HHS) officials, grantees, and others. GAO updated selected information in August and September 2007 and conducted work for this statement in January 2008. In July 2007, following a reexamination of the status of the WTC health programs, GAO recommended that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the WTC attack, regardless of where they reside. As of January 2008, the department has not responded to this recommendation. As GAO testified in September 2007, NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC area, although it has taken steps toward expanding the availability of these services. In late 2002, NIOSH arranged for a network of occupational health clinics to provide screening services. This effort ended in July 2004, and until June 2005 NIOSH did not fund screening or monitoring services for nonfederal responders outside the NYC area. In June 2005, NIOSH funded the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide screening and monitoring services; however, DCC had difficulty establishing a nationwide network of providers and contracted with only 10 clinics in seven states. In 2006, NIOSH began to explore other options for providing these services, and in 2007 it took steps toward expanding the provider network.
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To address the need for improved funding, the Pension Protection Act of 2006 (PPA) included new provisions designed to compel multiemployer plans in poor financial shape to take action to improve their long-term financial condition. The law established two categories of troubled plans--endangered status (commonly referred to as "yellow zone", which includes an additional subcategory of "seriously endangered") and a more serious critical status (commonly referred to as "red zone"). PPA further requires plans in both categories to develop strategies that include contribution increases, benefit reductions, or both, designed to improve their financial condition. These strategies must generally be adopted through the collective bargaining process, and plans are required to periodically report on progress made in implementing them. Because of the greater severity of critical status plans' funding condition, such plans have an exception to ERISA's anti-cutback rule in that they may reduce or eliminate certain so-called "adjustable benefits" such as early retirement benefits, post-retirement death benefits, and disability benefits for participants not yet retired. For example, if an approved rehabilitation plan eliminated an early retirement benefit, appropriate notice was provided, and the reduction is agreed to in collective bargaining, then participants not yet retired would no longer be able to receive early retirement benefits. PPA funding requirements took effect in 2008, just as the nation was entering a severe economic crisis. The dramatic decline in the value of stocks and other financial assets in 2008 and the accompanying recession broadly weakened multiemployer plans' financial health. In response, Congress enacted the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) and, later, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA) to provide funding relief to help plans navigate the difficult economic environment. For example, WRERA relief measures allowed multiemployer plans to temporarily freeze their funding status, and extended the timeframe for plans' funding improvement or rehabilitation plans from 10 to 13 years. Generally, PRA allows a plan that meets certain solvency requirements to amortize investment losses from the 2008 market collapse over 29 years rather than 15 years, and to recognize such losses in the actuarial value of assets over 10 years instead of 5, so the negative effects of the market decline would be spread out over a longer period. Overall, since 2009, the funding status of multiemployer plans has improved, but a sizeable number of plans are still critical or endangered. According to plan-reported data, while the funding status of plans has not returned to 2008 levels, the percentage of plans in critical status declined from 34 percent in 2009 to 24 percent in 2011. The percentage of plans in endangered status declined to a greater extent, from 34 percent in 2009 to 16 percent in 2011. However, despite these improvements, 40 percent of plans have not emerged from critical or endangered status. In addition to the difficulties many multiemployer plans face, the challenges that PBGC faces have led us to designate its insurance programs as a "high-risk" federal program. As we noted earlier this year, because of long term challenges related to PBGC's funding structure, the agency's financial future is uncertain. We noted that weaknesses in its revenue streams continue to undermine the agency's long-term financial stability. According to a 2011 survey of 107 critical status plans conducted by the Segal Company, the large majority of critical status plans have developed rehabilitation plans that both increase required employer contributions and reduce participant benefits in an effort to improve plans' financial positions. Plan officials explained that these changes can have a range of effects and, in some cases, may severely affect employers and participants. While most critical status plans expect to recover from their current funding difficulties, about 25 percent do not and instead seek to delay eventual insolvency. The 2011 survey showed the large majority of critical status plans surveyed developed rehabilitation plans that included a combination of both contribution increases and benefit reductions to be implemented in the coming years. Of plans surveyed, 81 proposed increases in employer contributions and reductions to participant benefits, while 14 proposed contribution increases only and 7 proposed benefit reductions only. The magnitude of contribution increases and benefit reductions varied widely among plans. As Figure 1 illustrates, the rehabilitation plans of 7 critical status plans proposed no contribution increases, while those of 28 plans proposed first year increases of 20 percent or more. It is important to note that these data tell only a part of the story because some rehabilitation plans call for additional contribution increases in subsequent years. The vast majority of multiemployer plans surveyed developed rehabilitation plans that reduced benefit accruals and/or adjustable benefits in an effort to improve the financial condition of the plan. Thirty- two of the 107 multiemployer plans surveyed proposed, in their rehabilitation plans, to reduce accrual rates, and of these, the large majority proposed to cut accruals by more than 20 percent. Fifteen plans proposed to cut accruals by 40 percent or more. This doesn't reflect all the changes plans made, because some plans reduced accrual rates prior to development of the rehabilitation plans. Furthermore, a majority of plans--88 out of 107--proposed to reduce one or more adjustable benefits. Typically, these reductions will apply to both active and vested inactive participants, but some plans applied them to only one participant group. While the data are informative, they do not get to the heart of the issue-- what impact will these changes have on employers, participants, and plans themselves? As might be expected, the impacts on employers and participants will vary among plans. In some cases, employers and participants will be able to bear these changes without undue hardship. In other cases, the impacts were expected to be significant. For example, plan officials said employers outside the plan generally do not offer comparable pension or health insurance benefits, and increases in contributions puts contributing employers at a significant competitive disadvantage. Similarly, an official of a long-distance trucking firm said high contribution rates have greatly affected the firm's cost structure and damaged its competitive position. In other cases, plans may have been unable to increase employer contribution rates as much as needed. For example, our review of one rehabilitation plan revealed that a 15 percent contribution increase resulted from a difficult balance between, among other factors, adequately funding the plan and avoiding excessive strain on contributing employers. According to the plan administrator, plan trustees determined many employers were in financial distress and a significant increase in contributions would likely lead to business failures or numerous withdrawals. Subsequently, five employers withdrew from the plan after the rehabilitation plan was adopted. Similarly, the reduction or elimination of adjustable benefits were significant and controversial for participants in some cases. Officials of several plans stated the reduction or elimination of early retirement benefits for participants working in physically demanding occupations would be particularly difficult for some workers. At the same time, some plans also eliminated or imposed limitations on disability retirement so workers who have developed physical limitations will have to either continue to work or retire on substantially reduced benefits. Importantly, while most plans expected to emerge from critical status eventually, a significant number did not and instead project eventual insolvency. According to the Segal survey, of 107 critical status plans, 67 expect to emerge from critical status within the statutory timeframes of 10 to 13 years, and 12 others in an extended rehabilitation period (See figure 2). However, 28 of the plans had determined that no realistic combination of contribution increases and benefit reductions would enable them to emerge from critical status, and their best approach is to forestall insolvency for as long as possible. Among these plans, the average number of years to expected insolvency was 12, with some expecting insolvency in less than 5 years and others not for more than 30 years. The majority of these plans expected insolvency in 15 or fewer years. Our contacts with individual plans provide insight into the stark choices faced by these plans. Four of the eight critical status plans we contacted expected to eventually become insolvent, and officials explained that their analyses concluded that no feasible combination of contribution increases or benefit reductions could lead them back to a healthy level of funding. Several indicated that efforts to do so would likely accelerate the demise of the plan. For example, plan documents noted that the actuary of one plan determined the plan would be able to emerge from critical status if contribution rates were increased by 24 percent annually for each of the next 10 years--a total increase of more than 850 percent. The trustees of this plan determined such a proposal would be rejected by both employers and workers, and would likely lead to negotiated withdrawals by employers. This, in turn, could result in insolvency of the plan, possibly as early as 2019. Instead, this plan opted for measures that officials believed are most likely to result in continued participation in the plan, which nonetheless are projected to forestall insolvency until about 2029. Similarly, according to officials of another plan, plan trustees concluded that the contribution increases necessary to avoid insolvency were more than employers in that geographic area could bear. In addition, the plan considered the impact of funding the necessary contribution increases through reductions to base pay. The plan found this infeasible because of the rising cost of living facing employees and their families. Consequently, the plan trustees adopted a rehabilitation plan forestalling insolvency until about 2025. In recent years, the total amount of financial assistance PBGC has provided to insolvent plans has increased markedly. From fiscal years 2006 to 2012, the number of plans needing PBGC's help has increased significantly, from 33 plans to 49 plans. For fiscal year 2012 alone, PBGC provided $95 million in total financial assistance to help 49 insolvent plans provide benefits to about 51,000 retirees. Loans comprise the majority of financial assistance that PBGC has provided to insolvent multiemployer plans. Based on available data from fiscal year 2011, loans totaled $85.5 million and accounted for nearly 75 percent of total financial assistance. However, the loans are not likely to be repaid because most plans never return to solvency. To date, only one plan has ever repaid a loan. PBGC monitors the financial condition of multiemployer plans to identify plans that are at risk of becoming insolvent--possibly requiring financial assistance. Based on this monitoring, PBGC maintains a contingency list of plans likely to make an insolvency claim, and classifies plans according to the plans' risk of insolvency. PBGC also assesses the potential effect on the multiemployer insurance fund that insolvencies among the plans on the contingency list would have. Table 1 outlines the various classifications and definitions based on risk and shows the liability associated with such plans. Both the number of plans placed on the contingency list and the amount of potential financial assistance have increased steadily over time, with the greatest increases recorded in recent years. According to PBGC data, the number of plans where insolvency is classified as "probable"--plans that are already insolvent or are projected to become insolvent generally within 10 years--increased from 90 plans in fiscal year 2008 to 148 plans in fiscal year 2012. Similarly, the number of plans where insolvency is classified as "reasonably possible"--plans that are projected to become insolvent generally between 10 and 20 years in the future--increased from 1 in fiscal year 2008 to 13 in fiscal year 2012. Although the increase in the number of multiemployer plans on the contingency list has risen sharply, the present value of PBGC's potential liability to those plans has increased by an even greater factor. For example, the present value of PBGC's liability associated with "probable" plans increased from $1.8 billion in fiscal year 2008 to $7.0 billion in fiscal year 2012 (see fig. 3). By contrast, for fiscal year 2012, PBGC's multiemployer insurance fund only had $1.8 billion in total assets, resulting in net liability of $5.2 billion, as reported in PBGC's 2012 annual report. Although PBGC's cash flow is currently positive--because premiums and investment returns on the multiemployer insurance fund assets exceed benefit payments and other assistance--PBGC expects plan insolvencies to more than double by 2017, placing greater demands on the insurance fund and further weakening PBGC's overall financial position. PBGC expects the liabilities associated with current and future plan insolvencies that are likely to occur in the next 10 years to exhaust the insurance fund by about 2023. Further, insolvency may be hastened by the projected insolvencies of two very large multiemployer plans whose financial condition has greatly deteriorated in recent years. According to PBGC officials, the two large plans for which insolvency is "reasonably possible" have projected insolvency between 10 to 20 years in the future. Importantly, the PBGC's projection of program insolvency by 2023 does not account for the impact of these two plans because their projected insolvency is more than 10 years in the future. PBGC estimates that, for fiscal year 2012, the liability from these plans accounted for about $26 billion of the $27 billion in liability of plans in the "Reasonably Possible" category. Taken in combination, the number of retirees and beneficiaries of these two plans would represent about a six-fold increase in the number of people receiving guarantee payments in 2012. PBGC estimates that the insolvency of either of these two large plans would exhaust the insurance fund in 2 to 3 years. Generally, retirees who are participants in insolvent plans receive reduced benefits under PBGC's statutory guarantee. When a multiemployer plan becomes insolvent and relies on PBGC loans to make benefit payments to plan retirees, retirees will most likely see a reduction in their monthly benefits. PBGC calculates the maximum benefit guarantee based on the amount of a participant's benefit accrual rate and years of credit service earned (see figure 4). For example, if a retiree has earned 30 years of credit service, the maximum coverage under the guarantee is about $1,073 per month, yielding an annual benefit of $12,870. Generally, retirees receiving the highest benefits experience the steepest cuts when their plans become insolvent and their benefits are limited by the pension guarantees. According to PBGC, the average monthly benefit received in all multiemployer plans in 2009 was $821. However, according to a PBGC analysis of benefit distributions among retirees of an undisclosed large plan, the range of benefits varies widely across retirees. About half of this plan's retirees will experience 15 percent or greater reductions in their benefits under the guarantee. Additionally, according to PBGC, one out of five retirees of this plan will experience 50 percent or greater reductions in their benefits under the guarantee. Ultimately, regardless of how long a retiree has worked and the amount of monthly benefits earned, any reduction in benefits--no matter the amount--may have significant effects on retirees' living standards. In the event that the multiemployer insurance fund is exhausted, participants relying on the guarantee would receive a small fraction of their already-reduced benefit. Because PBGC does not have statutory authority to raise revenue from any other source, officials said that, once the fund is depleted, the agency would have to rely solely on annual insurance premium receipts from multiemployer plans (which totaled $92 million for fiscal year 2012). The precise effect that the insolvency of the insurance fund would have on retirees receiving the guaranteed benefit depends on a number of factors--primarily the number of guaranteed benefit recipients and PBGC's annual premium income at that time. However, the impact would likely be severe. For example, if the fund were to be drained by the insolvency of a very large and troubled plan, we estimate the benefits paid by PBGC would be reduced to less than 10 percent of the guarantee level. In this scenario, a retiree who once received monthly benefit of $2,000 and whose benefit was reduced to $1,251 under the guarantee would see monthly income further reduced to less than $125, or less than $1,500 per year. Additional plan insolvencies would further depress already drastically reduced income levels. Despite unfavorable economic conditions, most multiemployer plans are currently in adequate financial condition and may remain so for many years. However, a substantial number of plans, including some very large plans, are facing very severe financial difficulties. Many of these plans reported that no realistic combination of contribution increases or allowable benefit reductions--options available under current law to address their financial condition--will enable them to emerge from critical status. While the multiemployer system was designed to have employers serve as principal guarantors against plan insolvency, PBGC remains the guarantor of last resort. However, given their current financial challenges, neither the troubled multiemployer plans nor PBGC currently have the flexibility or financial resources to mitigate the effects of anticipated insolvencies. Should a critical mass of plan insolvencies drain the multiemployer insurance fund, PBGC will not be able to pay current and future retirees more than a very small fraction of the benefit they were promised. Consequently, a substantial loss of income in old age looms as a real possibility for the hundreds of thousands of workers and retirees depending on these plans. In a matter of weeks, we will be releasing a report that goes into greater detail about the issues I have discussed in this testimony, and includes possible actions Congress can take to prevent a catastrophic loss of retirement income for hundreds of thousands of retirees who have spent years often in dangerous occupations and in some of the nation's most vital industries. This concludes my prepared statement. I would be happy to answer any questions the committee may have. Charles Jeszeck, 202-512-7215. In addition to the above, Michael Hartnett, Sharon Hermes, Kun-Fang Lee, David Lehrer, Sheila McCoy, and Frank Todisco 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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Multiemployer pension plans--created by collective bargaining agreements including more than one employer--cover more than 10 million workers and retirees, and are insured by the PBGC. As a result of investment market declines, employers withdrawing from plans and demographic challenges in recent years, many multiemployer plans have had large funding shortfalls and face an uncertain future. Also, both PBGC's single-employer and multiemployer insurance programs have been on GAO's list of high-risk federal programs for a number of years. This testimony provides information on (1) recent actions that multiemployer plans in the worst financial condition have taken to improve their funding levels; and (2) the extent to which plans have relied on PBGC assistance since 2009, and the financial condition of PBGC's multiemployer plan insurance program. GAO analyzed government and industry data, interviewed representatives of selected pension plans, and a wide range of industry experts and stakeholders and reviewed relevant federal laws, regulations, and documentation from plans. GAO is not making recommendations in this testimony. GAO will soon release a separate report on multiemployer pension issues. The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the majority of the most severely underfunded plans--those designated as being in critical status--developed plans to increase employer contributions or reduce certain participant benefits. In some cases, these measures will have significant effects on employers and participants. For example, one plan representative stated that contribution increases had damaged some firms' competitive position in the industry. Similarly, reductions or limitations on certain benefits--such as disability benefits--may create hardships for some older workers, such as those with physically demanding jobs. Most of the 107 surveyed plans expected to emerge from critical status, but about 26 percent did not and instead seek to delay eventual insolvency. The Pension Benefit Guaranty Corporation's (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund. As a result of current and anticipated financial assistance, the present value of PBGC's liability for plans that are insolvent or expected to become insolvent within 10 years increased from $1.8 to $7.0 billion between fiscal years 2008 and 2012. Yet PBGC's multiemployer insurance fund only had $1.8 billion in total assets in 2012. PBGC officials said that financial assistance to these plans would likely exhaust the fund in or about 2023. If the fund is exhausted, many retirees will see their pension benefits reduced to a small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits.
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Consistent with the premise that physicians play a central role in the generation of most health care expenditures, some health care purchasers employ physician profiling to promote efficiency. We selected 10 health care purchasers that profiled physicians in their networks--that is, compared physicians' performance to an efficiency standard to identify those who practiced inefficiently. To measure efficiency, the purchasers we spoke with generally compared actual spending for physicians' patients to the expected spending for those same patients, given their clinical and demographic characteristics. Most purchasers said they also evaluated physicians on quality. The purchasers linked their efficiency profiling results and other measures to a range of physician-focused strategies to encourage the efficient provision of care. Some of the purchasers said their profiling efforts produced savings. The 10 health care purchasers we examined used two basic profiling approaches to identify physicians whose medical practices were inefficient. One approach focused on the costs associated with treating a specific episode of illness--such as a stroke or heart attack. The other approach focused on costs, within a specific period, associated with the patients in a physician's practice. Both approaches used information from medical claims data to measure resource use and account for differences in patients' health status. In addition, both approaches assessed physicians (or physician groups) based on the costs associated with services that they may not have provided directly, such as costs associated with a hospitalization or services provided by a different physician. Although the methods used by purchasers to predict patient spending varied, all used patient demographics and diagnoses. The methods they used generally computed efficiency measures as the ratio of actual to expected spending for patients of similar health status. In addition, all of the purchasers we interviewed profiled specialists and all but one also profiled primary care physicians. Several purchasers said they would only profile physicians who treated an adequate number of cases, since such analyses typically require a minimum sample size to be valid. The health care purchasers we examined directly tied the results of their profiling methods to incentives that encourage physicians in their networks to practice efficiently. The incentives varied widely in design, application, and severity of consequences. Purchasers used incentives that included educating physicians to encourage more efficient care, designating in their physician directories those physicians who met efficiency and quality standards, dividing physicians into tiers based on efficiency and giving enrollees financial incentives to see physicians in particular tiers, providing bonuses or imposing penalties based on efficiency and quality excluding inefficient physicians from the network. Evidence from our interviews with the health care purchasers suggests that physician profiling programs may have the potential to generate savings for health care purchasers. Three of the 10 purchasers reported that the profiling programs produced savings and provided us with estimates of savings attributable to their physician-focused efficiency efforts. For example, 1 of those purchasers reported that growth in spending fell from 12 percent to about 1 percent in the first year after it restructured its network as part of its efficiency program, and an actuarial firm hired by the purchaser estimated that about three quarters of the reduction in expenditure growth was most likely a result of the efficiency program. Three other purchasers suggested their programs might have achieved savings but did not provide savings estimates, while four said they had not attempted to measure savings at the time of our interviews. Having considered the efforts of other health care purchasers in profiling physicians for efficiency, we conducted our own profiling analysis of physician practices in Medicare and found individual physicians who were likely to practice medicine inefficiently in each of 12 metropolitan areas studied. We focused our analysis on generalists--physicians who described their specialty as general practice, internal medicine, or family practice. We did not include specialists in our analysis. We selected areas that were diverse geographically and in terms of Medicare spending per beneficiary. Under our methodology, we computed the percentage of overly expensive patients in each physician's Medicare practice. To identify overly expensive patients, we grouped the Medicare beneficiaries in the 12 locations according to their health status, using diagnosis and demographic information. Patients whose total Medicare expenditures-- for services provided by all health providers, not just physicians--far exceeded those of other patients in their same health status grouping were classified as overly expensive. Once these patients were identified and linked to the physicians who treated them, we were able to determine which physicians treated a disproportionate share of these patients compared with their generalist peers in the same location. We classified these physicians as outliers--that is, physicians whose proportions of overly expensive patients would occur by chance less than 1 time in 100. We concluded that these outlier physicians were likely to be practicing medicine inefficiently. Based on 2003 Medicare claims data, our analysis found outlier generalist physicians in all 12 metropolitan areas we studied. In two of the areas, outlier generalists accounted for more than 10 percent of the area's generalist physician population. In the remaining areas, the proportion of outlier generalists ranged from 2 percent to about 6 percent of the area's generalist population. Medicare's data-rich environment is conducive to identifying physicians who are likely to practice medicine inefficiently. Fundamental to this effort is the ability to make statistical comparisons that enable health care purchasers to identify physicians practicing outside of established standards. CMS has the tools to make statistically valid comparisons, including comprehensive medical claims information, sufficient numbers of physicians in most areas to construct adequate sample sizes, and methods to adjust for differences in patient health status. Among the resources available to CMS are the following: Comprehensive source of medical claims information. CMS maintains a centralized repository, or database, of all Medicare claims that provides a comprehensive source of information on patients' Medicare-covered medical encounters. Using claims from the central database, each of which includes the beneficiary's unique identification number, CMS can identify and link patients to the various types of services they received and to the physicians who treated them. Data samples large enough to ensure meaningful comparisons across physicians. The feasibility of using efficiency measures to compare physicians' performance depends, in part, on two factors: the availability of enough data on each physician to compute an efficiency measure and numbers of physicians large enough to provide meaningful comparisons. In 2005, Medicare's 33.6 million fee-for-service enrollees were served by about 618,800 physicians. These figures suggest that CMS has enough clinical and expenditure data to compute efficiency measures for most physicians billing Medicare. Methods to account for differences in patient health status. Because sicker patients are expected to use more health care resources than healthier patients, the health status of patients must be taken into account to make meaningful comparisons among physicians. Medicare has significant experience with risk adjustment. Specifically, CMS has used increasingly sophisticated risk adjustment methodologies over the past decade to set payment rates for beneficiaries enrolled in managed care plans. To conduct profiling analyses, CMS would likely make methodological decisions similar to those made by the health care purchasers we interviewed. For example, the health care purchasers we spoke with made choices about whether to profile individual physicians or group practices; which risk adjustment tool was best suited for a purchaser's physician and enrollee population; whether to measure costs associated with episodes of care or the costs, within a specific time period, associated with the patients in a physician's practice; and what criteria to use to identify inefficient practice patterns. Our experience in examining what health care purchasers other than Medicare are doing to improve physician efficiency and in analyzing Medicare claims has enabled us to gain some insights into the potential of physician profiling to improve Medicare program efficiency. A primary virtue of profiling is that, coupled with incentives to encourage efficiency, it can create a system that operates at the individual physician level. In this way, profiling can address a principal criticism of the SGR system, which only operates at the aggregate physician level. Although savings from physician profiling alone would clearly not be sufficient to correct Medicare's long-term fiscal imbalance, it could be an important part of a package of reforms aimed at future program sustainability. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or the subcommittee members may have. For future contacts regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101 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. Other individuals who made key contributions include James Cosgrove and Phyllis Thorburn, Assistant Directors; Todd Anderson; Alex Dworkowitz; Hannah Fein; Gregory Giusto; Richard Lipinski; and Eric Wedum. 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's current system of spending targets used to moderate spending growth for physician services and annually update physician fees is problematic. This spending target system--called the sustainable growth rate (SGR) system--adjusts physician fees based on the extent to which actual spending aligns with specified targets. In recent years, because spending has exceeded the targets, the system has called for fee cuts. Since 2003, the cuts have been averted through administrative or legislative action, thus postponing the budgetary consequences of excess spending. Under these circumstances, policymakers are seeking reforms that can help moderate spending growth while ensuring that beneficiaries have appropriate access to care. For today's hearing, the Subcommittee on Health, House Committee on Energy and Commerce, which is exploring options for improving how Medicare pays physicians, asked GAO to share the preliminary results of its ongoing study related to this topic. GAO's statement addresses (1) approaches taken by other health care purchasers to address physicians' inefficient practice patterns, (2) GAO's efforts to estimate the prevalence of inefficient physicians in Medicare, and (3) the methodological tools available to identify inefficient practice patterns programwide. GAO ensured the reliability of the claims data used in this report by performing appropriate electronic data checks and by interviewing agency officials who were knowledgeable about the data. Consistent with the premise that physicians play a central role in the generation of health care expenditures, some health care purchasers examine the practice patterns of physicians in their network to promote efficiency. GAO selected 10 health care purchasers for review because they assess physicians' performance against an efficiency standard. To measure efficiency, the purchasers we spoke with generally compared actual spending for physicians' patients to the expected spending for those same patients, given their clinical and demographic characteristics. Most purchasers said they also evaluated physicians on quality. The purchasers linked their efficiency analysis results and other measures to a range of strategies--from steering patients toward the most efficient providers to excluding a physician from the purchaser's provider network because of poor performance. Some of the purchasers said these efforts produced savings. Having considered the efforts of other health care purchasers in evaluating physicians for efficiency, GAO conducted its own analysis of physician practices in Medicare. GAO used the term efficiency to mean providing and ordering a level of services that is sufficient to meet patients' health care needs but not excessive, given a patient's health status. GAO focused the analysis on generalists--physicians who described their specialty as general practice, internal medicine, or family practice--and selected metropolitan areas that were diverse geographically and in terms of Medicare spending per beneficiary. GAO found that individual physicians who were likely to practice medicine inefficiently were present in each of 12 metropolitan areas studied. The Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare, also has the tools to identify physicians who are likely to practice medicine inefficiently. Specifically, CMS has at its disposal comprehensive medical claims information, sufficient numbers of physicians in most areas to construct adequate sample sizes, and methods to adjust for differences in beneficiary health status. A primary virtue of examining physician practices for efficiency is that the information can be coupled with incentives that operate at the individual physician level, in contrast with the SGR system, which operates at the aggregate physician level. Efforts to improve physician efficiency would not, by themselves, be sufficient to correct Medicare's long-term fiscal imbalance, but such efforts could be an important part of a package of reforms aimed at future program sustainability.
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Social Security is largely a pay-as-you-go, defined benefit system under which taxes collected from current workers are used to pay the benefits of current retirees. Social Security is financed primarily by a payroll tax of 12.4 percent on annual wages up to $72,600 (in 1999) split evenly between employees and employers or paid in full by the self-employed. Since 1940, Social Security has been providing benefits to the nation's eligible retired workers, their dependents, and the survivors of deceased workers. In addition, since 1956, the program has provided income protection for disabled workers and their eligible dependents. Today, the Social Security program covers over 145 million working Americans--96 percent of the workforce. It is the foundation of the nation's retirement income system and an important provider of disability benefits. Currently, 44 million individuals receive Social Security benefits. Social Security retirement benefits are calculated using the worker's 35 years of highest earnings in covered employment. However, benefits are not strictly proportional to earnings. A progressive benefit formula is applied so that low-wage workers receive, as a monthly benefit, a larger percentage of their average monthly lifetime earnings than do high-wage workers. The benefit is adjusted for the age at which the worker first begins to draw benefits. To receive Social Security retirement benefits, employees must be at least 62 years old and have earned a certain number of credits for work covered by Social Security. Retirees are eligible for full benefits at age 65--the normal retirement age--and those retiring at 62 currently receive 80 percent of their full benefit. The age for full benefit eligibility is scheduled to incrementally increase to age 67 for those born between 1938 and 1960. Since 1975, benefits have been automatically adjusted each year to compensate for increases in the cost of living. Additionally, benefits are adjusted when recipients aged 62 through 69 have earnings above a certain threshold. Individuals may be eligible for Social Security benefits on the basis of their spouses' earnings. For example, a married person who does not qualify for Social Security retirement benefits may be eligible for a spousal benefit that is worth up to 50 percent of the primary earner's retirement benefit. Spouses who do qualify for their own Social Security retirement benefit but whose retirement benefit is worth less than 50 percent of the primary earner's benefit are eligible for both their own retirement and certain spousal benefits. Specifically, benefits for such dually eligible individuals are calculated so that their retirement benefit and their spousal benefit could add up to 50 percent of the primary earner's benefit. In practice, spouses receive either the value of their individual benefit or the value equivalent to 50 percent of the primary earner's benefit, whichever is higher. Under Social Security, retirement benefits can be paid to ex-spouses if they were married to the worker for at least 10 years, are not remarried, and are at least 62 years old. A deceased worker's survivors are eligible for benefits if the survivor is a spouse at least 60 years old or a disabled spouse at least age 50, a parent caring for an eligible child under age 16, an eligible child under the age of 18, or a dependent parent. Ex-spouses are eligible for survivor benefits if they do not remarry before age 60 and meet other qualifications for surviving spouses. Social Security's Disability Insurance program provides cash benefits to disabled workers and their dependents. To qualify for disability benefits, the worker must be unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or to last for a continuous period of at least 12 months. Disability benefits are available after a 5-month waiting period beginning at the onset of the disability. To be eligible, the employee, if over age 30, must have worked in Social Security-covered employment for at least 20 of the 40 quarters immediately preceding the disability's onset. If under 31, the disabled worker must have had earnings in at least one-half the quarters worked after he or she reached age 21, with a minimum of six quarters. Disabled worker benefits are automatically converted to retired worker benefits when the disabled worker reaches the normal retirement age. Workers for state and local governments were originally excluded from Social Security because many were already covered by a state or local government pension plan, and the federal government's constitutional right to impose a tax on state and local governments was uncertain. In the 1950s, the Social Security Act was amended to allow state and local governments the option of covering their employees. Those state and local governments that elected coverage were allowed to opt out later if certain conditions were met. However, the Congress amended the Social Security Act in 1983 to prohibit state and local governments from opting out of the program once they joined. In 1981, Galveston County officials, citing expected future increases in the Social Security tax rate and wage base, notified the Social Security Administration of the County's intent to withdraw from the program. County employees voted two to one in support of withdrawal. The neighboring counties of Brazoria and Matagorda followed Galveston's lead and also withdrew from Social Security. Rather than simply eliminate the Social Security payroll taxes and the coverage provided, the three Texas counties continued to collect these amounts to create the Alternate Plans--deferred compensation plans that include retirement, disability, and survivor insurance benefits. The Alternate Plans are designed to replicate many of the features found in the Social Security program. Creators of the Alternate Plans, however, wanted to replace Social Security's benefits package with one that offered potentially higher returns, while still providing a high level of benefit security. Today, about 3,000 employees of the three Texas counties are covered by these plans. While Social Security and the Alternate Plans offer a similar package of benefits, there are a number of important differences between the two approaches in the calculation of benefits and scope of coverage. The Alternate Plans' benefits are advance funded, while Social Security's promised benefits are not. As a defined benefit plan, Social Security calculates benefits by formula, whereas the Alternate Plans--defined contribution plans--determine benefits largely by the accumulations in the beneficiary's retirement account. Retirement benefits under the Alternate Plans are thus based on contributions and investment returns and are not adjusted to provide proportionately larger benefits to low-income workers, as is the case with Social Security. Survivor benefits under the Alternate Plans are not lifetime benefits, but a one-time life insurance payment made to the worker's designated beneficiaries, along with the worker's account balance; there are no additional benefits for dependents. Disability benefits under the Alternate Plans are equal to 60 percent of the employee's wage at the time of disability, up to a maximum benefit of $5,000 a month. Workers are eligible to receive the value of the employee's account at the time he or she becomes disabled. At that time, a new retirement account is established that pays an amount equivalent to the employee and employer's contributions at that time. The Alternate Plans' disability benefits make no allowances for dependents. Social Security's disability benefits are based on a modified benefit formula and include additional benefits for the dependents of disabled workers. As is the case with Social Security, the Alternate Plans are funded by payroll taxes collected from employers and employees. Galveston County employees, for example, contribute 6.13 percent of their gross earnings toward their deferred compensation account. The County contributes 7.785 percent of a worker's gross compensation. Total contributions to the Alternate Plans in Galveston County today are 13.915 percent--somewhat higher than the 12.4 percent contributed by employers and employees to Social Security. A portion of the County's contribution goes to pay for the employee's life and disability insurance premiums (4.178 percent in 1998). The Alternate Plans were designed to give the employees a guaranteed nominal annual return on their contributions of at least 4 percent. Therefore, the Alternate Plans' managers contracted with an insurance company to purchase an annuity that guaranteed the minimum return. The portfolios holding the plans' contributions are invested only in fixed-rate marketable securities (government bonds, corporate bonds, and preferred stocks) and bank certificates of deposit. Rates of return on the portfolios for all of the Alternate Plans have ranged widely over the years but currently are around 6 percent in nominal terms. Social Security, on the other hand, is mostly a pay-as-you-go program, but when revenues exceed outlays, as they currently do, the surplus is credited to the Trust Funds in the form of nonmarketable Treasury securities. The funds earn interest but, unlike the Alternate Plans, the interest income does not influence the amount of Social Security benefits paid to retirees. Because virtually all work in the United States is covered by Social Security, benefits are fully portable if the worker changes jobs. If participants in the Alternate Plans leave county employment, they can either take their account balances with them or leave the account, which will continue to earn the portfolio's rate of return. The Alternate Plans are tax-deferred plans, so if the employee elects to cash out the account, he or she must pay income taxes on the proceeds, although there is no penalty involved. All distributions of deferred compensation accounts are taxed at the employee's marginal tax rate at the time of distribution. Social Security income is not taxed as long as an individual's income does not exceed certain thresholds. There are also a number of significant differences in how retirement income benefits are determined under the two approaches. Because Social Security is a defined benefit plan, it calculates benefits by formula. The Alternate Plans are defined contribution plans, so benefits are directly related to the capital accumulations in the beneficiaries' retirement accounts. In addition, retirement benefits are available at younger ages under the Alternate Plans than under Social Security. Moreover, unlike Social Security retirement benefits, which are based on the 35 years of highest covered earnings and weighted to replace a larger share of a low earner's wages, retirement income benefits under the Alternate Plans depend solely on contributions to the individual's account and the earnings on the plans' investments. Also, Social Security provides a separate spousal benefit, and the Alternate Plans do not. (See table 1.) The Alternate Plans do not ensure the preservation of retirement benefits. While Social Security provides retirees with a lifetime annuity, the Alternate Plans allow retiring employees to choose between taking a lump sum payout or purchasing an annuity with one of several different payout options. If the worker chooses to receive income from the plan over his or her remaining lifetime or over that of a spouse, he or she must purchase either an individual annuity or a "joint and survivor" annuity. But annuities generally are not inflation-protected as they are under Social Security, so the purchasing power of this retirement income could decline over time. To protect against future inflation, the retiree can arrange to schedule the annuity payouts so that they are higher in the later years, but this means accepting smaller benefits in the early years. In 1998, the plan for Brazoria County was modified to allow employees to place their share of the contributions in equity funds. It is too soon to judge how this change would affect our comparisons. Unlike Social Security, the Alternate Plans' survivor benefits can be a one-time payment or a series of payments over a finite period of time. Under the Alternate Plans, if an employee dies, the surviving beneficiary (anyone named as beneficiary by the worker) receives the value of the employee's account at the time of death, plus a life insurance benefit. The life insurance benefit for a beneficiary of an employee who dies while under age 70 is 300 percent of the deceased worker's salary, with a minimum benefit of $50,000 and a maximum of $150,000. Beneficiaries of employees who die between the ages of 70 and 74 are entitled to insurance proceeds up to 200 percent of the covered employee's annual earnings, with a minimum of $33,330 and a maximum of $100,000. Beneficiaries of employees who die at age 75 or older are entitled to 130 percent of the employee's annual earnings, with a minimum of $21,665 and a maximum of $65,000. These lump sum payments can be used by the beneficiary to purchase a lifetime annuity. Social Security survivor benefits, on the other hand, are based on the worker's benefit at the time of death, adjusted for the number of beneficiaries. The benefit is paid as an annuity, not a lump sum distribution, and is paid generally to surviving spouses who are 60 years old or older or who have dependent children. (See table 2.) Under the Alternate Plans, workers are considered to be disabled if they cannot work in their occupation for at least 24 months. Social Security, in contrast, requires that the individual not be able to perform any substantial gainful activity because of a physical or mental impairment for at least 12 months to qualify for benefits. After an initial 180-day waiting period, the Alternate Plans' disability insurance pays 60 percent of an individual's base salary until age 65 or until the individual returns to work. The amounts provided by Social Security's disability insurance vary, but they follow the same formula as retirement benefits. Of the first $505 of monthly earnings, 90 percent is replaced, but the replacement rate falls off rapidly after that. Only 32 percent of monthly earnings between $505 and $3,043 are replaced, and only 15 percent of earnings above $3,043 are replaced. Few disabled workers who do not have dependents, therefore, would receive as much as 60 percent of their wage or salary. A totally disabled employee can receive a minimum monthly benefit payment of $100 under the Alternate Plans, up to a maximum benefit of $5,000 a month. At the time the worker ceases employment because of a disability, he or she can purchase an annuity with the account balance. A separate account is then set up by the disability insurance provider, and the insurer pays an amount into that account equivalent to the employer and employee contributions at the time the employee stopped working. Payments are made until the employee reaches age 65. Unlike Social Security, the Alternate Plans provide no dependent benefits. (See table 3.) Our comparisons of retirement, survivor, and disability benefits under the two approaches show that outcomes generally depend on individual circumstances and conditions. For example, certain features of Social Security, such as the tilt in the benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and those with dependents. The Social Security benefit formula replaces a larger share of the wages of a low earner than of a high earner. As a result, low-wage earners with relatively shorter careers in the three Texas counties would have received larger initial benefits from Social Security than from the Alternate Plans. Social Security benefits also are adjusted for inflation so their purchasing power is stable over time. Thus, the longer the period of retirement, the more likely it is that Social Security will provide higher monthly benefits than a fixed annuity purchased with the proceeds from the Alternate Plans. The Social Security spousal benefit also can significantly raise the retirement incomes of couples when one partner had little or no earnings. Under the Alternate Plans, workers have assets that they may pass on to designated beneficiaries. Conversely, a worker has no assets from Social Security to bequeath to his or her heirs. Finally, the fact that Social Security takes into account the number of dependents in calculating survivor and disability benefits means that individual family circumstances will be important in determining whether Social Security or the Alternate Plans provides larger benefits. Our simulations comparing the retirement benefits for employees of the three Texas counties show that the benefits from Social Security and the Alternate Plans depend on the employee's earnings, the number of years in the program, the presence of a spouse, the length of time in retirement, and the year the worker retires. In general, low-wage workers and, to a lesser extent, median-wage earners would fare better under Social Security. High-wage earners can generally expect to do better under the Alternate Plans, although if spousal benefits are included, even high-wage workers could eventually receive higher retirement income benefits from Social Security. Low-wage workers retiring at 65 today after a 35-year career in county employment would receive a higher initial monthly benefit under Social Security. If the family is eligible for a Social Security spousal benefit or if a joint and survivor annuity is elected under the Alternate Plans, the gap increases. Social Security provides a spousal benefit of up to 50 percent of a worker's benefit (for a spouse with a record of little or no earnings of his or her own), while the Alternate Plans' spousal coverage through the purchase of a joint and survivor annuity actually reduces the couple's monthly income. Low-wage earners with 35-year careers retiring in 2016 are projected to receive roughly the same individual initial monthly benefits under Social Security and the Alternate Plans. The Alternate Plans' benefits are relatively better for those retiring in the future than for those retiring today because earnings on the plans' investments were relatively low in the '60s and early '70s as compared with the '90s. (See table 4.) Nevertheless, because Social Security benefits are indexed for inflation, they would grow larger over time and would eventually exceed the retirement benefits from the Alternate Plans, as the latter remained constant. (See figs. 1 and 2). The picture for low-wage workers changes somewhat if a 45-year career is assumed. Because all contributions and the investment earnings on them determine the size of an Alternate Plan account, more years of earnings in jobs covered by Alternate Plans lead to higher account balances and, therefore, higher monthly benefits from the annuity. Social Security benefits, by contrast, are based on a formula using the 35 years of highest earnings from all jobs. With the longer work history, initial individual benefits for low-wage workers would be higher under the Alternate Plans than under Social Security, although, if spousal benefits and joint and survivor annuities were considered, Social Security benefits would again be larger. (See table 5.) Even the higher individual benefits would not be permanent, as indexation would ultimately close the gap. For low-wage workers retiring in 2008, however, the gap would be closed in 4 years, while for those retiring in 2026, the gap would be closed in 9 years. Thereafter, Social Security monthly benefits would be higher. (See figs. 3 and 4.) For median-wage earners, Social Security initial benefits are higher when spousal benefits are included. Individual benefits--even when they start out lower--eventually catch up to the Alternate Plans' benefits, but it does take longer for median-wage earners than for low-wage earners. After 7 years of retirement Social Security benefits would catch up to Alternate Plan benefits for median-wage earners retiring in 2008 after a 45-year career with the county assuming Social Security was indexed at 3.5 percent. For those with 45-year careers retiring in 2026, it would take about 13 years for Social Security individual retirement benefits to overtake those of the Alternate Plans. High-income workers, in general, would probably do better under the Alternate Plans, although consideration of spousal benefits or coverage also could lead to higher benefits under Social Security through indexation of benefits--at least for those with 35-year careers. We used 35- and 45-year work histories to approximate working careers. We recognize that many people have shorter or less continuous careers. For example, in 1993 the average 62-year-old woman spent only 25 years in the workforce, compared with 36 years for the average 62-year-old man. Both men and women leave the workforce temporarily for a variety of reasons, such as to return to school or to raise children. Fewer years and less continuity would influence the pattern of benefits under both plans. We simulated outcomes for workers who left the labor force for either 5 or 10 years early in their careers (at age 25). Under both Social Security and the Alternate Plans, retirement benefits were reduced. However, the reduction was larger under the Alternate Plans because the size of the accounts at retirement is sensitive to when the contributions are made. Monies not contributed early in the worker's career lose the benefits from compounding, leading to a significantly lower account balance at retirement. Social Security benefits are also reduced, but because they are based on the earners' 35 years of highest income and are not affected by compounding, the impact on retirement income is less. This simulation shows that the relative "superiority" of the two approaches depends on individual circumstances. These simulations are not meant to portray a "typical" worker, but rather to demonstrate the importance of particular factors in determining relative benefits from the two approaches. For example, currently only about 7 percent of Social Security benefits are spousal benefits, and that percentage is expected to decline over time as more women become eligible for benefits on the basis of their own earnings. It is also true that Social Security benefits are reduced on the death of the retired worker, while the joint and survivor annuity under the Alternate Plans could be structured to provide constant benefits. Nonetheless, for some county workers Social Security retirement benefits would probably have exceeded those available from the Alternate Plans. With respect to survivor benefits, our simulations indicated that, in cases in which the surviving spouse was left with two dependent children under age 16, benefits would usually be higher under Social Security because Social Security takes the number of dependents into account when computing the total family monthly benefit. For example, if a low-wage worker died at age 45, our simulations indicate a surviving spouse with two dependent children would receive $1,602 per month, while under the Alternate Plans, the family would receive only $831 per month on the basis of annuitizing lump sum benefits. (See table 6.) On the other hand, if there were no dependent children, the surviving spouse would not be eligible for survivor benefits under Social Security until age 60, whereas under the Alternate Plans, the surviving spouse would immediately be eligible to receive three times the worker's salary plus any dollar amounts in the worker's retirement income account. The Alternate Plans' survivor benefits would also be higher in cases in which the worker died late in his or her career. The survivor of a low-wage worker who died at age 60 with no dependents would receive $1,013 per month under Social Security, whereas the survivor could receive a lifetime monthly benefit of $1,494 under the Alternate Plans if he or she chose to use the proceeds to buy an annuity. Again, in about a dozen years, increases in benefits due to cost-of-living adjustments would lead to larger monthly benefits under Social Security than under the Alternate Plans. In those cases in which the worker died before working enough quarters to qualify for Social Security benefits, the surviving spouse would not be eligible for survivor benefits. Under the Alternate Plans, however, the survivor is immediately eligible to receive three times the employee's wage and any account accumulations regardless of how long the employee worked. Because the Alternate Plans replace 60 percent of a disabled worker's wage or salary and because disabled workers can also annuitize their account balances at the time of disability, the Alternate Plans often provide substantially better disability benefits than Social Security. This is especially true when no dependents are involved. Indexation of Social Security benefits for inflation can eventually close the gap, but it could take over 20 years to do so. For example, a 26-year-old low-income worker with no dependents would receive $711 monthly under Social Security, but $1,086 from the Alternate Plans. It would take a dozen years for indexation (at 3.5 percent per year) to raise the Social Security initial benefit to that received under the Alternate Plans. For a high-income 26-year-old, it would take more than 25 years to close the gap. Although the Alternate Plans still provide a larger initial monthly benefit in all the cases we simulated, the differences were narrowed when dependents were involved. Nevertheless, for high earners, even those with dependents, the Alternate Plans provided larger benefits, and indexation would not close the gap for 15 to 20 years. (See table 7.) The type of disability a worker has also influences how he or she fares under the two systems. Benefits for workers with "mental or nervous disorders" are limited to 12 months under the Alternate Plans. Workers with such disabilities would receive higher benefits under Social Security if their condition lasted over 12 months because Social Security does not limit benefits on the basis of impairment. Given the inherent differences between the two systems, our results suggest that benefits primarily depend on individual circumstances. Social Security was designed, in part, to protect low earners and their families, and indeed low-wage earners generally would do better under Social Security. Moreover, while individual circumstances play a role, particular features of Social Security, such as the spousal benefit and automatic cost-of-living adjustments, often result in larger Social Security benefits to recipients than the benefits available under the Alternate Plans. In addition, when dependent children are involved, survivor benefits can be higher under Social Security. Because the Alternate Plans do not tilt benefits in favor of low-wage earners, they can provide better benefits for high-wage workers. In terms of disability benefits, the Alternate Plans generally provide higher initial monthly benefits, especially for high-income workers. It is important to keep the results of our analysis in perspective. Our results reflect the specific features and conditions of the Alternate Plans and should not be construed as an analysis of the potential for individual accounts in general. For example, in an effort to mirror the "safety" of Social Security, the Alternate Plans have followed a conservative investment strategy wherein investments in common stocks are avoided. As a result, the Alternate Plans' investments have had low returns--especially relative to those from the equities markets. Also, our projections of future Social Security benefits assume the benefits available today will be available in the future. Social Security benefits in the future could certainly be less than those we simulate depending on the reforms that are implemented to address the system's long-term shortfall. Finally, many of the proposals for individual accounts do not call for the complete replacement of Social Security but rather provide for a two-tier system that combines the safety net, social insurance aspect of Social Security with the promise of higher returns from individual accounts. Overall, our analysis suggests that several of Social Security's features make an important difference to the relatively less well-off, to single-earner married couples, and to families with dependent children. How these features are treated in any changes to Social Security could have important implications for these groups. We shared a draft of this report with Social Security personnel familiar with the program's benefit structure, outside retirement income specialists, and individuals responsible for administering the Alternate Plans. We received technical comments from several reviewers and incorporated the comments as appropriate. Administrators for the Alternate Plans also provided us with updated figures, which we used in calculating benefits. In addition, these administrators pointed out that we should use the annuitized values of the accounts at the time of the disability to calculate the Alternate Plans disability benefits. We incorporated those changes. The administrators also noted that they were in the process of introducing a number of changes to the Alternate Plans that would improve benefits. They told us that they were introducing an annuity that provided for a 2- to 3-percent annual adjustment to protect against inflation. The administrators also said they were in the process of adding new benefits for surviving spouses and dependent children. The spouse would receive a lifetime benefit of 30 percent of the deceased worker's income, and dependent children would receive an additional 30 percent. How much these benefits would cost had not been determined, and it was not clear how they would affect our comparisons. Finally, the Alternate Plans administrators told us that, in their view, we should have used the average returns that the plans' investments made in the past 17 years in projecting future returns. We disagree. Returns on fixed income portfolios have declined significantly since the 1980s, and forecasts of future returns on the assets in fixed income portfolios do not envision a return to those higher levels. The projections we employed were for an asset whose performance has closely mirrored the performance of the Alternate Plans' investments. We believe that is a more accurate estimate. We are providing copies of this report to the Commissioner of Social Security, officials of organizations and state and local governments that we worked with, and other interested congressional parties. Copies will also be made available to others upon request. Please contact me at (202) 512-7215 if you have any questions about this report. Other major contributors to this report are listed in appendix III. In order to compare potential retirement, survivor, and disability benefits under the Alternate Plans and Social Security, we simulated the work histories of county employees who had relatively low, median, or high earnings. We classified employees as low earners if they were at the 10th percentile of the wage distribution and as high earners if they were at the 90th percentile. Median earners are in the middle of the distribution (half earn more and half earn less). We used the 1998 wage distribution of Galveston County employees nearing retirement to determine low, median, and high earnings: $17,124, $25,596, and $51,263, respectively. Nationally, low, median, and high earnings were $13,000, $31,200 and $75,000. Low earners in Galveston County, therefore, had wages nearly one-third higher than those in the 10th percentile nationally, but the wages of high earners in Galveston were about 68 percent of those of the 90th percentile earners nationally; median wages of the Galveston County workers were 82 percent of the national median. In order to calculate Alternate Plans and Social Security benefits for our illustrative employees, we created earnings and contributions histories for these workers. We used a model of earnings growth over workers' careers to reflect the fact that wage income does not grow linearly over a working lifetime, but rather that wage growth resembles an "s"-shaped curve. This curve reflects more rapid growth during the years when an individual's productivity grows fastest and slower wage increases as the worker nears the end of his or her career. We used the earnings for workers nearing retirement in 1998 to project the nominal wages of such workers back to the beginning of their careers. We also used the model to project earnings experiences for those retiring in the future. We projected earnings at age 65 for workers retiring in the future in the three income classes by taking the wage distribution for 1998 earnings and inflating the earnings by nominal wage growth to the future retirement years, using the Social Security Trustees' Intermediate Cost Assumptions (see app. II). We applied the model to create the wage histories. The coefficients used to create the earnings histories were developed and reported in T. Hungerford and G. Solon, "Sheepskin Effects in the Returns to Education," Review of Economics and Statistics, 69(1), 1987. While actual earnings histories may have greater diversity over time than the wages produced by this model, this methodology allowed us to provide illustrative earnings patterns. To compute expected retirement, survivor, and disability benefits under the Alternate Plans, we calculated the expected balances in the accounts at the time of retirement, death, or onset of disability. Account balances depend on earnings, contributions, and investment income. We used the actual contribution rates that were in effect when the Alternate Plans began (Social Security payroll tax rates at the time) and adjusted the rates as they changed over time. Similarly, in projecting what the contributions would have been if the Alternate Plans had been in effect before 1981, we used the corresponding Social Security payroll tax rate. The contribution rates for the three counties differ only slightly, so we used the Galveston County contribution rates in generating our estimates. For future years, we assumed that current contribution rates would remain in effect. To arrive at the investment income, we obtained data on the interest rates earned on assets purchased by the Alternate Plans since 1981. To calculate the potential account balances for workers who entered county employment before 1981 or for future periods, we had to make some extrapolations. For the period 1963 to 1980, the funds' portfolio manager was able to provide us with the investment income on similar types of investment vehicles offered by the firm. In projecting future earnings, we found that Social Security special Treasury securities were another fixed income asset whose earnings closely paralleled the experience of the Alternate Plans' portfolios. The special Treasury securities issued to the Social Security Trust Funds closely mirrored the Alternate Plans' investment earnings history. We used Intermediate Assumptions' interest rate forecasts for the special Treasury securities developed for the Social Security Trustees 1998 Annual Report. To calculate Social Security benefits, we employed the Social Security Benefit Estimate Program for Personal Computers, known as the ANYPIA program, which is available on-line at www.ssa.gov. Finally, to calculate retirement and survivor benefits under the Alternate Plans, we calculated the monthly benefits that retirees or survivors would receive if they took their lump sum distributions and purchased either an individual life or a joint and survivor annuity. To estimate the monthly benefits, we obtained the annuity factors from the Alternate Plans' insurance and annuity providers. We also received annuity factors from the Social Security Administration to calculate the lifetime monthly retirement benefits. Our simulations made a number of simplifying assumptions. We do not represent the simulations we undertook to be "typical," but rather as illustrative of how workers and their families might fare under a range of circumstances. We assumed that individuals work continuously at one job for their entire working lives. We simulated 35-year and 45-year working lives and assumed that people retire at the normal Social Security retirement age. In reality, many individuals have very discontinuous work histories, work at many different places, and retire before the normal retirement age. Many people elect to take Social Security benefits when they first become eligible at age 62. We also assumed that Alternate Plan beneficiaries annuitized their lump sums, although currently very few elect life annuities. We made this assumption in order to put the two systems on an equal footing for benefit comparability. Average annual percentage in labor force(continued) Average annual percentage in labor force(continued) The real gross domestic product (GDP) is the value of total output of goods and services expressed in 1992 dollars. Francis P. Mulvey, Assistant Director, (202) 512-3592 Hans Bredfeldt James Lawson Christy Bonstelle Muldoon Barbara Smith Ken Stockbridge Bill Williams The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO provided information on three Texas counties' employee retirement plans, known as Alternate Plans, focusing on: (1) comparing the principal features and benefits of these plans with those of social security; and (2) simulating the retirement, survivor, and disability benefits that individuals in varying circumstances might receive under the Alternate Plans and under social security. GAO noted that: (1) while social security and the Alternate Plans offer retirement, disability, and survivor benefits to qualified workers, there are fundamental differences in the purpose and structure of the two approaches; (2) Social Security is a social insurance program designed to provide a basic level of retirement income to help retired workers, disabled workers, and their dependents and survivors stay out of poverty; (3) Social Security benefits are tilted to provide relatively higher benefits to low-wage earners, and the benefits are fully indexed to protect against inflation; (4) social security is a pay-as-you-go system that is projected to produce a negative cash flow in 2013 and become insolvent by 2032; (5) the Alternate Plans are advance funded plans; the contributions made by workers and their employers, which total 13.915 percent of workers' pay, and the earnings made on those invested contributions are used to fund retirement benefits; (6) the Alternate Plans' benefits are directly linked to contributions, so that retirement income is based on accumulated contributions and the earnings thereon; (7) at retirement, the worker can take the money in the account as a lump sum or select from a number of monthly payout options, including the purchase of a lifetime annuity; (8) GAO found that certain features of social security, such as the progressive benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and individuals with dependents; (9) many median-wage earners, while initially receiving higher benefits under the Alternate Plans, would also have received larger benefits under social security after 4 and 12 years after retirement, because social security benefits are indexed for inflation; (10) the Alternate Plans provide larger benefits for higher-wage workers than social security would, but in some cases, such as when spousal benefits are involved, social security benefits could also exceed those of the Alternate Plans; (11) survivor benefits often would be greater under social security than under the Alternate Plans, especially when a worker died at a relatively young age and had dependant children; (12) with regard to disability benefits, all workers in GAO's simulations would receive higher initial benefits under the Alternate Plans; and (13) it is important to note that the Alternate Plans performance is not necessarily indicative of how well a proposed system of individual accounts with social security might perform.
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The Federal Acquisition Regulation (FAR) establishes the policies and procedures governing suspension and debarment actions related to federal contracts. The Nonprocurement Common Rule (NCR) establishes the policies and procedures governing suspension and debarment for discretionary nonprocurement awards (i.e., grants, cooperative agreements, scholarships, or other assistance). The FAR and the NCR specify numerous causes for suspensions and debarments, including fraud, false statements, theft, bribery, tax evasion, and any other offense indicating a lack of business integrity. A suspension is a temporary exclusion pending the completion of an investigation or legal proceeding which generally may not last longer than 18 months, while a debarment is an exclusion for a reasonable, specified period depending on the seriousness of the cause, but generally should not exceed 3 years. A suspension or debarment under either the FAR or NCR has government-wide effect for all purposes, so that a party precluded from participating in federal contracts is also precluded from receiving grants, loans, and other assistance, and vice versa. OMB has the authority to issue guidelines for nonprocurement suspensions and debarments and the Office of Federal Procurement Policy within OMB provides overall direction for government-wide procurement policies, including those on suspensions and debarments under the FAR. ISDC, established in 1986, monitors the government- wide system of suspension and debarment. The ISDC consists of representatives from 24 federal agencies, as well as 18 independent agencies and government corporations. The Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 augmented and clarified certain ISDC functions to include providing assistance to help agencies achieve operational efficiencies in their suspension and debarment programs. The ISDC was also made responsible for coordinating lead- agency responsibility when multiple agencies have a potential interest in pursuing suspension and debarment of the same entity. In 2011, we made recommendations to improve agency and government- wide suspension and debarment efforts. We reviewed 10 agencies and found that the four agencies with the most procurement-related suspension and debarment cases shared common characteristics: a suspension and debarment program with dedicated staff, detailed policies and procedures, and practices that encourage an active referral process. Agencies are required to establish procedures for referring appropriate matters to their suspension and debarment official for consideration. The six agencies with few or no procurement-related suspensions or debarments for the period we reviewed--Commerce, HHS, Justice, State, Treasury, and DHS's FEMA--did not have these characteristics regardless of each agency's volume of contracting activity. To improve their suspension and debarment programs, we recommended these agencies take action to incorporate the characteristics associated with active programs. We also reported that government-wide efforts to oversee and coordinate suspensions and debarments faced a number of challenges. For example, we reported that the ISDC relies on agencies' participation and resources to fulfill its missions. To improve suspension and debarment programs at all agencies and enhance government-wide oversight, we recommended that OMB issue government-wide guidance that (1) describes the elements of an active suspension and debarment program, and (2) emphasizes the importance of coordinating with the ISDC. We found that the Departments of Commerce, HHS, Justice, State, the Treasury, and DHS's FEMA all took action since we made recommendations in 2011 to incorporate characteristics associated with active suspension and debarment programs.agencies have addressed staffing issues through actions such as defining roles and responsibilities, adding positions, and consolidating the suspension and debarment function into one office. The six agencies also have taken actions such as issuing formal policy and promulgating detailed guidance. Finally, the six agencies have engaged in practices that encourage an active referral process, including establishing positions to ensure cases are referred, developing case management tools that Since 2011, all six allow for referral tracking and case reporting, and establishing training programs. Table 1 summarizes the actions that agencies have taken since 2011. We found that all six agencies reported an increase in the number of suspension and debarment actions from fiscal year 2009 to 2013 as shown in table 2. The agencies generally experienced a notable increase starting in fiscal year 2011 when they began to take action to incorporate the characteristics associated with active suspension and debarment programs. Agency officials told us that the actions taken since 2011 to incorporate the characteristics associated with active suspension and debarments programs have resulted in an increased level of suspension and debarment activity at their respective agencies, though officials emphasized different factors. For example, officials from the Departments of Commerce, State, and the Treasury stated that improved coordination between the Office of the Inspector General and the Suspension and Debarment Official coupled with increased training and awareness resulted in more referrals and the processing of more actions. While the number of actions Treasury reported for fiscal years 2009 through 2013 has been modest, officials told us that 62 actions have been processed in the first 5 months of fiscal year 2014 and they expect continued increases in the number of referrals. Justice officials stated that one factor that may have contributed to an increased number of referrals and actions is the Attorney General's January 2012 memorandum to all litigating authorities and the Director of the Federal Bureau of Investigation, reminding them to consider whether the facts of a case could be used as a basis for an exclusion or debarment and to coordinate with agency suspension and debarment authorities. HHS officials noted that an increased number of actions have resulted in part from the Office of Inspector General providing additional resources for training investigators and auditors on how to make suspension and debarment referrals involving procurement and nonprocurement matters. Officials from DHS attributed an increase in the number of actions at FEMA and across DHS to having a centralized suspension and debarment office, a directive establishing common standards, increased staffing, and training. The number of suspension and debarment actions government-wide has increased in recent years, more than doubling from 1,836 in fiscal year 2009 to 4,812 in fiscal year 2013, as shown in figure 1. ISDC officials do not consider the overall number of suspensions and debarments as the only measure of success, and emphasized that increased suspension and debarment activity has been coupled with agencies' increased capability to use suspension and debarment appropriately and adhere to the principles of fairness and due process as laid out in the governing regulations. According to ISDC officials, the programmatic improvements made by many agencies are due in part to increased management attention within individual agencies, guidance from OMB, and support from the ISDC. OMB and ISDC have taken a number of actions to strengthen government-wide suspension and debarment efforts. In response to GAO's recommendations, on November 15, 2011, OMB directed agencies to take a number of actions to address program weaknesses and reinforce best practices in their suspension and debarment programs, including the following: Appoint a senior accountable official, if one has not already been designated, to be responsible for assessing the agency's suspension and debarment program and the adequacy of available resources, ensuring that the agency maintains effective internal controls and tracking capabilities, and ensuring that the agency participates regularly on the ISDC. Review internal policies, procedures, and guidance to ensure that suspension and debarment are being considered and used effectively. ISDC reported in September 2012 that each of the 24 agencies said it had an accountable official in place responsible for suspension and debarment activities, including assessing the adequacy of available training and resources; taken steps to address resources, policies, or both--in some cases by dedicating greater staff resources to handle referrals and manage cases and in others by entering into agreements to be mentored by the managers of successful programs; and procedures to forward possible actions to the suspending and debarring official. The ISDC also has increased its efforts to coordinate government-wide suspension and debarment efforts by promoting best practices and coordinating mentoring and training activities. For example, the ISDC maintains an online library of documents aimed at promoting standardization and has efforts to help agencies develop their suspension and debarment programs to ensure appropriate attention to administrative due process in accordance with the governing regulations. ISDC officials cite robust participation in the ISDC, including agencies with mature suspension and debarment programs, which has enabled the ISDC to assist agencies in making program improvements and, in some cases, standing up programs where none existed before. The ISDC also conducts training for member agencies, including cosponsoring with the Council of the Inspectors General on Integrity and Efficiency an annual debarment workshop. Also, ISDC members provide instructors for the debarment training courses offered by the Federal Law Enforcement Training Centers.understanding of suspension and debarment and holds monthly meetings to discuss topics, including specific suspension and debarment actions and selected agencies' suspension and debarment procedures and tracking tools. Finally, the ISDC undertakes outreach to promote The six agencies we reviewed reported that they highly value the functions performed by the ISDC as a focal point for government-wide suspension and debarment efforts. For example, Treasury officials told us that they designed their suspension and debarment program around the best practices identified by the ISDC, taking advantage of templates, guidance, and mentoring available through the committee. Officials from several agencies noted that the ISDC is instrumental in managing an informal process to help agencies coordinate lead agency responsibility when multiple agencies have a potential interest in pursuing suspension and debarment of the same entity. According to officials from the agencies we reviewed, the ISDC regularly distributes information on new potential cases reported by the agencies. The agencies take into consideration factors such as financial, regulatory, and investigative interests in determining which agency should take the lead in the case. Several of the agencies we reviewed reported that this process helps identify the most appropriate lead, while also involving other agencies that may have a stake in a particular action. Officials from several agencies also reported that ISDC monthly meetings provide an important forum through which suspension and debarment officials can seek advice from agency counterparts on a range of issues. In addition to speaking with officials from the six agencies we reviewed in 2011, we also reviewed the VA's suspension and debarment program to determine if government-wide efforts had affected the program. Based on our review, we found that the VA currently has the characteristics associated with active suspension debarment programs. For example, VA has a Debarment and Suspension Committee with a staff of about 10 positions that review all referrals for procurement-related suspension and debarment actions, conduct fact-finding, and present facts and recommendations to the Suspension and Debarring Official. Officials reported that VA has taken action to improve its suspension and debarment program in part in response to government-wide efforts. For example, VA's Suspension and Debarment Committee is currently drafting standard operating procedures to reflect leading practices. VA officials reported that the number of procurement-related suspension and debarment actions at VA has increased from 34 in fiscal year 2011 to 73 in fiscal year 2013. We provided a draft of this report to OMB and the Departments of Commerce, Health and Human Services, Justice, Homeland Security, State, the Treasury, and Veterans Affairs for review and comment. In an email response, the Associate Administrator of the Office of Federal Procurement Policy commented that OMB is pleased with the progress agencies have been making to strengthen their capabilities to consider the use of suspension and debarment when necessary. Further, OMB credits the work of the Interagency Suspension and Debarment Committee in helping to make many of the achievements possible. None of the seven agencies we reviewed provided substantive comments, but the Departments of Commerce, Health and Human Services, and Homeland Security provided technical comments which we incorporated, as appropriate. We are sending copies of this report to interested congressional committees; the Director of the Office of Management and Budget; the Attorney General and the Secretaries of Commerce, Health and Human Services, Homeland Security, State, the Treasury, and Veterans Affairs. The report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals who made key contributions to this report were Marie Mak, Director; Tatiana Winger, Assistant Director; Kristine R. Hassinger; Angie Nichols-Friedman; and Russ Reiter.
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To protect the government's interests, agencies can use suspension and debarment to exclude individuals, contractors, and grantees from receiving future contracts, grants, and other federal assistance due to various types of misconduct. In 2011, GAO reviewed ten agencies and found that agencies issuing the most procurement related suspensions and debarments shared common characteristics: dedicated staff, detailed policies and procedures, and an active referral process. GAO recommended that six agencies--the Departments of Commerce, Health and Human Services, Justice, State, the Treasury, and the Federal Emergency Management Agency--incorporate those characteristics, and that OMB issue guidance to improve oversight and government-wide suspension and debarment efforts. GAO was asked to review actions taken to implement the 2011 recommendations. This report examines (1) actions taken by the six agencies to incorporate characteristics of active suspension and debarment programs; (2) changes in the level of suspension and debarment activity; and (3) actions taken to improve oversight and government-wide efforts. To do so, GAO reviewed suspension and debarment programs, interviewed agency officials, verified the accuracy of agency data, and reviewed government-wide efforts. GAO is not making any new recommendations in this report. OMB commented that it is pleased with the progress that agencies have made and with the work of the ISDC.The other agencies did not provide substantive comments. The six agencies GAO reviewed all took action to incorporate characteristics associated with active suspension and debarment programs. Since GAO made recommendations to do so in 2011, the agencies have addressed staffing issues through actions such as defining roles and responsibilities, adding positions, and consolidating suspension and debarment functions. The agencies also have issued formal policies and promulgated detailed guidance. Finally, the agencies have engaged in practices that encourage an active referral process, such as establishing positions to ensure cases are referred for possible action, and developing case management tools. The number of suspension and debarment actions government-wide has more than doubled from 1,836 in fiscal year 2009 to 4,812 in fiscal year 2013. The number of suspension and debarment actions for the six agencies increased from 19 in fiscal year 2009 to 271 in fiscal year 2013 (see table below). The six agencies generally experienced a notable increase starting in fiscal year 2011 when the agencies began to take action to incorporate the characteristics associated with active suspension and debarment programs. The Office of Management and Budget (OMB) and the Interagency Suspension and Debarment Committee (ISDC) have taken action to strengthen government-wide suspension and debarment efforts. In November 2011, OMB directed agencies to address weaknesses and reinforce best practices in their suspension and debarment programs. The ISDC reported to Congress in September 2012 that, per OMB direction, the 24 standing member agencies of the ISDC had an accountable official in place responsible for suspension and debarment; taken steps to address resources, policies, or both; and procedures to forward matters to the suspension and debarment official for possible action. The ISDC has promoted best practices, coordinated mentoring and training, and helped coordinate lead agency responsibility when multiple agencies have an interest in pursuing suspension and debarment of the same entity. Reported increases in the number of suspension or debarment actions suggest that its efforts have been effective. ISDC officials emphasized that increased activity has been coupled with an increased capability to use suspension and debarment appropriately while adhering to the principles of fairness and due process.
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The department's vision of "One VA" was articulated to assist it in carrying out its mission of providing benefits and other services to veterans and dependents. It stems from the recognition that veterans think of VA as a single entity, but often encounter a confusing, bureaucratic maze of uncoordinated programs--such as those handling benefits, health care, and burials--that puts them through repetitive and frustrating administrative procedures and delays. According to the department, the "One VA" vision describes how it will use IT in versatile new ways to improve services and enable VA employees to help customers more quickly and effectively--in short, to really become "One VA." To help carry out its activities, VA plans to spend about $1.4 billion of its total fiscal year 2001 budget of about $48 billion on various IT initiatives. Of this $1.4 billion, about $763 million, $80 million, and $400,000, respectively, are intended for VHA, VBA, and the National Cemetery Administration (NCA). The remaining $589 million is for VA-wide IT initiatives in the financial management, human resources, infrastructure, security, architecture, and planning areas. The Clinger-Cohen Act and other related legislative reforms provide guidance on how agencies should plan, manage, and acquire IT as part of their overall information resources management responsibilities. These reforms require agencies to (1) appoint CIOs responsible for providing leadership in acquiring and managing IT resources, (2) perform business process reengineering prior to acquiring new IT, and (3) complete an integrated architecture to guide and constrain future investments. The Clinger-Cohen Act requires agency heads to implement an approach for maximizing the value and assessing and managing the risks of IT investments. It stipulates that this approach should be integrated with the agency's budget, financial, and program management processes. As detailed in our investment guide,an IT investment process is an integrated approach that provides for disciplined, data-driven identification, selection, control, life-cycle management, and evaluation of IT investments. In May 2000, we testified before this Subcommittee that VA had improved its processes for selecting, monitoring, and managing Capital Investment Board-level projects.In addition, VA had improved its in-process and post implementation reviews. However, as we testified, the in-process reviews may still not have been timely and lessons learned from post implementation reviews were provided only to the sponsoring VA organizations, and not to decisionmakers, such as the investment panel members, who could also benefit from them. Finally, the capital investment process used for projects below the Capital Investment Board- level was not as structured, and guidance for managing those projects was not complete. To address these issues, we testified that VA needed to (1) establish and monitor deadlines for completing in-process reviews, (2) provide decisionmakers with information on lessons learned from post implementation reviews, and (3) develop and implement guidance to better manage IT projects below the Capital Investment Board threshold. Last month we recommended that the Acting Secretary of Veterans Affairs implement these actions to improve VA's IT investment decision-making process.VA concurred with these recommendations, and stated that the in-process review plans will include completion dates, post implementation review findings, such as lessons learned, will be provided to investment panel members, and the VAInformationTechnologyCapitalInvestmentGuide,which was printed and distributed to VA's agencies earlier this month, provides guidance on processes for selecting, controlling, and evaluating IT investments and procurements below the Capital Investment Board threshold. The Clinger-Cohen Act directs the heads of major federal agencies to appoint CIOs to promote improvements in work processes used by the agencies to carry out their programs; implement integrated agencywide information technology architectures; and help establish sound investment review processes to select, control, and evaluate IT spending. To help ensure that these responsibilities are effectively executed, the act requires that the CIO's primary responsibility be related to information management. In July 1998, we reported that the responsibilities of VA's CIO were not limited to information management.Specifically, the CIO served the department in a variety of top management positions, including assistant secretary for management, chief financial officer, and deputy assistant secretary for budget. We noted that in an agency as decentralized as VA, the CIO was faced with many significant information management responsibilitiesthat constituted a full-time job for any CIO. Accordingly, we recommended that the Secretary of Veterans Affairs appoint a CIO with full-time responsibility for information resources management. VA concurred with this recommendation. It decided to separate the CIO function from the chief financial officer and established the position of assistant secretary for information and technology to serve as VA's CIO. This executive branch position--assistant secretary for information and technology--has remained unfilled, however, since its creation in 1998. Instead, the principal deputy assistant secretary for information and technology served as VA's acting CIO from July 1998 until he retired on June 1, 2000. The Secretary subsequently designated an acting principal deputy assistant secretary to serve as VA's acting CIO. VA still intends to have a departmentwide CIO. The White House just announced last week that it intends to submit a nominee to the Senate for confirmation as assistant secretary for information and technology and department CIO. The Clinger-Cohen Act requires agency heads to analyze the missions of their agencies and, on the basis of the results, revise and improve the agency's mission-related administrative processes before making significant investments in supporting IT. According to our business process reengineering guide,an agency should have an overall business process improvement strategy that provides a means to coordinate and integrate the various reengineering and improvement projects, set priorities, and make appropriate budgetary choices. We reported in 1998that VA had not analyzed its business processes in terms of implementing its "One VA" vision. We also pointed out that VA did not have a departmentwide business process improvement strategy specifying what reengineering and improvement projects were needed, how they were related, and how they were ranked. At that time, VA concurred with our recommendation to develop such a strategy. This past May,we testified before this Subcommittee that VA no longer planned to develop such a strategy. According to VA's assistant secretary for policy and planning, the department will, instead, rely on each of its administrations--VBA, VHA, and NCA--to reengineer its own business process. We subsequently recommended to the Acting Secretary of Veterans Affairs that VA reassess its decision to delegate business process reengineering to the individual administrations. VA did not concur with this recommendation. Specifically, the department stated that the administrations best understand the desired outcomes of their missions and the means to achieve them. It further stated that business process reengineering is a constantly evolving function that is not conducted in a vacuum. We agree that the individual administrations best understand their own operations and that business process reengineering is an evolving function that does not take place in a vacuum. However, by delegating primary responsibility for reengineering to the individual administrations, each administration is able to pursue its own reengineering initiatives separate and apart from each other, rather than focusing on achieving the "One VA" vision. Accordingly, VA is less likely to achieve this vision until it develops a departmentwide business process reengineering strategy. The Clinger-Cohen Act and Office of Management and Budget guidelines direct agency CIOs to implement an architecture to provide a framework for evolving or maintaining existing IT and for acquiring new IT to achieve the agency's strategic and IT goals. Leading organizations both in the private sector and in government use systems architectures to guide mission-critical systems development and to ensure the appropriate integration of information systems through common standards. In 1997, VA adopted the National Institute of Standards and Technology (NIST) five-layer modelfor its departmentwide IT architecture. However, as discussed in our 1998 report,VA and its components had yet to define a departmentwide, integrated IT architecture. Accordingly, we recommended that VA develop a detailed implementation plan with milestones for completing such an architecture. VA concurred with this recommendation. In May 1999, VA published a departmentwide technical architecture,which included a technical reference model and standards profile. This document described one layer--the technology layer--of the NIST model. VA had not documented the remaining four layers--the logical architecture--showing the business processes, information flows and relationships, applications processing, and data descriptions for the department. Mr. Chairman, during the Subcommittee's May 11, 2000, hearing, you requested that VA provide the Subcommittee with a plan and milestones for completing the logical portion of its departmentwide IT architecture within 60 days of the hearing. The resulting two-page plan, submitted to the Subcommittee on August 25, provides a high-level discussion of VA's approach for developing a target departmentwide logical architecture and time estimates for various deliverables. According to this plan, the VA administrations are expected to develop logical architectures for their administrations. To avoid duplicating the efforts of the administrations, VA expects the departmentwide logical architecture to focus on crosscutting issues and interdependencies. VA is obtaining contractor support to develop a detailed plan with milestones and to assist in developing this departmentwide logical architecture. VA expects this architecture to be completed within 6 months of the contract award date. In commenting on a draft of this testimony, VA stated that it expects to have the contract awarded by mid-October. VA's strategy for developing its logical architecture will not likely result in an integrated departmentwide architecture. In fact, VA acknowledges in its plan that the architectures developed by the administrations will not provide a unified picture of the department's architecture. By allowing each administration to develop its own logical architecture, at least three separate architectures could result. To avoid this, VA needs to reassess its current strategy and work together with VBA and VHA to develop an integrated, departmentwide logical architecture, consistent with the Clinger-Cohen Act. This will help foster achievement of the "One-VA" vision. According to VADirective6000,VA officials are required to maintain complete and accurate data on all personnel and non-personnel costs associated with IT activities. Further, the VACapitalInvestment MethodologyGuiderequires that project managers track expenditures against budget authorizations for IT projects. In addition, according to our IT investment management guide,an important step in the IT investment control process is a disciplined process for regularly tracking each project's expenditures over time. Further, according to our IT investment guide,organizations should have a uniform mechanism such as a management information system for collecting, automating, and processing data on expected versus actual outcomes, including expenditures. Although required to maintain complete and accurate IT cost data, VA does not consistently track IT expenditures across the department. Instead, the department has delegated the responsibility for tracking expenditures for IT projects to project managers within VA's administrations and offices, leading to different tracking approaches and difficulties in readily identifying the extent of IT costs. At the administration level, the extent of expenditure tracking varies. For example, VBA tracks IT expenditures centrally for procurements, such as hardware, software, and contract services. However, VBA does not track all regional office personnel costs associated with a project. In contrast to VBA, VHA has a decentralized process for tracking IT expenditures. Specifically, it has given responsibility for tracking more than 80 percentof its IT expenditures to its 22 VISNs. However, VHA does not have a uniform mechanism for tracking IT expenditures across the administration. VHA's new CIO acknowledged the need for a system to track all expenditures associated with IT projects. Until VA develops a uniform mechanism for tracking IT expenditures, the department will be less likely to make informed decisions on whether to modify, cancel, accelerate, or continue projects. At the same time, VA and its administrations may be unable to provide timely cost and budget IT information to the Congress. To improve tracking of IT project costs, VA recently initiated several actions. First, it is developing a uniform numbering system for its capital investment projects. This system is expected to generate reports from VA's financial management system showing actual expenditures associated with those projects. However, the department has yet to establish a date for when this system will be implemented. Second, VA has recently issued draft guidancedirecting the administrations to track actual IT expenditures. The department has not yet established a deadline for finalizing the guidance. Accordingly, the department needs to (1) establish timeframes for finalizing this draft guidance and then monitor its implementation to ensure compliance and (2) establish timeframes for implementing a uniform numbering system for its capital investment projects. I would now like to discuss the status of VA's efforts to develop and implement VHA's Decision Support System and VBA's compensation and pension replacement project. Each is at a different stage of development and implementation, and each continues to pose challenges to VA. VHA's Decision Support System is an executive information system designed to provide VHA managers and clinicians with data on patterns of patient care and patient health outcomes, as well as the capability to analyze resource utilization and the cost of providing health care services. VHA expects to use DSS to (1) prepare budgets for its medical centers, (2) allocate resources based on performance and workload, (3) generate productivity analyses and patient-specific costs, (4) support continual quality improvement initiatives, (5) measure outcomes-based performance and effectiveness of health care delivery processes, and (6) improve efficiency of care processes through the use of clinical practice guidelines. By the end of October 1998, DSS had been implemented at all VA medical centers. The total VA estimated cost from fiscal year 1994 through fiscal year 1999 to develop and operate DSS was approximately $213 million. As of June 30, 2000, VA calculated that it had spent another $36 million on DSS this fiscal year. As we testified this past May, DSS was not being fully utilized.Although cost reductions and improved clinical processes had been experienced by some VISNs and medical centers using DSS, none of the ones we contacted used DSS for all of the purposes VHA intended. The reasons given by VISNs and medical centers for not making greater use of DSS included (1) concerns about the accuracy and completeness of DSS data, (2) the need for 2 years of DSS data for budget formulation and resource allocation purposes, and (3) DSS staffing issues, including insufficient staff, staff with inadequate skills, and staff turnover. The May 2000 responses to two questions asked by VHA's chief network officer also indicate that DSS is not being fully utilized. Specifically, in a March 15, 2000, memorandum sent by VHA's chief network officer to all VISN and medical center directors, he asked for specific examples describing how the use of DSS had benefited veterans at the VISN and medical centers, and explanations for why DSS was not being used, including identification of barriers to its use. Regarding the first question on DSS usage, 4 of 22 VISNs--VISN 6 (Durham, North Carolina), VISN 8 (Bay Pines, Florida), VISN 20 (Portland, Oregon), and VISN 21 (San Francisco)--did not provide examples of DSS use. Further, VISN 6 and VISN 21 explicitly stated that they do not use DSS at the VISN level because they did not have reliable DSS data at the time from their medical centers. As illustrated in figure 1, the remaining 18 VISNs provided examples of using special studies/reports and cost studies/reports to make decisions with regard to resource utilization and quality improvement. Of the 18 VISNs, two--VISN 13 (Minneapolis) and VISN 10 (Cincinnati)--cited seven or more categories of DSS use; three VISNs--VISN 14 (Omaha), VISN 18 (Phoenix), and VISN 22 (Long Beach) cited only two categories of use. Data qualitym prove m ent Regarding medical centers, 59 of 140 did not provide specific examples of DSS use.Three of the 59 medical centers--Beckley (West Virginia), Anchorage Health Care System, and Boise (Idaho)--explicitly stated that they did not use DSS. Both Anchorage and Boise medical centers cited staffing problems as a reason for not using DSS; Beckley indicated problems with DSS data integrity. Figure 2 provides a snapshot of the 81 medical centers providing specific examples of DSS use. The Long Beach and Portland (Oregon) medical centers used DSS for the most categories--that is, eight or more. At the same time, three medical centers--Tomah (Wisconsin), St. Louis, and Wichita (Kansas)--cited only one category of use. Moving to the second question, on barriers, slightly over half of the VISNs--13--identified barriers to using DSS. As illustrated in figure 3, the barrier most often cited was the fiscal year conversion process,followed by data integrity concerns, software/connectivity issues,and staffing issues. Of the 24 medical centers identifying barriers, the fiscal year conversion process was also cited most frequently. For a snapshot of their responses, see figure 4. Lack om anage m enundersandng To address barriers with the fiscal year conversion process, the 2001 fiscal year clinical and financial conversion guidelines were issued on July 27, 2000, and the goal is to begin fiscal year 2001 processing by December 18, 2000. To encourage greater use of DSS, VHA has initiatives underway. For example, in December 1999, the undersecretary for health mandated the use of DSS data rather than data in cost distribution reports for the fiscal year 2002 budget resource allocations. DSS data will also be used as a performance measure in 2001 to determine whether VHA providers are following clinical guidelines for diabetes, according to VHA's Chief Quality and Performance Officer. Finally, the VISN and medical center managers' use of DSS data is expected to be monitored in 2001. Even with these initiatives, VHA officials within the Office of the Associate CIO for Implementation and Training and the VISNs and medical centers have told us that they are concerned that the recent decision to move the DSS program office from the Office of the CIO to the Office of the Chief Financial Officer may diminish DSS use for clinical purposes.These officials are concerned that this move may shift top management support and commitment more to the financial rather than clinical benefits of using DSS. According to VHA officials, using DSS for clinical purposes is very important and allows VA to improve health care delivery to veterans. For example, as we testified in May,the clinical practice of routinely ordering two units of pre-surgery autologousblood for total knee replacement was changed, based on DSS data, at the Portland (Oregon) VA medical center, resulting in estimated savings of $600+ per case. The transition plan for moving the DSS program office is currently being drafted and will address the oversight roles and responsibilities for DSS. The plan is expected to be completed by the end of this month. The second of the two projects you asked us to review is VBA's compensation and pension replacement project, one of the major initiatives under the agency's Veterans Service Network (VETSNET) strategy. This project was intended to replace VBA's existing compensation and pension payment systems with one new, state-of-the-art system. The project, which began in April 1996, had an estimated cost of $8 million and was originally scheduled for completion in May 1998. Over the years, we and others have reported on the problems VBA has encountered in completing this project.We stated that one key reason for the project's delays was the lack of an integrated architecture defining the business processes, information flows and relationships, business requirements, and data descriptions. For example, the project was begun before VBA had fully developed its business requirements. Project delays subsequently resulted due to confusion over the specific requirements to be addressed. Another reason for the project's problems was VBA's immature software development capability. In 1996 we reported that VBA's software development capability was ad hoc and chaotic--the lowest level of software development capability.At this level, VBA could not reliably develop and maintain high-quality software on any major project within cost and schedule constraints. Reviews by VA and by us illustrated that this project had difficulties meeting deadlines and that not all critical systems development areas were addressed. To date, VBA has yet to reach the next, repeatable, level of software development. The compensation and pension replacement project has missed several key milestones. For example, the project missed its original May 1998 completion date and a revised completion date of December 1998. In 1999, VBA changed its strategy for the compensation and pension replacement project to incorporate several software products previously developed and used at selected VBA regional offices. At that time, VBA did not have a completion date for this project. Since then, VBA has developed short-term milestones for this project. Specifically, the first product scheduled for implementation under VBA's revised strategy is expected to be rating board automation 2000. This product is expected to be implemented this November and is to assist veterans service representatives in rating benefit claims. Other products under development as part of the compensation and pension replacement project include: Modern award processing-development (MAP-D)--which is expected to manage claims development processes, including the collection of data to support the claim, requests for exams to determine degree of injury or disability, and tracking of the claim. MAP-D is also expected to provide direct access to three other software products that address claims development processes. Search/participant profile--which is expected to establish the veteran record and collect basic information on the veteran and family. Award processing--which is expected to compute the award or payment amount based on the results of the rating process. Finance and accounting system--which is expected to develop the actual payment record and handle all accounting functions. The project manager said that current plans are to complete development and testing of these five products by December 2000. A pilot test of all of the above products except MAP-D is expected to begin in January 2001. In the pilot, 10 new claims are to be processed and payments generated using the new products. However, before the compensation and pension replacement pilot can be fully implemented, top management in VBA must address several important issues. First, large, complex projects, such as the compensation and pension replacement project should have an approved project management plan and schedule to determine what needs to be done and when, and to use as a means of measuring progress. VBA has yet to develop such a project plan and schedule for developing and implementing this system. Instead, detailed plans and schedules exist only for the next few months. Similarly, VBA has yet to address fully other critical systems development areas. The first of these is data conversion. Specifically, data in the existing VBA system will need to be converted to the new system. According to VBA officials, this is the most difficult remaining part of the compensation and pension replacement project. They told us that a data conversion strategy has been drafted and is under review. In addition, VBA must develop data exchanges to allow the compensation and pension replacement system to share data with other systems. For example, it is critical that changes to veteran information, such as name and address, captured in the compensation and pension replacement system be changed in other VBA systems. Lastly, VBA is vulnerable to disruptions due to contractor volatility and staffing uncertainties. For example, of the 25 contractors currently involved in the compensation and pension replacement project, over half (13) have been added to the project within the last year. According to VBA officials, they may also experience problems with obtaining in-house staff from its data centers to help develop the compensation and pension replacement system and other VBA projects, such as an effort to consolidate VBA's data center operations from Hines (Illinois) and Philadelphia to Austin, because they compete for some of the same people over the next 2 years. These concerns increase the likelihood that schedule delays and cost overruns may occur. VBA officials acknowledge the above issues and have informed us that efforts are underway to address them. However, until VBA develops a fully integrated project plan and schedule that incorporates all critical system development areas, challenges and vulnerabilities will remain. The last area you asked us to discuss is computer security--critical to any organization's ability to safeguard its assets, maintain the confidentiality of sensitive information, and ensure the reliability of its financial data. If effective computer security practices are not in place, financial and sensitive information contained in VA's systems is at risk of inadvertent or deliberate misuse, fraud, improper disclosure, or destruction--possibly occurring without detection. Over the past several years we have reported on VA's computer security weaknesses. In September 1998 we reported that computer security weaknesses placed critical VA operations such as financial management, health care delivery, and benefits payments at risk of misuse and disruption.We reported in October 1999 that VA's success in improving computer security largely depended on strong commitment and adequate resources being dedicated to the information security program plan.In May 2000 we testifiedthat VA had still not adequately limited the access granted to authorized users, appropriately segregated incompatible duties among computer personnel, adequately managed user identification and passwords, or routinely monitored access activity. Earlier this month, we reported that serious computer security problems persisted throughout the department and VHA because VA had not yet fully implemented an integrated security management program and VHA had not effectively managed computer security at its medical facilities.Consequently, financial transaction data and personal information on veterans' medical records continued to face increased risk of inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. Specifically, as we reported, VA's New Mexico, North Texas, and Maryland health care systems had not adequately controlled access granted to authorized users, prevented employees from performing incompatible duties, secured access to networks, restricted physical access to computer resources, or ensured the continuation of computer processing operations in case of unexpected interruption. To facilitate VA actions to develop and implement a comprehensive, coordinated security management program that would encompass VHA and other VA organizations, we reiterated our October 1999 recommendation that VA develop computer security guidance and oversight processes and recommended that VA monitor and resolve coordination issues that could affect the success of the departmentwide computer security program. VA concurred with these recommendations and stated that it intends to develop an accelerated plan to improve information security at its facilities. Specifically, VA stated that it would track the resolution of the recommendations we made to correct specific information security weaknesses at the health care systems we visited. In addition, VA provided examples of security management activities performed by the VHA central security group to implement and oversee computer security throughout the administration. VA also stated that it would use its Information Security Working Group, which includes representatives of all administration and staff office security groups, to develop departmentwide policy, guidance, and processes. In summary, the department still faces important challenges in several IT areas. While it has improved its IT investment decision-making process and plans to fill its department CIO position, VA may encounter problems achieving its "One VA" vision until it develops an overall business process reengineering strategy and a departmentwide, integrated IT architecture. Full implementation of our prior recommendations in these areas is essential to VA's achieving its "One VA" vision. In addition, VA's lack of departmentwide tracking of IT expenditures makes it difficult for the department to manage the risks of its IT investments. Further, top management support and commitment are essential to addressing the challenges VA faces in making greater use of DSS and in addressing issues involved in developing the compensation and pension replacement project. Improving VA's computer security will also take sustained leadership and commitment to developing and implementing a comprehensive security management program. We performed this assignment in accordance with generally accepted government auditing standards, from June through September 2000. In carrying out this assignment, we assessed the actions taken to address our recommendations on improving VA's IT investment decision-making process. We reviewed documentation on VA's efforts to fill the CIO position and reviewed and analyzed VA, VBA, and VHA IT architecture documents, comparing these with NIST's five-layer standard, the guidance used by VA. To determine how IT expenditures are tracked, we reviewed and analyzed VA's policies and procedures and compared them with applicable guidance in this area. We discussed cost tracking procedures with officials at VA, VBA, VHA, and five VISNs, and reviewed relevant documentation. For the DSS project, we reviewed VISN and medical center examples for DSS use and barriers, and visited four VISNs--VISN 5 (Baltimore), VISN 8 (Bay Pines, Florida), VISN 18 (Phoenix), and VISN 21 (San Francisco)--to discuss their examples of DSS use and barriers to such use. Specifically, we analyzed the examples provided by the VISNs and medical centers and summarized them into nine categories of DSS use and 13 categories of barriers to such use. We also reviewed performance documentation and met with VHA officials to discuss actions planned for DSS use. For the compensation and pension replacement project, we reviewed plans and schedules for the project and visited the development site at Bay Pines. We also discussed issues with VBA managers in Washington, D.C. In the area of computer security, we evaluated security controls at three VHA medical facilities--VA Maryland Health Care System, VA New Mexico Health Care System, and the VA North Texas Health Care System--and reviewed our recent reports and VA updates on actions taken to address our recommendations. We provided a draft of this testimony to VA for comments and incorporated changes where appropriate. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For information about this testimony, please contact me at (202) 512-6253 or by e-mail at [email protected] making key contributions to this testimony included Nabajyoti Barkakati, Michael P. Fruitman, Amanda Gill, Tonia L. Johnson, Helen Lew, Barbara S. Oliver, J. Michael Resser, and Kevin Secrest. (511856)
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Pursuant to a congressional request, GAO discussed the Department of Veterans Affairs' (VA) information technology (IT) program, focusing on VA's efforts to: (1) improve its process for selecting, controlling, and evaluating IT investments; (2) fill the chief information officer (CIO) position; (3) develop an overall strategy for reengineering its business processes; (4) complete a departmentwide integrated systems architecture; (5) track its IT expenditures; (6) implement the Veterans Health Administration's (VHA) Decision Support System and the Veterans Benefits Administration's (VBA) compensation and pension replacement project; and (7) improve the department's computer security. GAO noted that: (1) overall, VA's IT investment decision-making process has improved, and it has started to implement recommendations GAO enumerated in May and August of this year; (2) further, VA is obtaining a full-time CIO now that the Administration has identified a candidate for the position; (3) however, the department no longer plans to develop an overall strategy for reengineering its business process to effectively function as "One VA," nor has it defined the integrated IT architecture needed to efficiently acquire and utilize information systems across VA; (4) in addition, VA lacks a uniform mechanism that readily tracks IT expenditures; (5) instead, VA's different offices use various mechanisms for tracking IT expenditures; (6) VHA's Decision Support System (DSS) and VBA's compensation and pension replacement project continue to face challenges; (7) as demonstrated in a survey to all Veterans Integrated Service Networks and medical centers directors, DSS is not being fully utilized; (8) in addition, while VBA plans to pilot test portions of its compensation and pension replacement system in January 2001, other key issues need to be addressed before the system can be fully implemented; (9) for example, VBA does not have a plan or schedule for converting data from the old system to the new system and exchanging data between the new system and other systems; (10) regarding computer security, VA has begun to address weaknesses identified by GAO and its Office of Inspector General; and (11) until it develops and implements a comprehensive, coordinated security management program, VA will have limited assurance that financial information and sensitive medical records are adequately protected from misuse, unauthorized disclosure, and destruction.
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IRS is in the midst of a major modernization effort, which, if implemented as intended, will change the way IRS receives, processes, stores, and retrieves information needed to administer the tax system and change the way taxpayers and IRS interact. As part of this effort, IRS plans to (1) shift from a paper-based to an electronic tax-processing system, (2) consolidate fragmented telephone assistance into fewer centrally managed locations to handle almost all taxpayer calls, and (3) develop a database that contains all pertinent taxpayer account information and make that information readily available to all employees who need it. These plans are all part of what IRS calls its new business vision. IRS is making organizational changes to accommodate this new vision by (1) moving responsibility for processing electronic returns from 5 service centers to 3 computing centers; (2) consolidating in 5 submission processing centers, the paper-processing activities now done in 10 service centers; and (3) consolidating in 23 sites, the customer service activities now done in over 70 sites. Electronic filing is one of IRS' first ventures into a more modern environment. This alternative to the traditional filing of paper returns started as a test in 1986 and became available nationwide in 1990. Some taxpayers can file electronically by telephone, but most electronic filing is done through a tax return preparer or an electronic return transmitter. Once received by IRS, electronic returns are automatically edited, processed, and stored--functions that are performed manually for paper returns. Electronic filing benefits taxpayers. The benefits include receipt of their refunds several weeks sooner than if they had filed paper returns and greater assurance that (1) IRS has received their returns, (2) the returns are mathematically accurate, and (3) information on the returns has been accurately posted to the taxpayers' accounts in IRS' records. Compared with IRS' current procedures for processing paper returns, electronic filing has several benefits for IRS. These benefits include reduced costs of processing, storing, and retrieving returns and faster, more accurate processing of returns and refunds. Also, with electronic filing, IRS gets 100 percent of the return information in its computers compared with the approximate 40 percent IRS inputs from paper returns. As part of its future business vision, IRS plans to capture 100 percent of the information on paper returns using new scanning technology. However, the cost of scanning the data from paper returns will most likely be higher than the cost of obtaining it electronically because (1) manual labor will still be required to prepare the paper documents for scanning and (2) IRS test indicate that scanning cannot always correctly read the information on paper returns, thus requiring rework and manual intervention. Therefore, electronic filing would continue to provide a more efficient way of obtaining tax return data than having taxpayers submit paper returns. Our objectives were to assess (1) IRS' progress in achieving its electronic filing goal, (2) the availability of data needed to develop an electronic filing strategy, and (3) the implications for IRS if it does not reach its electronic filing goal and reduce its reliance on paper. To accomplish our objectives, we did the following: We analyzed IRS data for calendar years 1990 through 1994 on the number and composition of electronic filings. For calendar year 1995, we analyzed such data through May 1995. We determined IRS' potential shortfall in meeting its 80-million goal for 2001 by using the annual growth rates for 1993 and 1994. We did not use the 1995 growth rate because IRS officials believe the 1995 rate is an aberration, and they expect the growth of electronic filing to resume in 1996. We used IRS data on the average cost to process electronic returns and various types of paper returns in 1993 (the latest available), along with data on the number of returns filed in 1994, to estimate (1) the potential savings if all forms 1040, 1040A, and 1040EZ had been filed electronically in 1994 and (2) the portion of potential savings that IRS realized, given the number of returns that were actually filed electronically in 1994. We did not assess the reliability of IRS' data on average processing costs for paper and electronic returns. We interviewed officials and staff who had electronic filing responsibilities in IRS' National Office; 2 of its 7 regional offices (Central and Mid-Atlantic); 5 of its 63 district offices (Baltimore, Cincinnati, Cleveland, Indianapolis, and Richmond); and 4 of its 10 service centers (Andover, Cincinnati, Memphis, and Philadelphia). We judgmentally selected IRS field offices that were involved with unique electronic filing initiatives and/or were convenient to our audit staff. We reviewed information related to the electronic filing program, including IRS' electronic filing strategy, related legislative proposals, and surveys of preparers and taxpayers done by the AICPA and other organizations. We reviewed IRS' modernization plans, including documents on the sizing of submission processing centers and discussed with returns processing and information systems managers in IRS' National Office, IRS' plans in the event electronic filing falls short of expectations. We did our work between April 1994 and May 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On July 27, 1995, IRS' Executive for Electronic Filing and the Site Executives for IRS' Computing Centers and Submission Processing provided oral comments. Those comments and our evaluation are summarized on pages 17 to 20 and are incorporated in this report where appropriate. Since the inception of electronic filing, IRS' marketing strategy has been targeted primarily at professional tax return preparers. That strategy has not resulted in the level of electronic filing that will bring IRS to its long-term goal nor has it attracted those taxpayers who file the kinds of returns that contribute most to IRS' paper-processing workload and costs. One impediment to the growth of electronic filing that IRS has yet to adequately address is its cost to taxpayers and preparers. When electronic filing started in 1986, IRS' marketing approach was to encourage tax return preparers to provide electronic filing in hope that they would market the service to the general public. IRS' rationale for this approach was based primarily on the large number of returns prepared by professional preparers--about 57 million for tax year 1993. Because we saw the need for IRS to expand the appeal of electronic filing, we recommended, in January 1993, that IRS identify additional market segments and specify national strategies for attracting those market segments to electronic filing. To that end, an IRS task group, in May 1993, presented a strategy that encompassed 21 initiatives for increasing the number of electronically filed returns. A few of the 21 initiatives have been implemented and have resulted in modest increases in the number of electronic returns. For example, one initiative called for expanding TeleFile--a program that allows taxpayers who meet certain criteria to file 1040EZ returns by telephone. About 680,000 taxpayers in 10 states filed returns using this method in 1995 compared with 149,000 in 1 state in 1993, and IRS plans to expand the program nationwide in 1996. Another initiative called for expanding cooperative arrangements with states that would allow electronic filers to jointly file their federal and state tax returns. As of June 9, 1995, about 1.5 million taxpayers in 29 states had used this program compared with about 635,000 taxpayers in 15 states in 1993. However, other initiatives included in the 1993 strategy have been delayed or dropped. According to the IRS task group, several of these initiatives required legislation. For example, the task group had estimated that IRS could obtain 37 million electronic returns by legislatively mandating that tax return preparers who prepare a large number of individual returns offer electronic filing. That initiative was dropped because, according to IRS and Treasury officials, there was little chance that Congress would pass such legislation. Appendix I provides additional information on those initiatives that the task group said would require legislation. Because several initiatives that were designed to attract large numbers of taxpayers to electronic filing have not been implemented, IRS' default strategy has been to continue marketing electronic filing to tax preparers. However, that strategy has resulted in a program that primarily attracts individuals who file simple tax returns, are due refunds, and are willing to pay the fees associated with electronic filing to get those refunds sooner. As shown in figure 1 on page 8, the number of electronic returns increased from about 4.9 million returns in 1990, when electronic filing became available nationwide, to a high of 16.4 million returns in 1994, before dropping to an estimated 14.8 million returns in 1995. IRS attributes the decrease in electronic filing in 1995 to steps it took to prevent refund fraud. As a result of these steps, refunds for millions of taxpayers were delayed, thereby reducing the major appeal of electronic filing. IRS officials believe that the decrease is temporary. Even if electronic filing begins growing again, IRS will be hard pressed to reach its electronic filing goal. We estimate that electronic filing, including returns filed on magnetic media, would need to grow at an annual rate of about 32 percent to reach 80 million returns in 2001. That rate contrasts with the 14 percent annual growth rate IRS achieved in 1993 and 1994. As shown in figure 1, if annual growth were to continue at 14 percent, we estimate that only about 33 million returns would be filed electronically in 2001. Not only is the number of electronic returns relatively low, but the returns being filed electronically are generally those that contribute least to IRS' paper-processing workload and operating costs. Electronic filing has not yet attracted a representative number of taxpayers who file individual income tax returns on the more complex Form 1040 and business returns. Since electronic filing began, IRS has focused its marketing efforts on individual income tax returns. Accordingly, those returns, which accounted for about 56 percent of all returns filed in 1994, accounted for 86 percent of those filed electronically. Despite the focus on individual returns, electronic filing is not attracting those taxpayers who represent the largest segment of individual filers and those who file the most costly individual income tax form to process on paper. As a result, potentially significant cost savings may be going unrealized. On the basis of IRS' 1993 service center processing cost estimates (the latest available), it cost IRS $4.53 to process a paper Form 1040, $3.95 to process a paper Form 1040A, and $3.36 to process a paper Form 1040EZ.The most costly of the three (Form 1040) accounted for about 59 percent of all individual returns (paper and electronic) processed in 1994, yet Form 1040 accounted for only about 20 percent of the individual returns filed electronically. On the basis of IRS' processing cost estimates for paper returns and its estimated average cost of $3.08 to process each electronic individual return, we estimated (1) the total potential processing savings that could have been achieved if all individual income tax returns had been filed electronically in 1994 and (2) the portion of those potential savings that went unrealized. Figure 2 shows that the greatest amount of unrealized savings, about $90 million, was for returns filed on Form 1040. Because paper returns filed by businesses are more expensive to process than paper returns filed by individuals, according to IRS data, they would seem to represent a potential source of significant savings if filed electronically. IRS estimated, for example, that in 1993 it cost $6.97 to process each partnership return (Form 1065), $6.95 to process each corporate income tax return (Form 1120), and $6.19 to process each Employers Quarterly Federal Tax Return (Form 941). In 1994, about 6 percent of all business returns were filed electronically (2.4 million out of 42 million), while the participation rate for individual returns was about 12 percent (14 million out of 115 million). Of the 2.4 million electronically filed business returns, all but about 46,000 were filed on magnetic media. IRS officials said that the lower participation rate for business returns reflects, in part, the priority IRS has attached to increasing the number of electronically filed individual returns. That priority is reflected in IRS' May 1993 strategy. The more traditional marketing aspects of IRS' strategy were focused on getting individual returns filed electronically. For business returns, IRS' strategy was to rely on legislative mandates. More specifically, the 1993 strategy included an initiative that called for developing a legislative proposal that would (1) mandate electronic filing of many business returns, including those filed by fiduciaries (Form 1041), partnerships, and corporations and (2) require the electronic transmission of Employers Quarterly Federal Tax Returns by businesses with 10 or more employees. IRS has since decided to pursue mandates only as a last resort but has not developed an alternative strategy for getting large numbers of business returns filed electronically. IRS has not been successful in dealing with a major impediment to greater taxpayer and preparer participation in electronic filing, i.e., its cost. For most taxpayers, the only way to file electronically is through a tax return preparer or electronic filing transmitter at a cost of from $15 to $40. This cost is in addition to any costs associated with preparing the return. In January 1993, we reported that electronic filing appealed primarily to taxpayers who most needed their refunds and that other taxpayers due refunds were unwilling to pay the going fees for that benefit. Cost is even more of an impediment to taxpayers owing money because those taxpayers see little, if any, benefit to filing electronically. We know of little that has changed since 1993 to alter that opinion. As a result, less than 2 percent of the individual income tax returns filed electronically in 1995 were from taxpayers owing money. In response to a recommendation in our January 1993 report and one of the initiatives in IRS' May 1993 strategy, IRS has (1) increased the number of walk-in sites that offer free electronic return preparation and transmission and (2) provided additional support for similar services at sites staffed by volunteers. As of April 29, 1995, about 246,000 taxpayers had availed themselves of these free services. The free electronic filing at IRS and volunteer sites is generally available to low-income taxpayers who file less complex returns. Cost is at least one factor that deters electronic filing by a potentially more lucrative market of individual taxpayers--those with home computers. Since 1992, taxpayers using tax preparation software could file returns from home computers and transmit them from home through an approved computer service. However, these filers must pay a fee of about $15 and must still send paper, including a signature document (Form 8453) and wage and withholding statements (Forms W-2), to IRS. Only about 1,400 taxpayers had filed their returns through this program as of May 5, 1995. For those taxpayers who prepare their returns on computers but are unwilling to pay to transmit the returns electronically, the result is inefficient and counterproductive. The taxpayer prepares the return on a computer and then converts it to paper for mailing to IRS, which then employs a labor intensive, error prone process to input that information back into a computer. IRS has completed a draft strategy for increasing the number of taxpayers filing from home computers. Part of the strategy focuses on eliminating the fees these taxpayers incur for having a third party transmit their returns to IRS. Cost also deters some preparers from participating in the electronic filing program. In September 1994, the Chairman of the AICPA's Tax Practice and Procedures Committee provided us with summary information on members' experiences with electronic filing. He said that some practitioners have been filing electronically for several years with positive experiences, while others discontinued doing so because IRS' current electronic filing program "did not fit into their 'office routine' or because they or their clients did not receive any additional benefit from the program to offset the additional cost." He said that many practitioners are concerned with the additional input, transmitting, and monitoring time required with the current electronic filing program and the fact that electronic filing is not yet a paperless system. Among the paper documents, the most problematic, according to the AICPA, is the signature document. That document, which is used to affirm that the information on the electronic return is accurate, must be signed by the taxpayer and filed with IRS within 24 hours after IRS has acknowledged acceptance of the electronic return. IRS has recognized for years the potential benefit of paperless electronic filing but thought that legislation was needed to authorize an alternative to the paper signature document. Information on IRS' efforts to obtain such legislation is presented in appendix I. In April 1995, however, IRS' Office of Chief Counsel concluded that IRS had regulatory authority to prescribe signature alternatives. An IRS official said that IRS plans to test signature alternatives in 1996. IRS recognizes that it needs to increase the appeal of electronic filing to attract more taxpayers. IRS also recognizes that it does not have unlimited staff or funds to apply to that effort. However, IRS' ability to effectively target its limited resources is hampered by inadequate data on the relative costs and benefits of processing different types of returns electronically versus on paper. Business and complex individual returns would seem to offer opportunities for significant cost reductions if filed electronically. However, IRS does not have sufficient data to determine (1) what it would cost to get those returns filed electronically, including the costs of any incentives that might be needed to prompt certain groups of taxpayers to file electronically and (2) how that cost compares to the expected benefits from electronic filing. As discussed earlier, IRS has data on some of the costs incurred in processing returns. However, IRS does not have data on other costs that can vary depending on how a return is filed. Those costs include (1) costs to store and retrieve returns and to administer certain fraud controls, such as those established to assess the suitability of preparers and transmitters who apply to participate in the electronic filing program and (2) certain nonservice center costs incurred in resolving taxpayer account errors that are made during IRS' manual processing of paper returns (such as the costs associated with handling the extra telephone calls generated by those errors). Without better data on the relative costs and benefits of electronic filing as well as data on why taxpayers do not file electronically and what it would take to get them to do so, IRS cannot make sound decisions on such things as the feasibility of offering incentives (such as a tax credit) to encourage greater participation in the program. IRS awarded a contract in May 1995 that may provide at least some of the needed cost/benefit data. Among other things, the contract calls for a systematic analysis of the costs and benefits of each step in the electronic filing process. We believe this aspect of the contract is critical to helping IRS focus its resources on those taxpayers or returns that provide the greatest opportunity for reducing overall operating costs. Data on the cost and benefits of electronic filing versus paper filing for various taxpayers or returns, coupled with estimates of the number of electronic returns IRS can expect to receive from these market segments, should provide IRS with a foundation for focusing future electronic filing marketing strategies. It is not clear whether the contractor will be doing any taxpayer focus groups or surveys to determine what changes IRS needs to make to better motivate taxpayers to participate in electronic filing. IRS' most recent taxpayer opinion data on electronic filing were collected in 1991 and those did not include data from businesses. Unless IRS obtains more current information from taxpayers, it may have difficulty reliably estimating the number of electronic returns it can expect to receive from different market segments. A complicating factor in any cost/benefit analysis is IRS' plan to change the way it processes paper returns in the future. Instead of the current manually intensive process by which tax return data are keypunched into the computer, IRS plans to scan paper returns. If scanning reduces the cost of processing paper returns, as expected, it could alter any analysis of the relative costs and benefits of electronic filing. In deciding on 5 submission processing centers and 23 customer service centers and in determining the number of persons needed to staff those centers, IRS relied, in large part, on expectations that it would be receiving a minimum of 61 million electronically filed returns by 2001. Using IRS' return filing projections for 2001, we estimated that submission processing centers would thus be expected to process about 163 million paper returns. If fewer returns are filed electronically or if the returns filed electronically do not substantially decrease IRS' paper-processing workload, IRS will have to process more paper, which would decrease productivity and increase costs. The need to process more paper could also cause IRS to revise its plans for the submission processing centers. Staffing and equipment needs could be expected to increase at the sites if more paper returns have to be processed. A National Office official told us that if another submission processing site is needed, site preparation costs alone would amount to more than $17 million. A substantial increase in the number of paper returns could also affect IRS' plans for its 23 customer service centers and the availability of staff to work in compliance positions. The customer service centers are responsible for handling taxpayer telephone and correspondence contacts, many of which are a byproduct of questions that arise from processing taxpayers' returns. Because of the substantially higher error rates associated with paper returns, according to IRS data (23 percent versus 2 percent for electronic returns), customer service centers would likely need to field more questions if IRS receives more paper returns than it has projected. And, if IRS needs more staff to process paper returns and provide customer service, it may have fewer staff to redeploy to compliance positions, thus decreasing the amount of additional tax revenue anticipated from such a redeployment. IRS National Office officials told us that they had not developed contingency plans for the possibility that electronic filing will fall short of expectations. They believe that IRS will be successful in achieving the level of electronic filing needed to support the projected workloads for the submission processing and customer service centers. In the event of a shortfall, they believe IRS will have time later to develop alternative plans. IRS has developed a contingency plan for the document imaging system that is to eventually replace IRS' current paper-processing system. The purpose of that plan is to ensure that the project office overseeing implementation of this automated system can help submission processing centers process tax documents if the automated system does not meet prescribed efficiency rates. The plan does not indicate how IRS' plans for the new imaging system would have to be revised if IRS receives more paper returns than the system is being designed to handle. The plan, given its focus on submission processing, also does not address the impact of a shortfall in electronic returns on IRS' plans for customer service. We believe that contingency plans are needed now. IRS is beginning to implement its customer service vision and is preparing to pilot the imaging system. In conjunction with those efforts, IRS needs to identify and take into account the impact of possible shortfalls in electronic filing. The longer IRS waits, the fewer its options become and the less time it will have to fully consider alternatives. IRS' ability to effectively process tax returns and assist taxpayers in the future largely depends on how successful IRS is in converting to an electronic environment and reducing its reliance on paper. Electronic filing of tax returns is a critical part of that conversion. However, without some dramatic changes in IRS' current electronic filing program over the next 6 years, many of the benefits available from electronic filing could go unrealized. The number of electronic returns has been growing at a pace that will leave IRS far short of its 80-million goal in 2001. Even more important to the ultimate success of electronic filing, in our opinion, is the fact that the returns being filed electronically are generally the less complex returns that are the least costly for IRS to process when filed on paper. The heavy representation of less complex returns may be influenced, at least in part, by IRS' goal of 80 million returns. Focusing solely on this goal could cause IRS to expend its limited resources on initiatives that are directed toward groups of taxpayers or types of returns that provide the greatest opportunity to increase the number of electronic returns but not the greatest opportunity to reduce IRS' paper-processing workload and operating costs. Although a marketing strategy that focuses on reducing paper and costs may generate fewer than 80 million returns, it could have a more significant impact on IRS' overall operations. The contract IRS awarded in May 1995 may provide cost/benefit data IRS can use to reassess its strategy. That information may help IRS identify effective steps to make electronic filing more attractive to those taxpayers and tax return preparers who are now put off by its cost. If the growth and impact of electronic filing fall short of expectations, IRS' paper-processing workload will increase. More paper means more errors, which, in turn, would create a need for more taxpayer contacts. Depending on the extent of the electronic filing shortfall, IRS may need to increase the number and/or size of submission processing and customer service centers and adjust plans for equipping and staffing the centers. However, IRS is not prepared to make those adjustments because it has no contingency plans. To help better ensure the success of IRS' modernization, we recommend that the Commissioner do the following: Identify those groups of taxpayers who offer the greatest opportunity to reduce IRS' paper-processing workload and operating costs if they were to file electronically and develop strategies that focus IRS' resources on eliminating or alleviating impediments that inhibit those groups from participating in the program, including the impediment posed by the program's cost. Adopt goals for electronic filing that focus on reducing IRS' paper-processing workload and operating costs. These goals could be used in addition to the existing electronic filing goal to assess IRS' progress in achieving the intended benefits of electronic filing. Prepare contingency plans for the possibility that the electronic filing program will fall short of expectations. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designated representative. Responsible IRS officials, including IRS' Electronic Filing Executive and Site Executives for Computing Centers and Submission Processing, provided IRS' comments in a July 27, 1995, meeting. These officials provided a few factual clarifications that we have incorporated in this report where appropriate. The officials also said that they generally agreed with our report recommendations. They stated that they recognized that much work needed to be done to increase the number of electronic returns and identified plans or actions that were under way that they believe address the recommendations. We agree that IRS has developed plans and is taking action to increase the number of electronic returns. However, we remain concerned that unless those actions or plans are supported by the type of analysis and goal setting that we are recommending, IRS may not be effectively targeting its limited resources for marketing the electronic filing program. On our first recommendation on identifying taxpayers who offer the greatest opportunity to reduce IRS' paper-processing workload and costs, IRS officials said that (1) they strongly believe that the electronic filing program already focuses on those taxpayers who offer the greatest opportunity to reduce IRS' paper-processing workload--essentially individual taxpayers--but had not yet prepared a business case to support that belief, (2) they were expanding TeleFile nationwide for the 1996 filing season to make electronic filing available to more individual taxpayers, and (3) research was under way to help make electronic filing more appealing to taxpayers and to help IRS expand the program to more individual taxpayers. In addition, IRS believes its current focus on individual taxpayers is appropriate because the bulk of its processing costs stem from having to process large numbers of individual returns in a short time period. IRS officials also said they are working with some large businesses on electronic filing of employment tax returns. These returns represent a large portion of all business returns filed. Although the actions IRS mentioned may help expand the electronic program, we believe the second and third items discussed above will most likely have an effect on those taxpayers that are already attracted to IRS' electronic filing program--those individual taxpayers who file relatively simple returns. The expansion of TeleFile in 1996, for example, will have no impact on those individual taxpayers that file more complex tax returns. As we discuss on page 6, the expansion IRS refers to is a geographic one--going from 10 states to all states in the 1996 filing season. The TeleFile program will continue to focus on those taxpayers who file the simplest individual tax return (Form 1040EZ). IRS' comment regarding research to make electronic filing more appealing refers to analysis being done to profile (1) those taxpayers who currently file electronically and (2) those who could file electronically, but currently do not. IRS believes this profiling will assist in marketing electronic filing to those individual taxpayers who do not currently use electronic filing. We agree that such an analysis may be helpful as a marketing tool for district offices. However, it is uncertain how this analysis will help alleviate some of the current impediments to electronic filing for many individual taxpayers, such as the cost to the taxpayer. With respect to our second recommendation on adopting goals for electronic filing that focus on reducing IRS' paper-processing workload and costs, IRS officials provided several examples of actions that they believed indicated that they have adopted such goals. These examples included (1) the contract to conduct cost and marketing analyses that we discuss on page 14, (2) another contract that was awarded to develop a strategy to reach taxpayers who could file from home computers, and (3) IRS' plans to eliminate processing of signature documents for electronic returns. We agree that some of the actions IRS mentioned may reduce paper-processing workload and costs. However, these actions are steps IRS is taking to achieve its existing performance goal of 80 million returns. The intent of our recommendation is for IRS to develop other performance goals based on the analysis done in response to the first recommendation. IRS' current performance goal provides little incentive to identify and pursue opportunities for reducing the paper-processing costs associated with more complex returns that may not represent a large number of returns. The analysis called for in our first recommendation would put IRS in a better position to develop specific goals for receiving certain types of returns electronically based on the their contribution to reducing overall paper-processing costs. For example, goals such as "receive 75 percent of all corporate returns electronically by 2001" or "reduce the number of paper returns processed (in terms of number of pages rather than number of returns) by 50 percent," might result in different decisions on how IRS should focus its limited marketing resources than those decisions currently being made. On our third recommendation regarding contingency planning, IRS agreed that it needed to prepare for the eventuality of receiving fewer electronic returns in 2001. However, IRS representatives said that contingency planning is not the only way to prepare for this eventuality. IRS officials said IRS is using a program management approach to phase in operations under its new business vision. IRS officials expected this approach to provide the flexibility for adjusting program plans to address any significant shortfall in the number of electronic returns received. In addition, IRS officials said that the contract for procuring new scanning equipment for paper returns is flexible. Therefore, IRS expects to have an option to buy additional equipment if it needs to process more paper returns than it originally estimated. We reviewed a November 29, 1994, memorandum from IRS' Modernization Executive to the heads of offices that are involved in IRS' modernization program. That memorandum described the program management approach that IRS refers to above and a program control process for helping to ensure that IRS achieves its modernization goals. According to the memorandum, the program control process will include risk assessments that are to (1) identify impediments to delivering various aspects of IRS' business vision and (2) prompt the development of mitigation strategies to address identified risks. IRS would be responsive to our recommendation if it succeeds through its program management approach in (1) promptly developing mitigation strategies if more paper tax returns have to be processed in future years than IRS currently expects and (2) specifying alternative actions for processing paper returns and implementing its customer service vision. As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution for 30 days. At that time we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. We will also make copies available to others on request. The major contributors to this report are listed in appendix II. If you or your staff have any questions about this report, you can reach me at (202) 512-8633. In May 1993, the IRS Electronic Filing Strategy Task Group issued a report that included 21 initiatives directed at increasing the use of electronic filing. Five of those initiatives cited the need for legislation. As discussed below, none of that legislation has been enacted and, in some cases, IRS has decided not to seek legislation. One of the 21 initiatives was directed at increasing the number of balance due returns filed electronically. Critical to the success of this initiative, according to the task group, was legislation that would allow credit card payments of tax obligations. Such a provision was included in section 4122 of H.R. 11, the Revenue Act of 1992, which was passed by both houses of Congress but vetoed by the President. A similar provision was included in other bills, none of which were enacted. Most recently, IRS included this proposal in a package of legislative initiatives sent to the Assistant Secretary of the Treasury for Tax Policy in January 1995. In February 1995, Treasury's Office of Fiscal Assistant Secretary raised several questions about the potential costs associated with this proposal and how those costs would be funded. As of June 26, 1995, IRS and Treasury had not resolved these cost issues. The task group estimated that 46 million more electronic returns would be received if (1) preparers of 100 or more individual returns were required to offer electronic filing and (2) businesses with 10 or more employees were required to file their returns electronically. The business returns specifically identified by the task group were Form 1041 (U.S. Fiduciary Income Tax Return), Form 1065 (U.S. Partnership Return of Income), Form 1120 (U.S. Corporation Income Tax Return), Form 1120S (U.S. Income Tax Return for an S Corporation), forms 5500 and 5500 C/R (Annual Return/Report of Employee Benefit Plan), and Form 941 (Employer's Quarterly Federal Tax Return). "The Service has proposed that the Secretary be given regulatory authority to require that tax returns be filed other than in paper form, including electronically or by magnetic media. . . . Broad regulatory authority to require that returns be filed other than in paper form is appropriate and essential to the Service's ability to modernize its systems, streamline its operations and, in general, deliver quality services at the least cost. However, in view of the potential burdens on taxpayers and preparers in complying with electronic or magnetic media filing requirements, we currently are considering whether legislative refinements to this proposal may be necessary to clarify the intended scope and timing of the conversion to a non-paper based system." The proposal was eventually dropped because IRS and Treasury officials believed that Congress would not pass legislation that would enable IRS or Treasury to dictate who would have to file electronically. The task group noted that "In virtually every study conducted on electronic filing, the issue of processing paper documents has been identified as impacting negatively upon IRS' ability to realize electronic filing's full savings potential." The task group further said that "Eliminating the requirement to prepare and submit paper documents could have a significant impact on reducing the cost electronic filers pass on to their customers." This initiative called for eliminating the paper documents associated with electronic filing by proposing legislation that would (1) allow alternatives to the paper signature document and (2) eliminate the submission of paper attachments to the electronic return. H.R. 11, referred to earlier, included a provision (section 4933) that would have addressed the first of those two legislative needs by authorizing the Secretary of the Treasury to prescribe alternative methods of verifying returns on a trial basis. IRS' latest proposal, included in its January 1995 submission to the Assistant Secretary for Tax Policy, was broader. It would have authorized the Secretary of the Treasury to permit alternative methods of (1) verifying, signing, and subscribing returns and other statements and (2) submitting written declarations, statements, or other documents required by the Internal Revenue Code. In April 1995, IRS' Office of Chief Counsel concluded that IRS had regulatory authority to prescribe alternative methods for signing and submitting tax returns and other written documents. An IRS official said that IRS plans to test signature alternatives in 1996. The task group determined that "a full scale, high-powered promotional campaign" was needed to "maximize the number of electronic returns." Because of the anticipated scope of the promotional campaign, the task group recommended that IRS obtain an appropriations rider for paid advertising. IRS has taken no action to get such a rider because of concerns that a paid advertising campaign might jeopardize current free public service advertising. To encourage greater participation in electronic filing, the task group proposed that IRS initiate legislative action to provide tax incentives for businesses and preparers. The group suggested consideration of such incentives as a more accelerated depreciation schedule for electronic filing equipment and a higher percentage of investment tax credit. IRS has decided not to pursue such legislation. As noted in this report, IRS does not have the data needed to determine what kind of incentives would be most effective and what level of incentives makes sense given the benefits of electronic filing. Daniel J. Meadows, Evaluator-in-Charge Linda Standau, Senior Evaluator Laurie Housemeyer, Evaluator Robert I. Lidman, Regional Assignment Manager 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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GAO reviewed the Internal Revenue Service's (IRS) plans to maximize electronic filing, focusing on: (1) IRS progress in broadening the use of electronic filing; (2) the availability of data needed to develop an electronic filing strategy; and (3) the implications for IRS if it does not significantly reduce its paper-processing workload. GAO found that: (1) IRS will fall far short of its 2001 goal of 80 million electronic returns if the increase in electronic filing continues at its present pace; (2) IRS believes the decrease in the number of returns filed electronically in 1995 was due to its actions against electronic filing fraud; (3) IRS is having little success in increasing the electronic filing of individual 1040 and business tax returns which constitute the bulk of returns and take the most time to process manually; (4) the transmittal fees for electronic filing tend to deter filers unless they need their tax refunds quickly; (5) IRS does not have the data needed to determine whether greater electronic filings of 1040 and business returns would reduce its administrative costs; (6) IRS has contracted to gather some data on why taxpayers do not use electronic filing more and how many returns it could expect if it could motivate people to file electronically; (7) IRS plans to use scanning more to process paper returns, which should reduce some costs; and (8) unless IRS can increase electronic filing, its customer service and paper processing workloads may overwhelm its planned staffing and alter various aspects of its modernization efforts.
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The costs of natural gas, its transportation and storage, and subsequent local delivery are incorporated into monthly gas bills. According to the Department of Energy (DOE), residential customers in 1997 were billed $34.6 billion for natural gas deliveries, or $617 per customer. Figure 1 shows the separate components of the natural gas delivery system from the wellhead, where natural gas is extracted, to the burner tip, where the fuel is used in a home or business. Before customer choice programs, the services shown in figure 1 were arranged for or directly provided by local gas utilities. Historically, gas utilities contracted with interstate and/or intrastate pipeline companies for the natural gas and transportation services (called upstream capacity) necessary to transport gas from the producer's field to the start of the gas utilities' local distribution system, called the city gate. To guarantee the availability of upstream pipeline and storage space, gas utilities contracted with pipeline companies for priority upstream capacity, called firm capacity, to meet the peak day requirements of their customers. The purchasing of firm capacity by gas utilities was often done at the behest of state regulators, who wanted to ensure that gas flowed to homes, schools, and businesses on the coldest days of the year, regardless of additional demands placed on the gas delivery system. Once gas reached the city gate, gas utilities provided for the local distribution of gas through their network of local pipelines. Local gas utilities also provided other gas-related services, such as billing and metering. Customer choice programs allow residential and small commercial customers to choose their own provider of gas within this delivery system. Under a customer choice program, nonutility gas suppliers, called gas marketers, purchase gas and arrange for its transportation to the local gas utility. Customers then purchase, from a gas marketer, gas that is shipped along the local gas utility's network of distribution pipes to their home or business. The gas utility still charges customers regulated rates for the costs of local gas distribution and the related services it provides, such as billing and metering. Until recently, customer choice opportunities were limited to large industrial and large commercial customers, such as factories and electric utilities that use gas for power generation. These opportunities allow these gas users to contract competitively for gas, either directly with gas producers or with gas marketers, as well as with interstate pipelines for upstream capacity. According to DOE, average gas prices paid by electric utilities and industrial gas customers have fallen 36 and 24 percent, respectively, between 1990 and 1995, adjusted for inflation. DOE noted that these customers may have the option of multiple servers as well as the capability of using fuels other than natural gas, which allows them to be more aggressive in negotiating contracts and services. While natural gas deregulation has resulted in lower prices for natural gas, it has also at times been associated with greater price uncertainty. According to DOE analysts, prior to deregulation, many gas utilities' supply contracts were long-term--often for 20 years or more--with little variability in price. With deregulation, gas utilities began to purchase gas on the spot market, which can sometimes be highly volatile. For example, in our report on natural gas price volatility during the winter of 1996-97, we found that residential gas prices in New Mexico were 68 percent higher in January 1997 than in December 1996. For some gas utilities we spoke with, price spikes have sometimes resulted in discontented customers and drawn the attention of state regulatory authorities. While state regulators allow gas utilities to recover their upstream costs, including those for interstate transportation and storage and the cost of gas, without profit or loss, regulators in some states can disallow the recovery of costs when they believe gas utilities have made imprudent gas-purchasing decisions. For some gas utilities, extending customer choice programs to their residential and small commercial customers has given them an opportunity to reduce their regulatory risk and improve their public image with their customer base. Other gas utilities view gas marketers' participation in customer choice programs as a way to increase the demand for gas and therefore help expand their distribution system. Still other gas utilities view customer choice programs as part of a process of change that will result in the increasing importance of nonutility energy companies that market natural gas, electricity, and even oil-based products in an increasingly competitive environment. Some observers believe that mergers, acquisitions, and alliances are bringing diverse energy companies together across energy markets. Several gas utilities have established marketing affiliates that are already active in both gas and electricity markets. As of July 31, 1998, 43 gas utilities in 16 states had customer choice programs under way for residential and/or small commercial natural gas users. In addition, gas utilities in 11 other states and the District of Columbia were beginning or considering customer choice programs for residential or small commercial gas users. In general, the customer choice programs under way are relatively new, as most of these programs are less than 3 years old and several are less than 1 year old. Despite the likelihood of future growth, participation in current programs is generally low. According to our survey of gas utilities, roughly 553,000 residential gas users, about 4 percent of the customers eligible to participate in customer choice programs, are participating in them. The figures for national participation in small commercial programs could not be determined because data were unavailable. Participation rates in customer choice programs vary dramatically; in some programs, over half of all eligible customers participated, while other programs are still awaiting their first participant. Customer participation rates are determined by a variety of factors, such as the potential to save money through the purchase of gas from a gas marketer rather than through a gas utility. Other factors reported to us by gas utilities, gas marketers, and state regulators as influencing customers' participation include efforts by these parties to make customers aware of the program, and program rules, such as caps on participation, that can limit overall customer participation. Gas marketers told us their participation in customer choice programs is influenced by the potential for them to earn a profit on their gas sales. Their potential to earn profits can be affected by program rules, such as whether gas marketers can contract for their own transportation services to transport gas to a local gas utility. As shown in figure 2, small-volume customer choice programs--allowing choice for residential and/or small commercial customers--are concentrated in midwestern and eastern states. As of July 31, 1998, New York had 10 active customer choice programs, followed by Michigan, which had 5. New Jersey and Pennsylvania each had four customer choice programs under way, and Ohio, Illinois, and Maryland each had three active programs. States not considering or beginning small-volume customer choice programs. States considering or beginning small-volume customer choice programs (includes District of Columbia). States with small-volume customer choice programs under way as of July 31, 1998. Figure 2 also shows that 11 additional states and the District of Columbia are considering or beginning small-volume customer choice programs. Among these initiatives, a recent Georgia law allows Atlanta Gas Light to begin a customer choice program for the 1.4 million residential and commercial customers in its service area in November 1998. Iowa will allow a statewide choice of gas suppliers in February 1999. In addition, in 1999, gas utilities in Montana will begin customer choice programs that will offer a choice of gas suppliers to most of their residential and commercial gas users. The other states that are considering or beginning programs are likely to begin customer choice programs in 1999 or 2000. In addition, gas utilities and state regulators in Ohio, Illinois, Massachusetts, Michigan, New Jersey, Virginia, and Wyoming are expanding existing customer choice programs. The American Gas Association (AGA) reported that once all these programs are under way, 33 percent, or 18.1 million, of the 54 million households in the United States with natural gas service will be able to choose their gas supplier. AGA also estimated that more than 40 percent of the country's commercial customers can now, or soon will be able to, buy gas from a nonutility supplier. Thirty-four of the 43 local gas utilities we surveyed reported that they had residential customer choice programs under way as of July 31, 1998.Thirty-one of these utilities reported that they began their customer choice programs in 1996 or later. In California, three residential customer choice programs began in 1991. Of the 34 residential customer choice programs, 14 had specific ending dates and may be considered pilot programs. Pilot programs may be limited to one town or county within a gas utility's service area and can restrict the number of customers eligible to participate in the program. State regulators may direct gas utilities to limit eligibility to less than all customers in their service area so they can gain experience in administering a choice program before broadening it. Thirty-five gas utilities also reported that they had small commercial choice programs under way as of July 31, 1998. Twenty-eight of these programs began in 1996 or later, while 7 began in 1988 through 1995. Of the 35 small commercial customer choice programs, 15 had specific ending dates and may be considered pilot programs. Thirty-two gas utilities reported that they had both residential and small commercial customer choice programs under way as of July 31, 1998. The 34 gas utilities that reported residential customer choice programs under way as of July 31, 1998, provide over 21 million residential customers with gas service. Of these customers, over 15 million were eligible to participate. However, only about 553,000, or roughly 4 percent, of those eligible to participate had actually selected a gas marketer as their new supplier of natural gas. Table 1 provides information, by state, on the 34 residential customer choice programs. Table 1 shows that, by state, the number of eligible participants and the participation rate vary widely among residential customer choice programs. For example, residential customer choice programs in California and New York have by far the largest number of eligible participants, but their programs, collectively, have relatively low participation rates. Eleven of the 12 residential programs in these states had participation rates of under 1 percent. The four residential customer choice programs in Pennsylvania account for about one-third of all such participants nationwide. Residential customer choice programs in Ohio, Michigan, and Maryland also account for a large percentage of the total participation nationwide. Across individual programs, participation rates varied greatly. For instance, as of September 9, 1998, 70 percent of the 82,000 residential customers eligible to participate in Nebraska's KN Energy choice program were participating. In contrast, as of August 31, 1998, none of the 380,000 eligible residential customers were participating in the Public Service Company of New Mexico's program because of the unavailability of gas marketers. (See table I.1, in app. I, for the number of participants and participation rates for each of the 34 residential customer choice programs in our survey.) National figures for participation in small commercial programs could not be determined. Several gas utilities that responded to our survey kept information for commercial customers but did not keep separate information for small commercial customers. Also, several programs had different gas usage requirements for small commercial participation, making comparisons among programs unreliable. For instance, some programs were open to all commercial customers regardless of annual gas usage, while others set annual limits on gas usage for participation. To the extent that information was available, table I.2, in appendix I, identifies small commercial customer choice programs by state, the number of eligible participants, participants, and participation rates. According to state regulators, gas utility representatives, and gas marketers we spoke with, residential participation rates in customer choice programs are determined by many factors. An important factor is the potential of residential customers to save money by purchasing gas from a gas marketer rather than from a gas utility. Savings are defined as the difference between what the gas utility would charge and what the gas marketer charges for gas delivered to a utility's city gate. As discussed in the next section, gas utilities told us that customers' savings come from a combination of gas marketers' savings on upstream transportation and storage costs and on the cost of gas. In some states, customers are also achieving savings because natural gas sold by marketers is subject to fewer state and local taxes than gas sold by local gas utilities. To the extent gas marketers pay lower taxes, they can charge lower prices. State regulators, gas utilities, and gas marketers told us that other factors influencing customers' participation include efforts to make customers aware of choice programs through education and outreach activities. In Massachusetts, Bay State Gas Company was able to achieve a relatively high rate of customer participation partially through public education efforts coordinated through a collaborative process with state regulators, consumer representatives, and gas marketers. Bay State Gas Company offered customer choice to all its residential customers in Springfield, Massachusetts, in the summer of 1997. The collaborative promotion campaign that followed involved direct mail and billing statement inserts from the gas utility, media advertising in 10 newspapers, four television stations, and nine radio stations, and individual campaigns by gas marketers. As of July 31, 1998, almost 28 percent of the residential customers in the Springfield area had selected a gas marketer under the program. Another collaborative effort took place under Columbia Gas of Ohio's program. In this program, Columbia Gas of Ohio offered customer choice to about 160,000 residential and 11,500 small business customers in its Toledo, Ohio, service area beginning in April 1997. The gas utility also collaborated with state regulators, consumer representatives, and gas marketers to find the best way to continue, improve, and expand the choice program. Public education efforts for this program began with a 14-day advertising moratorium, during which gas marketers voluntarily refrained from contacting or enrolling customers. During this moratorium, only Columbia Gas of Ohio, the Public Utility Commission of Ohio (PUCO), and the Ohio Consumers' Council could contact customers and inform them of the choice program. The moratorium and subsequent educational campaigns included print, television, radio, billboard and mail advertising, news releases, and community events. As of July 31, 1998, 53,985 residential customers, or 34 percent of all eligible customers, had chosen a gas marketer under the program. Other programs may have encouraged participation by making it easier for customers to participate. For example, in Nebraska and Wyoming, KN Energy allowed customers to select gas suppliers through mail-in balloting. For these programs, KN Energy sent ballots to all eligible residential and commercial customers in order for them to select a gas marketer. Balloting took place during 2-week open seasons. While potential savings and customer education and outreach efforts can increase customers' participation, program rules, such as caps on participation, can limit overall participation. For instance, some programs limit eligibility to less than all the customers in their service area so that gas utilities can gain experience in administering a program prior to broadening it. Thirteen gas utilities in our survey reported that eligibility was limited to fewer than half of all the residential customers in their service area. For example, under the SEMCO Energy Gas Company's Battle Creek Division program in Michigan, participation is capped at 1,000 residential customers, which is only 3 percent of the 32,400 residential customers in the utility's service area. Under the Baltimore Gas and Electric Company's customer choice program, while all residential customers were eligible, participation was capped at 50,000 residential customers, which was only 9 percent of the 530,000 residential customers in the utility's service area. State regulators, gas utilities, and gas marketers told us that gas marketers' participation in customer choice programs is influenced by the potential for the gas marketers to earn a profit on their gas sales. They also said that limits on customers' participation in some areas may be such that a marketer cannot expect to make a profit. For instance, some programs limit customers' eligibility, and gas marketers may not offer service in these programs because they may be unable to recover administrative and marketing costs. One marketer told us that it will not participate in a choice program that has fewer than 100,000 eligible customers if the service area is remote and the marketer cannot combine its marketing effort for a remote area with its efforts to sell gas to other customers in adjacent programs. Generally, residential customer choice programs that had fewer eligible customers had fewer marketers offering gas services. For example, the Central Illinois Light Company's choice program limits participation to 10,081 customers, which is 6 percent of the 183,058 customers in its service territory. This choice program is served by only one marketer. Geographical factors can also discourage marketers' participation. For example, in the New Mexico customer choice program, no gas marketers are currently active for residential customers. The New Mexico Public Utility Commission and gas utility representatives in the state reported that marketers did not see the potential for financial benefit in the program, given the relatively low cost of gas in the state. One gas marketer that left the residential choice program in New Mexico told us the administrative and advertising costs it incurred in attracting residential customers exceeded the profits it could make in selling gas to these customers. The potential for gas marketers to earn profits may also be affected by program rules, such as whether gas marketers can contract for their own transportation services to transport gas to the gas utility. Under two residential customer choice programs in New York--New York State Electric and Gas and Rochester Gas and Electric--only one gas marketer was participating in each program, and the marketers were required to assume existing pipeline contracts. The New York Public Services Commission reported that gas marketers may not be participating in some state customer choice programs because their profit margins are too thin. The commission issued an order on November 3, 1998, that would allow, by April 1, 1999, gas marketers participating in any customer choice program in the state to contract for their own transportation services. Other program rules and fees may also limit gas marketers' participation. For instance, several customer choice programs require gas marketers to sign up a minimum number of customers, called aggregation requirements, in order to participate as marketers. If these aggregation requirements are set at a high enough level, they can limit gas marketers' participation. For example, in California, gas marketers must meet a 250,000-thermaggregation minimum in order to be able to offer services in the state's customer choice programs. In a January 1998 report, the California Public Utility Commission recommended eliminating this aggregation requirement because it hindered marketers' participation. Under the Central Illinois Gas Company program, gas marketers are required to post a $300 bond per customer served. According to the utility, a gas marketer complained that the bond is a barrier to marketers' participation. This program is currently served by only one gas marketer--the utility's marketing affiliate. Gas marketers have told us that other utilities require that marketers post performance bonds or security deposits per customer served and that these costs can constitute a financial barrier to entry for them. One gas marketer told us that a $10 per customer security deposit requirement constituted a $200,000 "entry fee" if the marketer wanted to supply gas to 20,000 customers in a customer choice program. Table I.3 in appendix I lists the number of gas marketers participating in current small-volume customer choice programs. Although customer choice programs are relatively new, some information on the impacts of these programs exists. Several gas utilities in our survey reported that program participants achieved savings and greater service options with no apparent reduction in service reliability. While gas utilities reported few reliability problems with gas marketers' deliveries, some noted that customer choice programs are less than 3 years old and the reliability of gas marketers' deliveries has yet to be tested. Most gas utilities in our survey did not provide an estimate of customer savings, in part because their programs were in their initial stages of operation and information on savings were unavailable from gas marketers. Savings estimates ranged from 1 to 15 percent on total gas bills and were estimated to come from lower transportation and storage costs, the lower cost of gas, and savings on state and local taxes. Most gas utilities in our survey have set up independent marketing arms, called affiliates, to sell gas as a separate service to residential and small commercial gas users. For several of the customer choice programs that we surveyed, these marketing affiliates have large market shares, raising concerns about how competitive these programs are and thus their potential to reduce prices to customers. In many states, state regulators permit gas utilities to create their own gas marketers, called marketing affiliates, to compete with other nonutility gas marketers for customers in customer choice programs. These marketing affiliates are wholly or partly owned by the gas utility or its parent company. For several customer choice programs that we surveyed, these marketing affiliates had large market shares, raising concerns among state regulators about how competitive these programs are and thus their potential to reduce prices. Of the 38 utilities that responded to our survey, 33 had marketing affiliates that offer gas services, while 5 did not have marketing affiliates. Of the 33 gas utilities with marketing affiliates, several had substantial customer participation, largely because of the customer sign-ups initiated by the marketing affiliates. For instance, the concentration of the affiliates' market share has been relatively high in three of the four Pennsylvania residential customer choice programs. The affiliate for the Equitable Gas residential choice program served all 42,000 residential customers participating in the gas utility's choice program as of August 31, 1998. As of July 31, 1998, the Peoples Natural Gas affiliate served 79 percent of all residential customers participating in the utility's program. As of September 10, 1998, the National Fuel Gas affiliate served 63 percent of all residential customers participating in the utility's program. These choice programs account for a significant portion of residential customers' participation nationwide--159,000, or 27 percent, of residential participants in customer choice programs. Only the affiliate for the Pennsylvania Columbia Gas program did not have the largest market share. Another large customer choice program with a relatively high affiliate market share is the East Ohio Gas choice program. For this program, the East Ohio Gas marketing affiliate served 83 percent of the 32,000 participating residential customers as of March 31, 1998. All the programs mentioned above that have high market concentrations also require that gas marketers use the gas utility's existing upstream transportation and storage. The marketing affiliate in the fourth Pennsylvania program--the Columbia Gas of Pennsylvania program--had only the third largest market share among marketers in the program, and the program allows marketers the option of using the gas utility's existing upstream transportation and storage or contracting for their own. In our review of the three Ohio customer choice programs, we found the only program that required gas marketers to use the gas utility's existing upstream transportation and storage--the East Ohio Gas program--also had the highest market concentration by its affiliate. The two other Ohio programs--the Cincinnati Gas and Electric program and the Columbia Gas of Ohio program--gave gas marketers the option to use the gas utility's existing upstream transportation and storage or to contract for their own. Anticompetitive factors are a concern among state regulators we interviewed. Gas marketers and regulators have raised concerns about the marketing affiliates of gas utilities operating in their parent company's service area. Concerns include the potential for a gas utility to subsidize its affiliate with rate-payer funds or to extend to its affiliate preferential treatment over other marketers for any services or information. In many states, regulators have instituted affiliate rules or codes of conduct aimed at preventing and penalizing abuses in relationships between gas utilities and their affiliates. Three gas utilities in our survey reported reliability problems with marketers, and 11 gas utilities reported problems with marketers' conduct. In one case, the problem reported was a failure by a gas marketer to deliver gas to the gas utility for local distribution when required. While some gas utilities reported few reliability problems with gas marketers' deliveries, some utilities and state regulators noted that customer choice programs are less than 3 years old and the reliability of gas marketers' deliveries has yet to be tested. A study by the staff of the Public Utility Commission of Ohio (PUCO) found that while marketers demonstrated their ability to deliver directed quantities of gas to city gates during the 1997-98 winter, that winter was unseasonably warm, and marketers' ability to supply quantities of gas at or above peak conditions was not tested. The report concluded that because of limited information, the PUCO staff could not state with any certainty that marketers' ability to deliver daily quantities under severe weather conditions would mirror their performance during the 1997-98 winter. While some gas utilities have concerns about gas marketers' reliability, particularly if gas marketers are allowed to arrange for their own transportation of gas to a utility's city gate, gas utilities can use enforcement mechanisms to ensure the reliability of service. All of the gas utilities responding to our survey reported that they have the authority to either suspend marketers from programs or levy penalties on marketers for failing to deliver gas according to set delivery schedules. In addition to the mechanisms available to gas utilities to ensure gas marketers' reliability, the emergence of a secondary market for released capacity gives gas marketers access to pipeline transportation. As noted earlier, in 1992, FERC issued Order 636, which, among other things, allowed holders of firm capacity reservations to release unused capacity back to pipeline companies for resale to others. While this market has been somewhat limited because of a FERC-required price cap on the resales of pipeline contracts, FERC has recently proposed to remove this price cap. In a May 1998 report, DOE concluded that "the unused capability of the interstate pipeline system for transportation service appears to be substantial." DOE reported that during the 1996-97 heating year, 37 percent of the nation's gas pipeline system capacity went unused. Thirty-one gas utilities in our survey responded that gas marketers were offering residential and small commercial customers additional service choices. Most of these choices provide residential and small commercial gas users with an opportunity to reduce their exposure to wide swings in the price of gas. Among the service choices, gas marketers most often offered customer choice participants the option of buying their gas at a fixed price--30 of the 31 utilities responding to our survey. Six gas utilities responded that gas marketers were offering customers the option of a fixed monthly bill. Gas utilities also noted that gas marketers were offering customers nongas services, such as free carbon monoxide detectors and the option to buy electricity and other fuels, such as propane and fuel oil. For 27 of the programs we surveyed, gas marketers were allowed to bill the customer directly for marketer-provided services. Competition for residential and small commercial natural gas users is gradually emerging in the United States. Regulators, gas utilities, and gas marketers are currently experimenting with ways to create small-volume customer choice programs that attract gas marketers, offer savings to customers, and ensure the reliability of service. While efficient, competitive programs that fully tap the potential for customer savings and ensure reliable service are taking time to develop, the speed of this development may be sensitive to certain key features of program design. Key program design features include customer education efforts, the removal of barriers to entry for gas marketers, and the arrangement of the upstream transportation of gas that increases the potential for customer savings while ensuring reliability. Given geographical limitations and the savings already achieved through past deregulation efforts, some gas utilities, state regulators, and state legislatures may struggle with ways to find additional savings for customers. However, in other states, opportunities for savings exist, and collaborative efforts among regulators, utilities, and marketers in a few programs have shown that key design features can be successfully addressed. Competition for residential and small commercial gas users may also provide an incentive for those utilities wishing to continue selling natural gas to find ways to reduce the prices they charge and offer additional services. In this way, even those customers choosing not to switch to marketers may benefit. Customer choice programs provide gas utilities with the opportunity to position themselves for a more competitive environment. Some observers believe that the changing regulatory environment and competition across energy markets will favor utility companies that are creating energy marketing affiliates or forging alliances with other complementary energy companies. We provided the Department of Energy with a copy of a draft of this report for review and comment. We met with the Director and staff of the Natural Gas Division, Energy Information Agency, as well as staff of the Policy Office, to obtain the Department's comments. The Department agreed with the facts presented and provided some technical clarifications where appropriate. The Department's comments are presented in appendix III. Through interviews with industry experts at DOE, AGA, and local gas utilities, we determined there were 43 gas utilities that offered customer choice programs for residential and/or small commercial gas users. To identify the initial experiences of competition in retail gas markets and to identify the impacts of these initiatives on small-volume customers, we surveyed all natural gas utilities in the United States that had customer choice programs under way as of July 31, 1998, for residential or small commercial customers. We designed and mailed a questionnaire to all 43 utilities that covered areas of customers' and gas marketers' participation, the regulation of gas marketers, customer savings, and quality of service. We surveyed gas utilities because they were the most available source of information for the rules of customer choice programs and the levels of customer's and gas marketers' participation. We received responses from 38 of the 43 gas utilities. Information presented in the report on customers' and gas marketers' participation, program rules, and projected customer savings are based on these 38 responses. The results of the survey are shown in appendix II. In addition, we conducted follow-up telephone interviews with questionnaire respondents to clarify and add to the information gathered in the questionnaires. In addition to the questionnaire, we conducted case studies on individual programs in Ohio, Massachusetts, and New Mexico. We reviewed customer choice programs in Ohio because industry observers noted that the state had among the most developed programs in the country. We selected programs in New Mexico and Massachusetts for review because of their proximity to, and long distance from, natural gas production areas, respectively. We interviewed natural gas utility officials, gas marketers, state regulators, and industry experts in these states. We also reviewed existing evaluations of gas utility customer choice programs from state regulators, DOE's Energy Information Agency, and AGA. We performed our review from March through November 1998 in accordance with generally accepted government auditing standards. As arranged with your offices, we will send copies of this report to the appropriate Senate and House committees. We will also make copies available to others on request. Please call me at (202) 512-3841 if you have any questions about this report. Major contributors to this report are listed in appendix IV. The tables in this appendix list selected results from our survey of 43 gas utilities that had small-volume customer choice programs under way as of July 31, 1998. Table I.1 identifies participating customers and participation rates for residential customer choice programs. Table I.2 identifies participating customers and participation rates for small commercial customer choice programs. Table I.3 identifies the number of gas marketers selling gas to small-volume customers in these customer choice programs. Table I.4 identifies customer choice programs' rules on the treatment of upstream capacity. The table identifies whether gas marketers are allowed to arrange, at least in part, for their own upstream transportation and storage of gas or whether they are required to use transportation services previously contracted for by the gas utility. Finally, table I.5 identifies whether gas utilities with small-volume customer choice programs charge fees to recover costs associated with their programs. These costs may include program implementation costs, such as advertising and customer education expenses and unused upstream capacity. Table I.1: Participation in Residential Customer Choice Programs (continued) Apr. 1, 1997 Apr. 1, 1998 Apr. 1, 1997 Apr. 1, 1997 Apr. 1, 1996 Apr. 1, 1997 (continued) Information unavailable. Apr. 1, 1998 Apr. 1, 1997 Mar. 1, 1998 (continued) Information on small commercial customers was unavailable from the gas utility. Pacific Gas and Electric Co. San Diego Gas and Electric Co. Southern California Gas Co. Central Illinois Light Co. The Peoples Gas Light and Coke Co. Northern Indiana Public Service Co. Bay State Gas Co. SEMCO Energy Gas Co.-Battle Creek Div. Michigan Consolidated Gas Co. SEMCO Energy Gas Co. New Jersey Natural Gas Co. Public Service Electric and Gas Co. Public Service Company of New Mexico (continued) Brooklyn Union-Brooklyn, Queens, Staten Island Central Hudson Gas and Electric Corp. Consolidated Edison Company of New York, Inc. Corning Natural Gas Corp. New York State Electric and Gas Corp. Niagara Mohawk Power Corp. Orange and Rockland Utilities, Inc. Rochester Gas and Electric Corp. Cincinnati Gas and Electric Co. National Fuel Gas Co. Peoples Natural Gas Co. Wisconsin Gas Co. Gas utility not offering small commercial customer choice program, as of July 31, 1998. Gas utility not offering residential customer choice program, as of July 31, 1998. Information unavailable from gas utility. Pacific Gas and Electric Co. San Diego Gas and Electric Co. Southern California Gas Co. Central Illinois Light Co. The Peoples Gas Light and Coke Co. Northern Indiana Public Service Co. SEMCO Energy Gas Co.-Battle Creek Div. Michigan Consolidated Gas Co. SEMCO Energy Gas Co. New Jersey Natural Gas Co. Public Service Electric and Gas Co. Public Service Company of New Mexico Brooklyn Union-Brooklyn, Queens, Staten Island (continued) Central Hudson Gas and Electric Corp. Consolidated Edison Company of New York, Inc. Corning Natural Gas Corp. New York State Electric and Gas Corp. Niagara Mohawk Power Corp. Orange and Rockland Utilities, Inc. Rochester Gas and Electric Corp. Cincinnati Gas and Electric Co. National Fuel Gas Co. Peoples Natural Gas Co. Wisconsin Gas Co. Capacity assignment is not an issue in New Mexico, given the location of gas fields in the state. Pacific Gas and Electric Co. San Diego Gas and Electric Co. Southern California Gas Co. Central Illinois Light Co. The Peoples Gas Light and Coke Co. Northern Indiana Public Service Co. Bay State Gas Co. SEMCO Energy Gas Co.-Battle Creek Div. Michigan Consolidated Gas Co. SEMCO Energy Gas Co. New Jersey Natural Gas Co. Public Service Electric and Gas Co. Public Service Company of New Mexico Brooklyn Union-Brooklyn, Queens, Staten Island (continued) Central Hudson Gas and Electric Corp. Consolidated Edison Company of New York, Inc. Corning Natural Gas Corp. New York State Electric and Gas Corp. Niagara Mohawk Power Corp. Orange and Rockland Utilities, Inc. Rochester Gas and Electric Corp. National Fuel Gas Co. Peoples Natural Gas Co. Wisconsin Gas Co. Information not provided. We mailed a questionnaire to 43 gas utilities that had either, or both, residential or small commercial customer choice programs under way as of July 31, 1998. The questionnaire, reprinted below, contained 41 questions covering customers' and marketers' participation, marketers' certification and regulation, customer savings, and quality of service. We received responses from 38 gas utilities. For most of the questions in the reprinted survey, we identified the number of gas utilities that marked each box in each question. For the questions on customers' and marketers' participation, we included the results in the tables in appendix I and referred the reader to these tables. For some questions on marketers' participation and the estimates of customer savings, we identified the range of responses. Also, several gas utilities did not respond to all of the questions, so some questions have fewer total respondents than others. Charles W. Bausell, Jr., Assistant Director Timothy L. Minelli, Evaluator-in-Charge Philip G. Farah, Senior Economist Lynne L. Goldfarb, Publishing Advisor Lynn M. Musser, Senior Social Science Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on: (1) initial participation in natural gas customer choice programs; and (2) the effect of these recent customer choice initiatives on residential and small commercial customers. GAO noted that: (1) 43 gas utilities in 16 states have customer choice programs for either or both residential and small commercial natural gas customers; (2) gas utilities in 11 other states and the District of Columbia are beginning or considering customer choice programs; (3) as of July 31, 1998, roughly 553,000 residential gas users were participating in customer choice programs in the United States, representing only about 4 percent of the residential customers eligible to participate in these programs; (4) national figures for participation in small commercial programs could not be determined because data were unavailable; (5) while overall participation in residential customer choice programs is generally low, participation rates vary dramatically among programs; (6) customer participation rates are determined by a variety of factors, such as the customers' potential to save money by purchasing gas from a marketer rather than a gas utility; (7) gas marketers told GAO that their participation in customer choice programs is influenced by their potential to earn a profit on their gas sales; (8) customer choice programs for residential and small commercial customers are relatively new, with most being less than 3 years old and several less than 1 year old; (9) as a result, information on these programs' impacts on customers is limited; (10) gas utilities that responded to GAO's survey reported that customers achieved savings and greater service options with no apparent reduction in reliability; (11) while gas utilities reported few problems with the reliability of gas marketers' deliveries, some noted that since customer choice programs are less than 3 years old, the reliability of gas marketers' deliveries has yet to be tested; (12) most gas utilities did not provide an estimate of customer savings because their programs were in their initial stages of operation and information on savings was unavailable from gas marketers; (13) savings estimates GAO did receive ranged from 1 to 15 percent on total gas bills and were estimated to come from lower transportation and storage costs, lower gas costs, and savings on state and local taxes; (14) most gas utilities in GAO's survey have set up independent gas marketers, called marketing affiliates, to sell gas as a separate service to residential and small commercial gas users; and (15) these marketing affiliates have large market shares, raising concerns among some state regulators about how competitive these programs can be and, thus, their potential to reduce prices.
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The Federal Service Labor-Management Relations Statute (Statute) includes a congressional finding that labor organizations and collective bargaining in the civil service are in the public interest because they contribute to effectively conducting public business, among other things. The Statute allows for the use of official time, and while federal employees are not required to join a union, the union must represent all employees in a bargaining unit, regardless of whether they are dues- paying members of the union. Employees on official time are treated as if they are in a duty status when they are engaging in union representational activities, and they are paid accordingly. The Statute provides a legal basis for the current federal labor and management relations program and establishes two sources of official time. Official time for negotiation of a collective bargaining agreement, attendance at impasse proceedings, and authorized participation in proceedings before the Federal Labor Relations Authority, is provided as a statutory right. Official time for other purposes allowed under the Statute must be negotiated between the agency and the union in an agreed-upon amount deemed reasonable, necessary, and in the public interest. Accordingly, collective bargaining agreements often include provisions concerning the conditions for granting official time. Agencies and unions can negotiate at the department, component, operating administration, or facility level, for example, and there can be variation in how official time is managed within an agency. Activities that relate to internal union business, such as the solicitation of members or the election of union officials, must be performed when in a non-duty status; that is, not on official time. VA has negotiated master CBAs with five national unions. These agreements negotiated between VA and the unions contain provisions by which VA manages official time. As we previously reported, one approach used by VA to manage official time is to specify the percentage or number of hours authorized for a designated union position, such as the President, Vice-President, Secretary, or Treasurer. Time specified for designated positions in CBAs is typically characterized as a percentage of an employee's total time, such as 50 or 100. Certain CBAs negotiated between VA and unions provide for at least one union official to charge up to 100 percent of their duty hours to official time. In addition to official time, unions may negotiate to receive other support from agencies, such as office space, supplies, and equipment. CBAs negotiated between VA and unions typically include information on accessibility, privacy, and size of unions' designated space at VA facilities. Since fiscal year 2002, OPM has annually produced reports on the government-wide use of official time, with its most recent report covering fiscal year 2012. OPM officials stated that it is not required to report official time, and has no statutory or regulatory role for monitoring or enforcing agencies' use of official time. However, there have been various legislative proposals over the years to require OPM to report official time. In its reporting of official time, OPM relies on federal agencies to verify the accuracy of the data provided. According to OPM, there is no uniform requirement concerning the degree and specificity of records kept for tracking and recording official time. However, OPM encourages labor and management to record official time data in the following categories for union representational activities and includes this information in its annual reports: (1) term negotiations; (2) mid-term negotiations; (3) general labor-management relations; and (4) dispute resolution. See figure 1 for examples of union representational activities as they relate to these categories. In reporting on the use of official time within federal agencies, OPM has noted that agency management and labor share a responsibility to ensure official time is authorized and used appropriately, and that the amount of official time used by agencies can depend on a number of factors, such as the timing of term negotiations, number of grievances, number of bargaining unit employees, and involvement of unions in labor management decisions. There is no standardized way for VA facilities to record the amount of official time employees use for representational activities because there are currently two time and attendance systems being used across the agency that capture this information differently. VA began implementing its new time and attendance system, the Veterans Affairs Time and Attendance System (VATAS), at some facilities in 2013 to replace its older system, the Enhanced Time and Attendance (ETA) System. VA expects to complete its rollout of VATAS in July 2018. According to a VA official, approximately 50 percent of VA facilities and about one-third of VA employees (120,000) had transitioned to using VATAS as of September 2016. For the five selected facilities we visited, three had transitioned to VATAS and two were still using ETA at the time of our visits. VATAS provides specific codes for timekeepers to record the various uses of official time for union representational activities, but according to VA officials, ETA lacks such codes. Under ETA, VA officials explained that timekeepers can record the amount of official time used by employees for representational activities in the remarks section of employees' time and attendance records, which according to VA officials, does not always make clear the purpose for which official time is being used. While VATAS and ETA provide a means to record official time, we found that three of the selected facilities did not record official time in either of these systems. Two selected facilities under VATAS recorded information on the use of official time outside of the time and attendance system, and one facility under ETA did not record the information anywhere. Although the remaining two facilities recorded information in their time and attendance system, they recorded different information in different ways. The inconsistent recording of information raises questions about VA's ability to monitor the use of official time and ensure that public resources are being used effectively. However, VATAS could help standardize the way individual facilities record information on official time and improve VA's ability to monitor its use. VATAS could help standardize the way individual facilities record information on official time and provide better information on the different purposes for which official time is used; however, we found that VA has not provided consistent training to employees on how to record official time in the new system. The lack of consistent training on how to record official time in VATAS is due in part to the fact that VATAS is being implemented in phases and training is being updated throughout the course of implementation. For example, a VA official told us that information on how to record official time was incorporated into the VATAS training curriculum in June 2016. However, VATAS implementation began in 2013, and employees trained on VATAS prior to June 2016 may not have been instructed on how to record official time in the system. For instance, timekeepers and other officials from the three selected facilities that had implemented VATAS prior to June 2016 said that recording official time was not covered during their VATAS training and these facilities were not using the codes in VATAS to record official time because they were not aware of them. As a result, these facilities continued to use different approaches to record official time and documented different information. According to federal internal control standards, management should internally communicate quality information that enables personnel to perform key roles, and it should provide appropriate training to personnel so they may carry out their responsibilities. Without effectively providing guidance on how to record official time in VATAS, personnel responsible for recording and overseeing its use may not know how to perform certain duties, and VA is missing an opportunity to more accurately track the amount of official time used by employees across the agency to better monitor its use and manage its resources effectively. VA took several steps in 2016 to provide better guidance to facilities on how to record official time in VATAS, including: updating VATAS training curriculum for timekeepers and supervisors to include face-to-face training on official time at facilities where VATAS is being implemented; making information on how to record official time available on the VA discussing how to record official time during a monthly "VATAS Connections" call with payroll offices. Despite VA's recent efforts, however, as of October 2016 two of the three selected facilities using VATAS at the time of our visits were still not using the different official time codes in VATAS for recording official time. An official from VA's Financial Services Center (FSC) said that FSC is producing a timekeeper refresher training video to help ensure timekeepers are aware of the most recent changes in VATAS, including instructions on recording official time, and hopes to complete the video by the end of November 2016. To provide agency-wide official time data to OPM, which reports on the use of official time for representational activities government-wide, VA's Office of Labor-Management Relations (LMR) annually collects and compiles data from individual facilities and shares the aggregated data with OPM. VA's Office of LMR uses its LMR Official Time Tracking System to obtain information from individual facilities on the amount of official time used by employees. The LMR system is separate and distinct from VA's time and attendance systems and provides the Office of LMR with a centralized way of collecting official time data from individual facilities. The Office of LMR sends an email each year to facilities with a link to access the LMR system, and a management representative at each facility manually enters information on the use of official time into the LMR system. The actual amount of official time used by employees across VA cannot be easily determined because VA offers facilities various options for calculating and reporting official time data in the LMR system. Federal internal control standards prescribe that management design control activities so that events are completely and accurately recorded and that it communicate reliable information to external entities, such as OPM, to help the agency achieve its objectives. VA allows facilities to use written records, estimates, samples, or surveys of official time hours used, or any combination of these methods to determine the amount of official time used by employees at their facility. Figure 2 shows the various information fields included in the LMR system for fiscal year 2015, including the different calculation methods VA allows facilities to use to determine the amount of official time used by employees. Fiscal year 2015 data collected through the LMR system show that employees spent approximately 1,057,000 hours on official time for union representational activities, and according to VA officials, unions represented almost 290,000 bargaining unit employees across the agency during this time. In addition, the data show that 346 employees spent 100 percent of their time on official time. However, as previously discussed, this data is inconsistent and not reliable. Of the 332 official time submissions from facilities in fiscal year 2015, 104 entries indicate that the facility used only records such as time and attendance records, 5 entries indicate the facility used only a survey of supervisors of union representatives, 123 entries indicate the facility used an estimate only, and 99 indicate that the facility used a combination of these methods to determine the amount of official time used. For one entry, it was not clear which method was used. These different methods of calculating official time result in inconsistent information on the number of official time hours used by employees for union representational activities. Figure 3 illustrates the range of information selected facilities submitted to the Office of LMR on the use of official time. In calculating the amount of official time used, VA strongly encourages facilities to provide comments describing how they arrived at their numbers when submitting their data on official time; however, our review of selected facilities' fiscal year 2015 official time submissions found that none of the facilities provided such comments. Without reliable information from facilities on official time, VA management does not have what it needs to monitor the use of official time and manage its resources effectively. According to VA officials from the Office of LMR, once VATAS is fully implemented, there will be no need for individual facilities to use different methods to calculate the amount of official time used because facilities will be able to rely on information in VATAS when submitting data in the LMR system. A VA official also told us that after VATAS is fully implemented, they plan to issue a policy on the change to calculating official time. Until VATAS is fully implemented, however, the various calculation methods used by facilities will continue to produce inconsistent data on the amount of official time used agency-wide. Furthermore, once fully implemented agency-wide, VATAS could provide VA with an alternative to collecting data from individual facilities through its LMR system on the amount of official time used by employees. An official from VA's FSC stated that FSC currently has the capability to generate reports in VATAS on the amount of official time used at individual facilities. The official added that once all facilities are using VATAS, FSC could generate one report with official time data, thereby eliminating the need for individual facilities to submit official time data through the LMR system. However, an official from VA's Office of LMR was not aware of FSC's ability to produce such reports and said that the Office of LMR currently plans to continue using the LMR system to obtain information from facilities on the amount of official time used. According to federal internal control standards, management should use reliable data for effective monitoring. If VA does not obtain more consistent data on the amount of official time used by employees, it will not be able to accurately track the amount of official time used by employees in order to ensure public resources are being used appropriately. At the five selected facilities GAO visited, VA provided unions with designated space for union representational activities. We found that the amount of designated space for these activities at selected facilities varied, but in all cases, unions' designated space comprised less than 1 percent of the overall space available. VA does not collect or track data from individual facilities on the amount of designated space used by unions, but officials at selected facilities were able to provide us with information on the amount of designated space for representational activities. At the smallest facility, about 0.65 percent of the overall space was designated for representational activities (240 out of 37,068 square feet). At the largest facility, about 0.11 percent of the overall space was designated for representational activities (2,777 out of 2,546,036 square feet). Designated space for representational activities at selected facilities consisted primarily of office space. At all five selected facilities, union officials either had their own office space designated for representational activities, or they shared designated office space. For example, at one facility with two local unions representing a total of about 900 bargaining unit employees, both union presidents had their own office space designated for representational activities. At another facility with three local unions representing a total of about 3,900 bargaining unit employees, all three union presidents shared their designated space with other union officials. Figure 4 shows designated office space at a selected VA facility for a union official who did not share his space, and figure 5 shows designated office space at another selected facility that was shared by up to three union officials. In addition to office space, designated space for union activities included conference rooms and storage rooms at some of the selected facilities. Further, VA provided unions at all five selected facilities with basic office furniture and equipment, such as desks, chairs, filing cabinets, computers, printers, and fax machines. In some cases, union officials said they purchased additional office equipment using union funds. Union officials from three of five groups we interviewed said that limited space for representational activities was a challenge. Specifically, union officials from those three groups said there was not always sufficient privacy to ensure confidentiality for employees, especially in cases where designated space for representational activities was shared by multiple union officials. Union officials from one of five groups we interviewed said their requests to management for additional space were denied; however, union officials from two of five groups provided examples of instances where they declined offers from management to relocate to larger spaces in other buildings. For example, a union official at one facility said the union declined an offer from management to relocate from their space in the main hospital building to an ancillary building on the campus because it might not be as safe for employees to access when working night shifts or during periods of inclement weather. A VA official from the Office of LMR said that, in general, certain VA facilities may have space constraints depending on where they are located, the types of services provided, and the number of veterans served. VA does not track information on the costs associated with unions' use of designated space across the agency, and we were not able to obtain consistent information on costs from selected facilities. However, operating costs at VA facilities typically include operations and maintenance expenses, such as utilities, cleaning costs, and grounds maintenance expenses. Therefore, certain costs associated with unions' designated space at VA facilities are operating and maintenance expenses that would be incurred by VA, regardless of whether VA owned or rented the facilities. VA owned four of five selected facilities, and while some officials at these facilities provided us with information on cost, they used different methods and sources of information to calculate the costs associated with designated union space. At the one selected facility rented by VA, officials used rental payment information and information on the overall square footage of the building to calculate the cost per square foot for fiscal year 2016 to determine the cost associated with designated space for union representational activities at the facility. VA managers and union officials from groups we interviewed at selected facilities cited similar benefits of employees' use of official time for representational activities. Managers and union officials from most groups we interviewed said that employees' use of official time improved decision making and helped them resolve problems at their respective VA facilities, and some believed it improved relationships between management and labor (see fig. 6). VA managers from four out of five groups and union officials from all five groups we interviewed believed unions' use of official time for pre- decisional involvement during meetings at which proposed policies or facility practices are discussed improved decision making processes. This pre-decisional involvement enabled union officials to provide employees' perspectives on certain proposed policy changes and patient and worker safety initiatives. For example, a group of managers and a group of union officials at one selected facility said they recently collaborated to develop a policy on self-scheduling for nursing staff, which they hope will improve employee retention and morale by providing employees with greater flexibility. According to union officials at another selected facility, management and the union collaborated to develop an anti-bullying policy at the facility. Union Official's Opinion on Benefits of the Use of Official Time A union official at one facility believed there was a mutual respect between labor and management at the facility, and that management respected the role of the unions and their concerns. For example, she said several supervisors contacted her with questions regarding how to handle certain employees and situations, and together they developed different approaches to resolve the issues before they escalated. In addition, VA managers and union officials from most groups we interviewed said that employees' use of official time improved conflict resolution by allowing union officials time to communicate with management and employees about any problems that arise. Managers from four out of five groups and union officials from four out of five groups said official time may help resolve problems before they escalate. For example, the use of official time may help prevent problems from evolving into formal actions, such as grievances against management or disciplinary actions against employees. Further, managers and union officials from some groups cited improved relationships as a benefit of employees' use of official time. Specifically, managers from three out of five groups and union officials from three out of five groups thought official time led to improved relationships between management and labor by providing union officials with time to build and maintain a good rapport with managers. For example, a union official from one group said the use of official time helped the union build a good relationship with management, which they believed led to more satisfied employees and management at the facility. According to union officials at the national and local levels, employees' use of official time also facilitates the whistleblower process at VA by providing an avenue for employees to report issues or concerns. For example, national union officials said the unions were involved in uncovering various issues, such as overprescribing opiates and long wait times for veterans. Officials from one national union said nearly 50 whistleblowers had come through the union's office to report issues with VA's patient waitlist and long wait times. Further, a local union official at a selected facility explained that the unions have a sense of professional obligation within VA to report any whistleblower activity. Managers and union officials across selected facilities identified different challenges associated with employees' use of official time. Managers from all five groups we interviewed cited staffing and scheduling challenges associated with employees' use of official time. In some instances, employees split their worktime between union representational activities and non-union duties. For example, an employee at one selected facility served as union president 80 percent of the time and as a pharmacist for the remaining 20 percent. Managers said it is sometimes difficult to accommodate such employees' use of official time because it may detract from these employees' non-union responsibilities. Manager's Opinion on Challenges Associated with the Use of Official Time A manager at one facility said it was difficult to find staff to fill in for employees who spent most of their time using official time. Further, she said the main focus is to provide access for veterans at the facility and employees' use of official time can take away from patient care. Specifically, a manager from one group we interviewed said it can be especially challenging to find other staff to fill in for employees who are responsible for serving patients yet spend most of their worktime on official time. Union Official's Opinion on Challenges Associated with the Use of Official Time A union official at one facility who had a set schedule for using official time explained he had limited flexibility to attend various committee meetings that occurred on days when he was not scheduled to use official time. As a result, he said he was unable to provide employees' perspectives on different issues that were discussed. Union officials from three of five groups we interviewed said they experienced challenges with limited flexibility in terms of when official time may be used. Employees with designated union positions at selected facilities who split their worktime between union representational activities and non-union responsibilities often had set times during which they would use official time, and said that deviating from that schedule could be challenging. In addition, union officials from three of five groups we interviewed said that more official time is needed, and union officials from four groups said they used varying amounts of personal time to conduct union representational activities. The use of official time is viewed by VA managers and union officials we interviewed as beneficial, but it should be monitored effectively to ensure that public resources are spent appropriately. Reliable data on official time are important for effectively overseeing its use, understanding the extent to which it is used across VA, and assisting OPM with the government-wide tracking of the amount of official time used. Our findings raise questions about whether VA is doing all it can to ensure it obtains accurate information on the use of official time in order to effectively oversee its use and share with external entities. The agency-wide implementation of VATAS is an important step toward that goal. Prior to the agency-wide implementation of VATAS, however, VA is not doing all it can to encourage facilities to standardize the way in which they determine the amount of official time used. Taking the intermediary step to standardize methods for determining the amount of official time used at the facility level will not solve all of the data reliability issues surrounding VA's tracking of official time, but it is a step toward collecting more reliable data. In addition, VA has not provided consistent training to facilities on how to record official time in VATAS, and some facilities are still not aware of VA's updated guidance on how to record official time in the system, despite recent efforts. Furthermore, given the potential capabilities of VATAS, there may be better ways for VA to collect information on official time in the future and it may not be necessary for VA to continue using the LMR system to track official time. Until all personnel responsible for recording official time in VATAS are aware of and familiar with VA's guidance, and VA is able to determine a way to obtain more consistent data from facilities, VA will not have an accurate picture of how much time employees use for union representational activities and cannot know how best to manage tracking its use. To improve VA's ability to accurately track employees' use of official time, we recommend that the Secretary of Veterans Affairs direct the Assistant Secretary for Human Resources and Administration to: 1. increase efforts to ensure timekeepers at all facilities receive training and consistent guidance on recording official time in VATAS; 2. standardize the methods used by facilities for determining the amount of official time used prior to the agency-wide implementation of VATAS by encouraging facilities to rely on time and attendance records when calculating the amount of official time used at the facility level; and 3. in preparation for the full implementation of VATAS, take steps to transition from using the LMR system to VATAS to collect and compile information on the amount of official time used agency-wide. We provided a draft of this report to the Department of Veterans Affairs (VA) and the Office of Personnel Management (OPM) for review and comment. We received formal written comments from VA, which are reproduced in appendix I. In addition, OPM provided technical comments, which we incorporated as appropriate. In its written comments, VA agreed with all three of our recommendations. With regard to our first recommendation, VA stated that the Office of Labor Management Relations (LMR) has revised its policy to include specific directions to human resource offices to begin recording official time in the VA Time and Attendance System (VATAS) once VATAS has been implemented at their respective facilities. With regard to our second recommendation, VA stated that the Office of Human Resources and Administration plans to develop a memo directing facilities to rely on time and attendance records when calculating the amount of official time used at the facility level. With regard to our third recommendation, VA stated that the Office of LMR will transition from using the LMR Official Time Tracking System to collect and compile data on official time and will coordinate with the Financial Services Center to use VATAS to create a report on the agency-wide use of official time. 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 committee, the Secretary of Veterans Affairs, VA's Assistant Secretary for Human Resources and Administration, the Director of OPM, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 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. In addition to the contact named above, Mary Crenshaw (Assistant Director), Meredith Moore (Analyst-in-Charge), Amber D. Gray, and Teresa Heger made significant contributions to this report. Also contributing to this report were Rachel Beers, Mark Bird, David Chrisinger, Lee Clark, George Depaoli, Ronald La Due Lake, Edward Laughlin, Steven Lozano, Marcia Mann, Signora May, Jean McSween, Mimi Nguyen, James Rebbe, Susan Sato, Almeta Spencer, Carolyn Voltz, and Craig Winslow.
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In fiscal year 2012, there were over 250,000 bargaining unit employees at VA, and these employees spent about 1.1 million hours performing union representational activities on official time, according to an OPM report. The ways in which VA manages its human resources, including the use of official time, have received increased scrutiny in recent years. GAO was asked to review the amount of official time used by VA employees as well as the amount of space designated for representational activities. This report examines (1) the extent to which VA tracks official time, (2) what is known about the amount of designated space used for union representational activities at selected VA facilities, and (3) the views of VA managers and union officials on the benefits and challenges of employees using official time. GAO reviewed VA's fiscal year 2014 and 2015 data on official time--the most recent data available; analyzed information on designated union space and held group interviews with VA managers and union officials at a nongeneralizable sample of five VA facilities selected based on the number of bargaining unit employees and other factors; and interviewed officials at VA, OPM, and from national unions. The Department of Veterans Affairs (VA) cannot accurately track the amount of work time employees spend on union representational activities, referred to as official time, agency-wide because it does not have a standardized way for its facilities to record and calculate official time. Specifically: Recording official time --VA uses two separate time and attendance systems that capture official time differently. VA's new system (VA Time and Attendance System, or VATAS), which VA began rolling out at some facilities in 2013, has specific codes to record official time, but the older system does not. The inconsistent recording of official time raises questions about VA's ability to monitor its use, but VATAS could help to standardize this process. In rolling out the new system, which VA expects to complete agency-wide in 2018, VA has provided inconsistent training and guidance on how to use the codes in VATAS. While VA has taken steps to provide better training and guidance on recording official time, GAO recently found that timekeepers at two of three selected facilities where VATAS has been rolled out were still not using the codes. Without consistent guidance and training, personnel may not know how to properly record official time in the new system. Calculating official time --VA provides its facilities with a range of options for calculating the amount of official time used. VA annually collects and compiles these data agency-wide using the Labor-Management Relations (LMR) Official Time Tracking System--separate and distinct from VA's time and attendance systems. In calculating official time, facilities may use records, estimates, or other methods, which results in inconsistent data. VA officials told GAO that all facilities will eventually be able to rely on VATAS time and attendance records to calculate official time when submitting data in the LMR system. The full implementation of VATAS will provide VA with an alternative to using the LMR system to collect and compile more reliable official time data. Without reliable data, VA cannot monitor the use of official time agency-wide or share reliable data with the Office of Personnel Management (OPM), which reports on the government-wide use of official time. At all five selected VA facilities, designated space for representational activities comprised less than 1 percent of the overall square footage at each location, according to GAO's analysis. VA does not collect or track data from individual facilities on the amount of space designated for representational activities. Union officials at three of the five facilities GAO visited said that limited space for representational activities made it difficult to provide privacy for employees. A VA official said that certain VA facilities may have space constraints depending on where they are located and the number of veterans served, for example. At most selected VA facilities, VA managers and union officials GAO interviewed cited similar benefits of employees using official time, such as improving decision-making and resolving problems. However, they had differing views on challenges associated with employees' use of official time, such as when and how much official time may be used. GAO is making three recommendations to VA including that it provide consistent guidance and training on how to record official time in VATAS and that it take steps to collect more reliable data from facilities. VA agreed with GAO's recommendations and stated that it would take action to address them.
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The Air Force began the F/A-22 development program in 1986 and expected to complete development in 9 years for an estimated cost of $12.6 billion. Today, after being in development for almost two decades, the estimated development cost is $28.7 billion, a 127 percent increase. The average unit procurement cost to buy the F/A-22 has also increased 122 percent. The result of these changes has been a loss of buying power that has reduced the initial buy quantity from 750 to 277 aircraft. Table 1 shows the changes in the development program from 1986 to 2002. We have reported in the past that the F/A-22 acquisition approach was a major contributor to the cost increases and delays in schedule that led to reduced buying power. In testimony last year, we identified lessons to be learned in the F/A-22 program, which did not follow a knowledge-based acquisition approach used by successful commercial firms. Leading commercial firms that we studied employ an acquisition approach that evolves a product to its ultimate capabilities on the basis of mature technologies and available resources. These firms then ensure that high levels of knowledge exist at three critical junctures in a development program. First, a match must be made between a customer's needs and the available resources--technology, engineering knowledge, time, and funding--before a new development program is launched. Second, a product's design must demonstrate its ability to meet performance requirements and be stable about midway through development. Third, the developer must show that the product can be manufactured within cost, schedule, and quality targets and is demonstrated to be reliable before production begins. DOD issued new acquisition policy in May 2003 that governs the development of major acquisition systems. This new policy embraces the best practice concepts of knowledge-based, evolutionary acquisition and represents a good first step toward achieving better outcomes from major acquisition programs. The initial F-22 acquisition strategy did not employ an evolutionary approach. Instead, it sought to develop revolutionary capabilities from the outset of the program taking on significant risk and onerous technology challenges. Three critical technologies were immature at the start of the program--low-observable materials, propulsion, and integrated avionics. Integrated avionics has been a source of major schedule delays and cost increases in the F/A-22 program. Starting the program with these immature technologies prevented the program from knowing cost, schedule, and performance ramifications until late in the development program, after significant investments had already been made. Efforts to mature technology cascaded into development, delaying attainment of design and production maturity. The JSF, which started in 1996, is not as far along in its development, but is experiencing problems that could similarly threaten DOD's investment. It is at a critical crossroad, one that, based on our prior work, was approached and passed by several other DOD programs without capturing the appropriate knowledge for the sizable investment decisions being made. While the JSF program started with higher risks by failing to mature its technologies, it is considering a delay to its investment decision that determines the need to invest in tooling, labor, and facilities to manufacture aircraft until the airframe design has become more stable. The basic mission of the F/A-22, initially focused on air-to-air dominance, has changed to include a significantly greater emphasis on attacking ground targets. To accomplish this expanded mission, the Air Force will need additional investments to develop and expand air-to-ground attack capabilities for the F/A-22. Moreover, the efforts to expand its capability will also add risks to an already challenged program. To accommodate planned changes will also require a new computer architecture and processor to replace the current less capable ones. The expanded air-to-ground attack capability will allow the F/A-22 to engage a greater variety of ground targets, such as surface-to-air missile systems, that have posed a significant threat to U.S. aircraft in recent years. This was not previously considered a primary role for the aircraft as it was intended to be primarily an air-to-air fighter to replace the F-15. From the outset the F/A-22 was built to counter expected large numbers of new advanced Soviet fighter aircraft, but this expected threat never materialized. The Air Force has a modernization program to improve the capabilities of the F/A-22 focused largely on a more robust air-to-ground capability. It intends to do so using five developmental spirals planned over more than a 10-year period, with the initial spiral started in 2003. In March 2003, the Office of Secretary of Defense's Cost Analysis Improvement Group (CAIG) estimated that the Air Force would need $11.7 billion for the planned modernization program. The CAIG estimate included costs for development, production, and the retrofit of some aircraft. As of March 2003, the Air Force F/A-22 approved program baseline did not include estimated costs for the full modernization effort. Instead, the Air Force estimate included $3.5 billion for modernization efforts planned through fiscal year 2009. Table 2 shows each spiral as currently planned. To complete the planned enhancements, the F/A-22 will also need a new computer architecture and avionics processors. Current architecture and processors will be upgraded to support enhancement through the Global Strike Enhanced development spiral. However, because the current architecture and processors are old and obsolete and do not have sufficient capacity to meet the increased processing demands required for planned new air-to-ground capabilities beyond the Global Strike Enhanced spiral, they must be replaced. Rather than start a new development program, the F/A-22 program office plans to leverage two other ongoing Air Force development or modification programs for this new processing capability: the new architecture being developed for the JSF and the new commercial off-the-shelf general-purpose processors designed for newer versions of the F-16. According to F/A-22 program officials, they do not expect the new architecture to be fully developed and ready for installation in the F/A-22 for at least 5 to 6 years. Additional risks are likely because the new processor and architecture are being developed by other major aircraft programs and will require extensive integration and operational testing to ensure that the F/A-22 program does not encounter similar problems that have delayed integration and testing of the F/A-22's current avionics suite. F/A-22 program officials acknowledge that this mass changeover of the F/A-22 computer architecture and avionics processor will be a time-consuming and costly effort and will likely create additional program risks. Air Force cost estimates are not yet available, but program officials estimate the nonrecurring engineering costs alone could be at least $300 million. At the time of our review, the Air Force had not made a decision about retrofitting aircraft equipped with the old microprocessor. The Air Force schedule includes plans to make the full rate production decision in December 2004, but initial operational test and evaluation (IOT&E) has not started. The Air Force's efforts to stabilize avionics software and improve its performance have not been sufficiently demonstrated to start IOT&E, and the planned entrance criterion was changed. In addition, the F/A-22 program is not performing as expected in some other key performance areas like system reliability. These problems have contributed to the need for a new test schedule and an additional 7- month delay in the start IOT&E. Together these problems increase the potential for additional development costs and delays in the full rate production decision. Since our report in March 2003, the Air Force has corrected some key design problems identified at that time, but others remain. The stability and performance of F/A-22 avionics has been a major problem causing delays in the completion of developmental testing and the start of IOT&E. Because the F/A-22 avionics encountered frequent shutdowns over the last few years, many test flights were delayed. As a result, the Air Force Operational Test and Evaluation Center wanted assurances that the avionics would work before it was willing to start the IOT&E program. It established a requirement for a 20-hour performance metric that was to be demonstrated before IOT&E would begin. This metric was subsequently changed to a 5-hour metric that included additional types of failures, and it became the Defense Acquisition Board's criterion to start IOT&E. In turn, Congress included the new metric, known as Mean Time Between Avionics Anomaly or MTBAA, in the National Defense Authorization Act for Fiscal Year 2004. As of January 2004, the Air Force had not been able to demonstrate that the avionics could meet either of these criteria. Testing as of January 2004 showed the program had achieved 2.7 hours-- 54 percent of the 5-hour stability requirement to begin IOT&E. While the Air Force has not been able to meet the new criteria, major failures, resulting in a complete shutdown of the avionics system, have significantly diminished. These failures are occurring only about once every 25 hours on average. This is the result of a substantial effort on the part of the Air Force and the contractor to identify and fix problems that led to the instability in the F/A-22 avionics software. However, less serious failures are still occurring frequently. The F/A-22 program is not meeting its requirements for a reliable aircraft, and it is not using a knowledge-based approach. The Air Force established reliability requirements to be achieved at the completion of development and at system maturity. As a measure of the system's overall reliability, the Air Force established a requirement for 1.95-hours mean time between maintenance by the completion of development and 3-hours mean time between maintenance at system maturity. This measure of reliability represents the average flight time between maintenance actions. As of October 2003, the Air Force had only been able to demonstrate a reliability of about 0.5 flying hours between maintenance actions or about 26 percent of the development requirement and 17 percent of system maturity requirement. This has led to test aircraft spending more time than planned on the ground undergoing maintenance. In addition to the high level of maintenance required, failures in F/A-22 parts and components also caused reliability problems. During 2003, the Air Force identified 68 parts that had a high rate of failure causing them to be removed or replaced and affecting the F/A-22 system reliability. The contractor has initiated programs to eliminate the high failure rates experienced by these parts. The canopy has also been experiencing failures during testing, allowing it to achieve only about 15 percent of its expected 1,600-hour life. The Air Force is considering using a second manufacturer for canopies, but until it has passed qualification testing, it cannot be used as an alternative source for the high-failing canopies. The F/A-22 program began limited production before demonstrating reliability. Our work has shown that product development engineers from leading commercial firms expect to achieve reliability requirements before entering production. They told us reliability is attained through an iterative process of design, testing, analysis, and redesign. Commercial firms understand that once a system enters production, the costs to achieve reliability through this iterative design change process become significantly more expensive. The F/A-22 aircraft has been in production since fiscal year 1999, and the Air Force has on contract 52 production aircraft, and an additional 22 aircraft on long lead contracts representing 27 percent of the planned buy quantity. With 83 percent of the reliability requirement yet to be achieved through this iterative design change process, the Air Force can expect to incur additional development and design change costs. If the Air Force fails to improve the F/A-22's reliability before fielding the aircraft, the high failure rates will result in higher operational and support costs to keep the aircraft available for training or combat use. Avionics and reliability problems were the major contributors to delays in F/A-22 flight-testing in 2003. As a result, the start of IOT&E was delayed an additional 7 months. Realizing the Air Force would not be ready to enter initial operational testing as previously planned, the Office of the Secretary of Defense requested the F/A-22 program to establish a new operational test plan that includes measures to ensure the aircraft and its avionics are ready before entering operational testing. In response, the Air Force put in place a two-phase operational test program. Phase 1, also called an operational assessment, is not the official start of operational testing. It is intended to assess the F/A-22's readiness for IOT&E. Started in October 2003, it calls for testing two F/A-22 aircraft. Phase 2 testing is considered the actual start of IOT&E. To begin this phase, the Air Force must meet a number of criteria. Perhaps most importantly, it must demonstrate that the F/A-22's integrated avionics will be able to operate for sufficient lengths of time, without shutting down. Figure 2 compares the changes in the planned test program since our March 2003 report. According to Air Force test officials, results of some phase 1 tests could be used to satisfy IOT&E requirements if the aircraft and software configurations do not change for IOT&E testing. This could reduce the scope of the test effort planned during IOT&E. The Defense Acquisition Board is scheduled to review the F/A-22's readiness for IOT&E later this month. At the present time, the Air Force expects to complete IOT&E in October 2004, before the full rate production decision, now expected in December 2004. The time allotted to complete IOT&E under the new test plan, however, has been compressed by 4 months, assuming phase 1 testing results are not permitted to be used for IOT&E. This means the Air Force would have less time than previously planned to complete the same amount of testing. If the Air Force continues to experience delays in testing prior to IOT&E, then the full rate production decision would also have to be delayed until IOT&E is complete and the Beyond Low Rate Initial Production Report is delivered to Congress. The Air Force has corrected design problems discussed in our March 2003 report. To correct the movement or buffeting of the vertical fins in the tail section of the aircraft, the Air Force designed and implemented modifications, which strengthen the fin and hinge assemblies. Because of this problem, the Air Force placed restrictions on flights below 10,000 feet. Testing was done above and below 10,000 feet, and the flight restrictions were removed. Likewise, the Air Force modified the aircraft to prevent overheating concerns in the rear portion of the aircraft by adding thermal protection and strengthened strategic areas in the aft tail sections. The Air Force also plans to modify later production aircraft using a new venting approach to resolve the heat problems. We reported that the Air Force had also experienced separations in the horizontal tail materials. After additional testing, the Air Force deemed that the original tails met requirements established for the life of the airframe. However, the Air Force redesigned the tail to reduce producibility costs. Tests will be performed on the redesigned tail in late 2004. The business case made to justify the F/A-22 program at its outset is no longer valid. Since that time, program cost and schedule have grown substantially and affordable quantities have been reduced by 60 percent. The expected threat, for which this aircraft was originally designed, never materialized, and new, more demanding ground threats, like surface-to-air missile systems, have evolved, requiring expanded capabilities that will require significant new developmental investments. In addition, technical problems have not been resolved, and uncertainty about the outcome of operational testing could lead to additional development costs and further delays. Today, the Air Force estimates the total F/A-22 acquisition program will cost about $72 billion, excluding about $8 billion estimated by the CAIG to complete modernization activities. Including these costs brings the estimated total investment for the F/A-22 program to about $80 billion. Through fiscal year 2004, about one-half of this investment has been funded, leaving key investment decisions in the near future on the remaining $40 billion for aircraft production and upgrades in capability. Last year, in light of the changes in the program and investments that remained, the Subcommittee on National Security, Emerging Threats, and International Relations of the House Committee on Government Reform asked DOD to provide a new business case justifying the Air Force's planned number of F/A-22s (276 at that time) as well as how many F/A-22s are affordable. In its response, DOD did not sufficiently address key business case questions such as how many F/A-22s are needed, how many are affordable, and if alternatives to planned investments increasing the F/A-22 air-to-ground capabilities exist. Instead, DOD stated it planned to buy 277 F/A-22s based on a "buy to budget" concept that determines quantities on the availability and efficient use of funds by the F/A-22 program office. Furthermore, justification for expanding the capability to a more robust air-to-ground attack capability was not addressed in DOD's response. While ground targets such as surface-to-air missile systems are acknowledged to be a significant threat today, the response did not establish a justification for this investment or state what alternatives were considered. For example, the JSF aircraft is also expected to have an air-to-ground role, as are planned future unmanned combat air vehicles. These could be viable alternatives to this additional investment in F/A-22 capability. While the business case information submitted to the subcommittee called for 277 aircraft, DOD stated it could only afford to acquire between 216 and 218 aircraft within the congressionally imposed cap on production costs--currently at $36.8 billion. DOD expects improvements in manufacturing efficiencies and other areas will provide it with sufficient funds to buy additional F/A-22 aircraft. However, this seems to be an unlikely scenario given the program's history. Previously, DOD, under its "buy to budget" approach, used $876 million mostly from production funds to cover increases in development costs, thus reducing aircraft quantities by 49. With testing still incomplete and many important performance areas not yet demonstrated, the possibility for additional increases in development costs is likely. The analysis and conclusions in our recent report led us to recommend that DOD complete a new business case that justifies the need for the F/A-22 and that determines the quantities needed and affordable to carry out its air-to-air and air-to-ground mission. In preparing the business case, we also recommended DOD look at alternatives to the F/A-22 for dealing with the ground threats that were driving the need for an expanded air-to- ground capability. In response to a draft of that report, DOD partially concurred, stating that it evaluates the F/A-22 business case elements as part of the annual budget process. Additionally, DOD's response acknowledged that this year the department is undertaking a broader set of reviews under the Joint Capabilities Review process and that the F/A-22 will be a part of that review. In our report, as part of the evaluation of DOD's comments, we noted that an independent and in-depth study of the F/A-22 program has been requested by the Office of Management and Budget and that such a study provided an opportunity for completing a business case analysis. The JSF acquisition program is approaching a key investment decision point in its development as it prepares to stabilize the design for its critical design reviews. The program has many demands and requirements to satisfy before it is completed. It is the most expensive acquisition program in DOD's history with plans to buy almost 2,500 aircraft for an estimated acquisition cost of about $200 billion. The design plans are for three variants for the Air Force, Navy, and Marine Corps, with development partners and potential customers that span the globe. Upcoming investment decisions will be a prominent indicator of the risk program management and senior leadership will assume for this program. The program's size--in terms of funding, number of aircraft, and program participants--will create challenges for decision makers over the next several years. They will face decisions that need to be guided by a sound business case and an evolutionary, knowledge-based acquisition process that will provide more predictable cost, schedule, and performance outcomes. The JSF is a joint, multi-national acquisition program for the Air Force, Navy, Marine Corps, and eight cooperative international partners. The program's objective is to develop and deploy an affordable weapon system that satisfies a variety of war fighters with different needs. The system is intended to consist of a family of highly common and affordable strike aircraft designed to meet an advanced threat and a logistics system to enable the JSF to be self-sufficient or part of a multisystem and multiservice operation. This family of strike aircraft will consist of three variants: conventional takeoff and landing, aircraft carrier suitable, and short take off and vertical landing. The JSF program began in November 1996. After a five-year competitive concept demonstration phase between Boeing and Lockheed-Martin, DOD awarded Lockheed-Martin a contract in October 2001 to begin system development and demonstration. We are aware that program managers are contemplating changes to the program that could delay the schedule and increase costs, but confirmation and details are not yet available. Nonetheless, current program office estimates do provide some insights. Since the JSF acquisition program began in 1996, the cost of development has grown by about 80 percent. As shown in figure 3, the majority of this cost growth, from an estimated $24.8 to $34.4 billion, was recognized at the time the program transitioned from concept development to system development and demonstration in 2001. The program office cited schedule delays, implementation of a new block development approach that extended the program by 36 months, and a more mature cost estimate as the major causes for the increase. Since the start of system development and demonstration, the estimate has increased by an additional $10.3 billion because of continued efforts to achieve international commonality, optimize engine interchangeability, further refinements to the estimating methodology, and schedule delays for additional design work. In both 2000 and 2001, when the program was making the critical decision to move into system development and demonstration, we reported and testified that technologies had not been sufficiently demonstrated to reduce risk to a level commensurate with a decision to commit major capital and time to product development. While some of these technologies continue to be troublesome, in March 2003, the program's preliminary design review revealed significant issues related to aircraft design maturity. Weight has become the most significant design risk for the program as it approaches its critical design review. The increased weight of each variant design could degrade aircraft range and maneuverability if not brought under control. According to the program office, the airframe design has matured more slowly than anticipated and software development and integration is posing a significant design challenge. Also, in a 2003 annual report, the Director of Operational Test & Evaluation stated that weight growth is a significant design risk for all the variants, that the development schedule is aggressive, and that efforts to reduce weight have eroded a large part of the schedule. We also note that the program's funding profile assumes almost $90 billion of funding over the next 10 years, an average of almost $9 billion a year. This will require the JSF program to compete with many other large programs for scarce funding during this same time frame. Sustaining this level of high funding for such a long period will be a challenge. The JSF program's latest planned funding profile for development and procurement--as of December 2002--is shown in figure 4. The JSF program faces critical decisions over the next 24 months. Decisions made today will greatly influence the efficiency of the rest of its funding--almost 90 percent of the total. As a result of current concerns over system integration risk, the program office is currently restructuring the development program, which will add significant cost and delay the development schedule. For example, it is considering delaying its critical design reviews, its first flights of development aircraft, and its limited rate production decision to allow more time to mitigate design risk and gather more knowledge before moving forward with continued major investments. While no one wants to delay critical reviews, now is the time to get the design right rather than later. Going forward with an incomplete review may cause more problems later in the effort. Indeed, based on our past best practices work and lessons learned from the F/A-22 development effort, we have seen many examples where programs moved forward past their critical design review without gathering the knowledge needed to verify that their design was stable. This has led to poor cost and delivery outcomes for these programs. We have also seen the reverse, where programs have gathered appropriate knowledge before their critical design review. These programs had much more predictable cost and schedule outcomes. The F/A-22 program held its critical design review in 1995 with only about 26 percent of its design drawings complete. Best practice criteria calls for 90 percent of drawings to be complete before a design can be considered stable enough to commit to additional significant investments of time, labor, material, and capital. Figure 5 shows the engineering drawing completion history of the F/A-22 along with changes to development cost estimates as the program progressed. An incomplete F/A-22 critical design review contributed to several design and manufacturing problems that resulted in design changes, labor inefficiencies, cost increases, and schedule delays. Since the time of its critical design review, the F/A-22's development costs have increased by about 50 percent. The JSF program has the opportunity to avoid a similar situation. We believe that, given the apparent design challenges at this point in the program, a delay to gather more knowledge before increasing the investment is warranted and may help to reduce turbulence later in development, before the program begins "bending metal" for development aircraft. The JSF program is at a pivotal point, one in which the effort will turn from a paper design to actually manufacturing a product, something that requires considerably more money. While we believe the program moved forward with too much technology risk up to this point, it has an opportunity now to achieve critical design knowledge by taking the time to develop a mature design before moving into manufacturing. The program can use lessons learned from the F/A-22 acquisition right now to keep on track and deliver an affordable, high quality weapon system sooner rather than later. The JSF program is based on a complex set of relationships among all three services and governments and industries from eight foreign partners. The program is expected to benefit the United States by reducing its share of development costs, increasing future aircraft sales, giving it access to foreign industrial capabilities, and improving interoperability among the services and allies. For their part, partner governments expect to benefit from relationships with U.S. aerospace companies, access to JSF program data, and influence over aircraft requirements. They will also benefit financially by obtaining waivers of nonrecurring aircraft costs on an aircraft they could otherwise not afford to develop on their own. The partners expect a return on their investment through JSF contract awards for their industries that will improve their defense industrial capability, a critical condition for their participation. They have agreed to contribute about $4.5 billion to the JSF development program and are expected to purchase several hundred aircraft once it enters production. With these mutual benefits come challenges. Support for the program from our international partners hinges in large part on expectations for financial returns, technology transfer, and information sharing. If these expectations are not met, that support could deteriorate. In addition, a large number of export authorizations are needed to share information and execute contracts. These authorizations must be done in a timely manner to maintain schedule and ensure competition. Finally, transfer of sensitive U.S. military technologies needed to achieve commonality and interoperability goals will push the boundaries of U.S. disclosure policies. DOD is not immune to efforts to address the fiscal imbalance confronting the nation and will continue to face challenges based on competing priorities, both within and external to its budget. This will require decisions based on a sound and sustainable business case for DOD's acquisition programs based on clear priorities, comprehensive needs assessments, and a thorough analysis of available resources. In addition, it will require an acquisition process that provides for knowledge-based decisions at critical investment junctures in order to maximize available dollars. DOD has instituted a new acquisition policy that embraces evolutionary and knowledge-based acquisition concepts. However, policy alone will not solve the problems DOD faces. This will also require disciplined actions on the part of DOD's leadership to employ the concepts established in its new policy. While it is too late for the F/A-22 to go back and follow these concepts, there still is time to evaluate the need for additional aircraft; over fifty F/A-22's are presently on contract. Because of the nation's fiscal challenges, tough choices will need to be made regarding future spending priorities, including the remaining potential $40 billion investment in the F/A-22. In light of this substantial investment and the many changes that have occurred in the F/A-22 program, we believe decision makers would benefit from a new business case that justifies the need for the full air-to- air and air-to-ground capabilities and the quantities needed and affordable. The JSF program has a greater opportunity to make critical investment decisions using a knowledge-based approach. While the program started off with a high-risk approach by not maturing technologies before starting system development, it has the opportunity to manage the system development phase and stabilize the design before committing to large investments in manufacturing capability--tooling, labor, and facilities--to build test aircraft. The JSF program is considering a delay in its critical design review to attain greater design stability in its airframe. In addition to seeking greater design stability, leadership in DOD can reap the benefits of its new acquisition policy by actively promoting and maintaining a disciplined approach throughout the remaining critical decision points over the next few years. With these activities in place, DOD will be in a better position to request continued JSF funding and support. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have. If you have future questions about our work on the F/A-22 or JSF, please call Allen Li at (202) 512-4841. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Department of Defense's (DOD) two major tactical aircraft fighter programs, the F/A-22 and the Joint Strike Fighter, represent an investment of about $280 billion. Problems in the F/A-22 development program have led to a 10-year delay in delivering the initial capability and development cost increases of $16 billion. The Joint Strike Fighter, which experienced problems early in the program, is now at a critical crossroad in development. Any discussion of DOD's sizeable investment that remains in these programs must also be viewed within the context of the fiscal imbalance facing the nation within the next 10 years. GAO was asked to testify on the status of the F/A-22 and draw comparisons between both F/A-22 and Joint Strike Fighter programs' acquisition approaches. The F/A-22 program has experienced several significant challenges since it began development in 1986. First, the Air Force had originally planned to buy 750 aircraft, but it now estimates it can only afford about 218 aircraft. Second, in order to develop an expanded air-to-ground attack capability, DOD estimates that the Air Force will need $11.7 billion in modernization funding. Third, the Air Force has determined that new avionics computer processors and architecture are needed to support most planned enhancements, which will further increase program costs and risk. Lastly, the development test program continues to experience problems and risks further delays primarily due to avionics failures and problems meeting reliability requirements. Because of the risks of future cost increases and schedule delays, a congressional subcommittee requested that DOD provide business case information on the F/A-22. However, the information DOD provided did not address how many aircraft the Air Force needs to accomplish its missions, how many the Air Force can afford considering the full life-cycle costs, whether investments in new air-to-ground capabilities are needed, and what are the opportunity costs associated with purchasing any proposed quantities of this aircraft. The Joint Strike Fighter program started system development and demonstration in 2001 and has already encountered some cost and schedule problems. It is now working toward maturing the aircraft design and is considering delays in its critical design reviews to attain greater knowledge before making a decision to increase its investment significantly. In contrast, the F/A-22 program encountered poor cost and schedule outcomes because it had not gathered the appropriate knowledge at critical junctures in the program. The Joint Strike Fighter program is still early in its development program, with a greater opportunity to efficiently apply knowledge to its critical investment decisions.
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Awareness of the environmental and economic importance of the Arctic region is growing. The Arctic region is a very harsh operating environment, making research expensive and risky. NSF is the largest federal provider of funds for research in this region. The U.S. Coast Guard, part of the Department of Transportation, is charged with providing and operating icebreakers to meet U.S. military, logistic, and research needs in the Arctic and Antarctic regions. From 1966 to 1991, the U.S. Coast Guard operated the nation's icebreakers. The mission of the Coast Guard's Ice Operations Division, Office of Navigation Safety and Waterways Services, includes assisting other governmental and scientific organizations in scientific research and supporting national interests in the polar regions. Investigators representing or sponsored by universities, private institutions, and government agencies--including the Office of Naval Research, the U.S. Geological Survey, and the National Oceanic and Atmospheric Administration--conduct research aboard the Coast Guard icebreakers. The Arctic Research and Policy Act of 1984, as amended, calls for coordination among agencies over the use of logistics resources, including icebreakers, in the conduct of research. The act established the Arctic Research Commission to promote research in the Arctic region and to recommend Arctic research policy. Also under the act, responsibility for promoting the coordination of all Arctic research activities among agencies, including logistics (e.g., icebreaker support), rests with the Interagency Arctic Research Policy Committee. The Committee is headed by NSF and includes the Coast Guard among its members. Furthermore, in a 1987 agreement aimed at minimizing conflict and serving national interests, NSF and the Coast Guard pledged "to plan together, to the maximum extent possible, for the use of U.S. icebreakers in the support of polar research." The Arctic research community has sought a vessel dedicated to Arctic research for many years. The Arctic Research Commission recommended that such a vessel be acquired. The Interagency Arctic Research Policy Committee echoed this recommendation. Beginning in 1987, the scientific community, through the University National Oceanographic Laboratory System (UNOLS), used funds from NSF to study the requirements for, and possible designs of, an Arctic research vessel. Comments from the Arctic scientific community from 1990 to 1992, discussions in the Interagency Arctic Research Policy Committee, and other forums were used to define the characteristics of the vessel. From 1990 to the present, NSF and UNOLS, working with a private engineering firm, developed preliminary designs for Arctic research vessels of increasing size and icebreaking capability. The first design called for a 200-foot vessel with modest icebreaking capability whose estimated cost was about $40 million. After the Arctic scientific community reviewed and commented on this design, it was agreed that a larger vessel with greater icebreaking capacity was needed. Accordingly, a 340-foot vessel was designed with significant icebreaking capability and the capacity to perform 90-day missions in the Arctic region. This vessel is expected to cost about $120 million. Acquisition of the proposed vessel is not supported by a quantified analysis of the nation's requirements for icebreakers or by the scientific community's criticism of the Coast Guard's support for research. Moreover, records of actual and projections of future icebreaker use suggest that a fifth icebreaking vessel may not be needed. A 1990 interagency study of national polar icebreaker requirements (PIRS),the most recent such quantified study, did not call for the construction of the proposed vessel. NSF justifies the proposed vessel on the grounds that (1) Arctic research needs are increasing and (2) the United States does not have a vessel dedicated to Arctic research. However, NSF has not demonstrated that another icebreaker is required to meet research needs. The study documented the nation's icebreaker requirements and recommended a fleet of four icebreakers. These are the Polar Sea and Polar Star (currently operating Coast Guard icebreakers); Nathaniel B. Palmer (an Antarctic icebreaking research vessel); and Michael A. Healy (a planned Coast Guard icebreaker). The proposed vessel would be the fifth U.S. icebreaker, one more than recommended by the 1990 study. Funds for the Healy have been approved, and the vessel is scheduled to begin duty in 1998. According to Coast Guard officials, the Healy will serve primarily as an Arctic research vessel except when circumstances require its use elsewhere. To determine icebreaker requirements, the 1990 study quantified operational and research mission needs. To quantify needs, the number of days icebreakers were required to accomplish the missions was totaled. Operational missions consisted of the annual resupply of the Thule Air Force Base in Greenland and the McMurdo Antarctic research station (an NSF mission), as well as treaty inspection duties in the Antarctic. Research requirements for icebreaker support were also quantified and used in the study. However, these requirements do not reflect subsequent changes in users' needs, such as the military's reduced needs for icebreaker services resulting from the end of the Cold War and other agencies' increased needs attributed to higher priorities for Arctic research. Areas of increased research emphasis include Arctic fisheries, because of concern over fluctuating fish catches, and Arctic water quality, because of concern over radionuclide and other contamination originating in the former Soviet Union. The scientific community has produced several reports recommending the acquisition of an icebreaking vessel dedicated to Arctic research. None of these reports attempts to justify the proposed vessel by comparing the realistic demand for icebreakers to be used for research with the availability of existing and planned Coast Guard icebreakers. Reports of the Polar Research Board of the National Academy of Sciences, the U.S. Arctic Research Commission, and the Interagency Arctic Research Policy Committee justify an additional vessel on the basis of (1) the increasing (although not quantified) needs for research in the Arctic and (2) the observation that the United States does not possess a vessel dedicated to Arctic research. These reports do not balance the increased needs for icebreakers to support research with the decreased needs for icebreakers to support defense missions. Nor do the reports state why existing and planned Coast Guard icebreakers, whose missions include supporting Arctic research, cannot meet these needs. Finally, the reports do not consider where the additional funding for research will be obtained to fully employ a five-icebreaker fleet. To address these shortcomings, NSF requested that the National Research Council, which is affiliated with the National Academy of Sciences, examine the scientific community's needs for icebreaker support and how they can best be met. Neither the NSF program manager nor the study's director is certain whether the study will attempt to quantify the needs for icebreakers to support research in the Arctic. Planning for the study began in November 1994, and the final results are expected in the summer of 1995. The potential for underutilizing existing and planned Coast Guard icebreakers has led that agency to oppose the construction of the proposed vessel. Both the actual use of Coast Guard vessels for research in the Arctic over the past 4 years and the projected use in 1995 and 1996 are lower than estimated in the 1990 study. Coast Guard records for 1994 show 83 days of icebreaker use for the Arctic research of NSF and others, compared with the 143 days of use projected for NSF's research in the 1990 PIRS. Furthermore, no use of Coast Guard vessels for research in the Arctic region is scheduled, or likely, for 1995. Prospects for a scientific mission in 1996 are not good, according to Coast Guard and NSF officials, because of funding constraints. Many in the Arctic scientific community justify the acquisition of the proposed vessel on the grounds that the Coast Guard, because it has multiple missions, does not possess the desire, skills, or facilities to provide adequate support for Arctic science. However, this justification is not convincing, given improvements in the Coast Guard's commitment and ability to support research in the region. Some Arctic scientists assert that the Coast Guard values its other missions over supporting science. As a result, say these scientists, the Coast Guard lacks the desire to ensure the successful completion of scientific cruises to the Arctic. For example, supporting the U.S. military is a significant and traditional Coast Guard mission. The Coast Guard's adherence to this mission may result in approaches and goals on cruises that differ from those of the scientists on board. For instance, the strict chain of command on Coast Guard vessels has made communication between the chief scientist and the Captain of the vessel cumbersome, limiting flexibility in the accomplishment of research. Scientists, on the other hand, are generally not accustomed to seeking authorization for minor changes in the conduct of research projects. In recent years, the Coast Guard has placed greater emphasis on its role in supporting science. This increased priority is evidenced by an agreement between the Coast Guard and NSF on support for polar research, Coast Guard directives concerning such research, and a decline in the military mission for the Coast Guard's icebreaker fleet. The Coast Guard's operating authority includes supporting oceanographic research as a Coast Guard mission. In addition, in 1987, the Coast Guard pledged in an agreement with NSF to maintain trained personnel and icebreakers with adequate facilities to support polar research. Also, following an unsuccessful and contentious scientific cruise in 1991, high-ranking Coast Guard officials, including the Commandant, issued several directives stressing the importance of supporting Arctic science as a Coast Guard mission. Finally, Coast Guard officials in the Division of Ice Operations observed that the scientific mission has taken on added importance for the Coast Guard icebreaker fleet as emphasis on the military mission for these vessels has declined. Arctic scientists who participated in scientific cruises aboard Coast Guard icebreakers have noted significant improvements in the willingness of Coast Guard personnel to work with and support scientists. However, many Arctic scientists have maintained that Coast Guard personnel lack the skills necessary to adequately support research in the Arctic. Furthermore, some of the scientists believe that acquiring the proposed vessel would allow them to employ a crew that is highly skilled in supporting research. Scientists also point to Coast Guard rotation policies that prevent personnel from acquiring and maintaining skills in planning scientific cruises, navigating and maneuvering in ice, and maintaining and operating scientific equipment, such as oceanographic winches. The Coast Guard recognizes these shortcomings and has taken steps to address them. First, to represent the needs of scientists before the Coast Guard, the agency created a position for a liaison with the civilian scientific community at the icebreakers' home port of Seattle, Washington. This representation includes ensuring that scientists' needs are met when the vessels are prepared for scientific cruises. Second, the Coast Guard arranged with the Canadian Coast Guard for an informal officer exchange/training program to improve the officers' skills and began sending new officers on trips aboard the icebreakers to familiarize them with icebreaker operations. In addition, the liaison has arranged training for Coast Guard technicians with equipment manufacturers on the proper use of scientific equipment found aboard the icebreakers. Some Arctic scientists believe that the two currently operating Coast Guard icebreakers are unreliable and lack necessary scientific facilities. The scientists cite mechanical failures that have hindered or prevented the completion of research projects. Scientists also cite poor laboratory facilities and research equipment as limiting research opportunities. The Coast Guard has taken steps to enhance the reliability of its two icebreakers and boost their basic scientific capabilities. First, the Coast Guard strengthened and rebuilt the faulty propeller hubs on the icebreakers to improve their reliability. From 1987 to 1992, the two icebreakers underwent the Polar Science Upgrade Project to improve the scientific capabilities of both vessels. This project upgraded laboratory spaces, oceanographic instrumentation, and communication equipment and provided new oceanographic and trawling winches. These upgrades improved the vessels' ability to support Arctic research. In addition, beginning in the spring of 1995, the Coast Guard plans to conduct midlife refits of its two existing icebreakers as part of the Reliability Improvement Project, which is designed to correct original design flaws and replace deteriorated and outdated equipment, although it will not result in further significant upgrades of scientific equipment and facilities. In addition to improving its two existing icebreakers, the Coast Guard is acquiring another icebreaker with significant research support capabilities. The Healy was justified and designed, in part, to support polar research. Coast Guard officials told us that the Healy will be used primarily as an Arctic research vessel. Compared with the two existing Coast Guard icebreakers, this icebreaker will provide significantly improved facilities for supporting science. Although the Healy was justified largely as a research vessel, the Coast Guard requires that it be capable of supporting other Coast Guard missions, namely, annually breaking the channels to allow the resupply of Thule Air Force Base, Greenland, and McMurdo Station, Antarctica. Accordingly, the Healy was designed with greater icebreaking and seakeeping capabilities than the vessel proposed by NSF. The Arctic scientific community is largely dissatisfied with the design compromises the Coast Guard made to the Healy. As a result, some scientists believe that the vessel's overall design does not adequately reflect the scientific community's needs and suggestions for changing the vessel's design. The scientists point to factors such as an outdated hull design, poor fuel efficiency (high costs), and an inefficient deck layout resulting from the engines' placement as areas that the scientists had rejected. The Coast Guard maintains that the hull's design is not outdated and that, while it may not be the most efficient icebreaking design, it is necessary to ensure the Healy's open-ocean transit capability. The Coast Guard conferred with leading Arctic scientists when designing the scientific facilities for the Healy through a survey and during several meetings. Some of the scientists' suggestions were incorporated into the vessel's design. For example, the arrangement of laboratory spaces was changed, and hatch sizes were increased to accommodate scientific equipment. However, the scientific community was not consulted on the vessel's basic design. According to Coast Guard officials, the procurement of the Healy involved the use of performance-based specifications that were defined in consultation with the user community. The officials said that the shipbuilder relied heavily on consultants who had designed and built the majority of the world's icebreakers. NSF and the Arctic scientific community have not demonstrated that the proposed vessel is needed. The most recent (1990) quantified assessment of national icebreaker requirements did not support a need for the proposed vessel. Reports identified by NSF as justifying the acquisition of the proposed vessel cite only increasing research needs and the lack of a dedicated research icebreaker without quantifying those needs and explaining why the current arrangement with the Coast Guard is inadequate. NSF recognizes the deficiencies in its justification for the proposed vessel, as evidenced by its recently contracting with the National Research Council, affiliated with the National Academy of Sciences, to study the need for icebreakers to support polar research. Furthermore, the Coast Guard improved its responsiveness to the needs of the scientific community, enhanced the capabilities of existing vessels, and is building a vessel whose primary mission is to support Arctic research. Further cooperation between the Coast Guard and the scientific community should facilitate more cost-effective research and the achievement of other national goals in the Arctic region. NSF provided written comments on a draft of this report. (See app. III for NSF's comments and our evaluation of them.) NSF had three general comments: (1) the agency does not agree with our conclusion that NSF and the scientific community have not demonstrated the need for the proposed vessel; (2) the agency believes that final judgment on the need for a dedicated Arctic research vessel should be deferred until the National Academy of Sciences has completed its study of this issue; and (3) the agency recognizes that interagency communication must be improved. We disagree with NSF's assessment that adequate need for the proposed vessel has been demonstrated. In our view, though scientific needs are important, fiscal constraints and the capacity of existing and planned icebreakers with scientific capability have not been taken into account when justifying an Arctic research vessel. We agree with NSF that the National Academy of Sciences' study is important. We note that our report is not, nor does it purport to be, the final judgment on the acquisition of an Arctic research vessel. We also support NSF's efforts to improve interagency cooperation in order to increase the effective use of resources for Arctic research. We discussed a draft of this report with Department of Transportation officials, who generally agreed with our findings and conclusions. On the basis of NSF's comments and our discussion with Transportation officials, we have made changes to our report, where appropriate. In examining the justification for the proposed vessel, we reviewed the Arctic Research Policy Act, as amended, and other relevant laws, regulations, and publications. We also reviewed the 1984 and 1990 Polar Icebreaker Requirements studies; relevant congressional testimony; correspondence from and for NSF and the Coast Guard; Coast Guard policies and procedures; design reports for the proposed Arctic research vessel and the planned Coast Guard icebreaker Healy; and data on the use of icebreakers. We interviewed officials from the Coast Guard, NSF, the U.S. Geological Survey, and the U.S. Navy's Naval Sea Systems Command and Office of Naval Research. We also interviewed officials from the University of Alaska and other universities and research institutions. Finally, we interviewed officials from the Arctic Research Commission, the University National Oceanographic Laboratory System, and the Polar Research Board of the National Academy of Sciences. Appendix II contains a more detailed discussion of our objectives, scope, and methodology. We conducted our review between June and December 1994 in accordance with generally accepted government auditing standards. We will send copies of this report to the Director, National Science Foundation; the Secretary of Transportation; the Commandant of the Coast Guard; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. If you have any questions or need additional information, please contact me at (202) 512-3841. Major contributors to this report are listed in appendix IV. The Ranking Minority Member, Subcommittee on VA, HUD, and Independent Agencies, Senate Committee on Appropriations, asked us to examine the National Science Foundation's (NSF) analysis of options for buying and leasing the proposed Arctic research vessel. We found that NSF's analysis closely follows the Office of Management and Budget's (OMB) guidelines and shows buying as the best option. However, because the analysis is necessarily preliminary, NSF plans to solicit both purchase and lease proposals, should it proceed in acquiring the proposed vessel. As required by OMB Circular A-94, NSF compared the cost to the federal government of two different methods of financing the proposed vessel: (1) full purchase of the vessel and (2) long-term leasing from a private builder/operator, covering its 20-year expected life. This analysis, which took into account both construction and operating costs, found that the federal government would have the least cost if it purchased the proposed vessel. However, because the design phase is preliminary, the cost estimates represent only rough approximations of the proposed vessel's costs. Moreover, in order to compare the expected costs of leasing and buying, NSF needed to make several simplifying assumptions. While NSF's analysis conforms reasonably well to the OMB guidelines for lease-purchase comparisons, the analysis is based on preliminary cost estimates and relies on a variety of assumptions for which alternative hypotheses might be reasonable as well. In addition, assumptions also needed to be made for key variables, such as private sector borrowing costs on maritime loans. Moreover, because of the difficulty of determining a unique methodology for analyzing more complex forms of financing, such as a lease with an option to buy, or some cost sharing that might be offered by the state of Alaska, NSF's analysis does not include all relevant options. The cost advantage of government purchase over long-term leasing of the vessel is related to two factors. First, under a lease arrangement, the costs of private sector financing--which are higher than the government's borrowing costs--are passed on to the federal government in lease payments, thereby increasing the vessel's financing costs over what they would be under outright government purchase. Second, NSF assumed that the cost of building the vessel is the same under both the buy and the lease scenarios, but that under the lease arrangement, an additional profit accrues to the lessor for services related to its retained ownership of the vessel. Under the base-case analysis, roughly half of the cost advantage of purchasing over leasing is related to the gap in federal and private sector borrowing costs, and the remainder is related to the assumption of an additional profit stream to the lessor. NSF's base-case estimates use a 5.8-percent government borrowing rate because that was the federal Treasury rate on 20-year bonds (a time horizon equal to the expected life of the vessel) as of early 1994. The cost of private sector capital was assumed to be 8.5 percent. In this case, NSF found the advantage of purchase over lease to be $55.7 million in present-value terms. NSF also looked at the sensitivity of the advantage of purchase over lease by using alternative interest rates for both the government and private sector borrowing costs. Throughout these analyses, government purchase was favored over leasing, but the range by which purchase was advantageous ranged from $22.9 million to $99.6 million, each in terms of present value. NSF's decision to delay choosing a method of financing the proposed vessel until after bids are solicited from shipbuilders for any of several financing options is appropriate. After bids are solicited, NSF will need to perform a financial analysis similar to the one it has performed, but it will then have the advantage of performing such an analysis on more detailed data derived from the bid solicitation. To determine whether the proposed vessel has been justified, we reviewed the Arctic Research Policy Act, as amended; other relevant laws and regulations; findings and recommendations of the Arctic Research Commission and the Interagency Arctic Research Policy Committee; the University National Oceanographic Laboratory System (UNOLS) Fleet Improvement Plan Update; and several other publications. We also reviewed the 1984 and 1990 Polar Icebreaker Requirements studies; relevant congressional testimony; correspondence from and for NSF, the Coast Guard, and UNOLS; Coast Guard policies, procedures, and Arctic research cruise reports; design reports for the proposed Arctic Research Vessel and the planned Coast Guard icebreaker Healy; and icebreaker usage and research cost data. We also obtained written statements from NSF and the Coast Guard on the appropriateness of agencies other than the Coast Guard acquiring and operating icebreakers. In addition, we interviewed officials at Coast Guard headquarters in Washington, D.C.; Seattle, Washington; and Alameda, California. We also interviewed NSF officials from the Office of Polar Programs, Oceanographic Centers and Facilities Section, Budget Division, and officials from the U.S. Geological Survey, the U.S. Navy's Naval Sea Systems Command, and Office of Naval Research. We interviewed officials from the University of Alaska, the University of Washington, Texas A&M University, the Lamont Dougherty Earth Observatory, and companies that conduct Arctic research. In addition, we interviewed officials from the Arctic Research Commission, the University National Oceanographic Laboratory System, and the Polar Research Board of the National Academy of Sciences. In order to evaluate NSF's analyses of leasing versus buying the proposed vessel, we reviewed OMB Circular A-94 and NSF's own analysis of the lease-buy option. We did not independently verify and validate the cost data that NSF used in the analyses, but rather, given NSF's cost estimates for building and operating the vessel, we reviewed the methodology NSF used to compare the costs of leasing with the costs of buying. In addition, we talked with OMB officials. The following are GAO's comments on the National Science Foundation's letter dated February 17, 1995, in addition to the comments discussed on page 9 of this report. 1. We have reviewed many relevant studies, including those written by the Interagency Arctic Research Policy Committee, the Arctic Research Commission, the Polar Research Board, the University National Oceanographic Laboratory System, and NSF. As we note on pages 4-5 in the report, these studies do not take into consideration the two existing and one planned icebreaker--each of which possesses some research support capabilities. In fact, the planned Coast Guard vessel Healy was partially justified as a research vessel. In addition, according to the Coast Guard, the Healy will serve primarily as an Arctic research vessel. The observation that the United States does not possess a dedicated Arctic research vessel is insufficient justification for spending $120 million to construct the proposed vessel, as well as committing substantial funds to operate and maintain it. NSF also needs to consider fiscal constraints and the availability of existing and planned U.S. Coast Guard icebreakers in assessing icebreaker needs. 2. We disagree with NSF's statement that "the report misinterprets the roles of the U.S. Coast Guard and the National Science Foundation with respect to the acquisition and operation of research vessels for use in Arctic settings." We do not dispute NSF's authority to acquire or lease icebreakers. In our view, the issue is not whether NSF has the authority to acquire the proposed vessel but whether NSF has demonstrated the need for an additional icebreaker. 3. The proposed vessel is an icebreaker. Special consideration was given to the proposed vessel's icebreaking capabilities. For example, the icebreaking requirements for the proposed vessel were increased twice between 1990 and 1994. Our report does not imply that any ship capable of breaking through ice can be considered a research vessel. However, we do state that the two existing Coast Guard icebreakers and the planned vessel Healy, while capable of breaking ice, also have been upgraded or were specifically designed to support research. We agree that none of the three Coast Guard vessels represent the ideal research platform. We disagree with NSF's view that we discuss the proposed vessel and the existing Coast Guard icebreakers as if they were equal research platforms. On page 7, we state that equipment and other facilities necessary to support science have been added and improved. The largely successful 1994 scientific mission to the Arctic confirms that the existing Coast Guard vessels are capable of supporting the accomplishment of a significant body of Arctic research. 4. We disagree that we imply a reduced need for scientific research in the Arctic. Rather, on page 5 we state that funding constraints have contributed to underutilization of existing Coast Guard vessels. 5. As we note on pages 4-5, neither the design of the Healy nor the availability of Coast Guard vessels are explicitly put forth, with supporting analysis, in the various studies NSF cites in this letter as supporting acquisition of the proposed vessel. 6. The 1993 U.S. Arctic Research Plan mentions the Coast Guard role of supporting Arctic research and describes an Arctic research vessel (the proposed vessel) but does not demonstrate a need for the vessel. NSF states in its comments that the planned vessel Healy is not suited for year-round dedicated research. However, the Coast Guard has stated its intent to make the Healy available for Arctic research 144 days a year. We also note that, according to the 1990 Polar Icebreaker Requirements Study, NSF approved the design of the Healy as a member of the Polar Icebreaker Users Council (an interagency group of icebreaker users that includes NSF). With three Coast Guard icebreakers available, it should be easier to schedule two vessels for central Arctic missions. Again, while it might be ideal to have a dedicated vessel available for research in the less hazardous Arctic waters, the acquisition (about $120 million), maintenance, and operations costs (at least $34,000 per day)--coupled with the costs of maintaining underutilized Coast Guard icebreakers in a state of readiness--raise doubts as to the net benefit to the nation of acquiring the proposed vessel. 7. While it appears that NSF has concluded that the proposed vessel is justified, NSF also states that final judgment should be withheld pending the National Academy of Science's (NAS) study. We believe that our report points to significant issues that must be addressed before any final judgment is made. The report does identify weaknesses in the justifications found in previous studies and will, in our opinion, help to guide the current NAS effort. Accordingly, we are encouraged that the NAS study commissioned by NSF will include an assessment of the roles of NSF and other agencies and the resources available to support Arctic research programs, including evaluations of their operating costs and management options. 8. The 1990 Federal Oceanographic Fleet Coordinating Committee (FOFCC) report that NSF cites is not a study of national icebreaker requirements, of which research is a significant part, as is the 1990 PIRS study we refer to in this report. While NSF criticizes the 1990 Polar Icebreaker Requirements Study (PIRS), NSF, as well as the Departments of Transportation and Defense and OMB, developed that report. The 1990 PIRS study points to a broader scope of national needs and research community needs and not specifically to the Coast Guard vessel. We found the quantitative assessment of icebreaker needs in the 1990 PIRS study persuasive while the 1990 FOFCC study focuses on fleet requirements for a variety of vessel types. 9. Coast Guard officials told us that the agency is opposed to the acquisition of the proposed vessel because of funding constraints that would likely lead to underutilization of existing and planned Coast Guard vessels. 10. We do not dispute the fact that the Coast Guard icebreakers have experienced reliability problems. As we note on page 7, the Coast Guard is continuing efforts to improve the reliability of its two existing icebreakers. 11. As we note on pages 7-8, the Coast Guard surveyed the scientific community and held meetings that included officials from NSF and UNOLS. Although the Healy will primarily be used to support Arctic research, it is a multipurpose vessel. So while significant scientific capabilities were designed into the vessel, it is not surprising that it does not meet every scientific requirement laid out by the scientific community for the proposed vessel. 12. We agree that the ability of Coast Guard icebreakers to support Arctic science is a serious issue and the report treats them as such. Referring to the Healy as a military icebreaker is misleading given the multiple missions for which the vessel was designed and the research for which the Coast Guard states the Healy will be used. The Coast Guard stated that the funding for the Healy is in place, the contract for construction of the Healy has been let, and assembly of component parts has begun in several locations. As noted on page 8, the Coast Guard solicited, and, in some cases, implemented input from the scientific community. Mindi G. Weisenbloom, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 justification for the National Science Foundation's (NSF) proposed procurement of an icebreaking research vessel. GAO found that: (1) NSF and the scientific community have not demonstrated an increase in icebreaker requirements since 1990 to sufficiently justify a fifth icebreaker vessel; (2) the three icebreakers currently in operation are underutilized and no research cruises in the Arctic region are planned for 1995 or 1996; (3) a fourth icebreaker is being built for the Coast Guard to serve as an Arctic research vessel; and (4) many Arctic scientists justify the acquisition of the proposed vessel on the grounds that the Coast Guard is unwilling and unable to provide reliable support to Arctic research activities, although the Coast Guard's commitment to Arctic research has recently improved.
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The national park system has 376 units. These units have, among other things, over 16,000 permanent structures, 8,000 miles of roads, 1,500 bridges and tunnels, 5,000 housing units, about 1,500 water and waste systems, 200 radio systems, and over 400 dams. According to the Park Service, these facilities are valued at over $35 billion. The proper care and maintenance of the national parks and their supporting infrastructure are essential to the continued use and enjoyment of our great national treasures by this and future generations. However, for years Park Service officials have highlighted the agency's inability to keep up with its maintenance needs. In this connection, Park Service officials and others have often cited a continuing buildup of unmet maintenance needs as evidence of deteriorating conditions throughout the national park system. The accumulation of these unmet needs has become commonly referred to by the Park Service as its "maintenance backlog." The reported maintenance backlog has increased significantly over the past 10 years--from $1.9 billion in 1987 to about $6.1 billion in 1997. Recently, concerns about the maintenance backlog within the National Park Service, as well as other federal land management agencies, have led the Congress to provide significant new sources of funding. These additional sources of funding are, in part, aimed at helping the agencies address their maintenance problems. For example, it is anticipated that new revenues from the 3-year recreational fee demonstration program will provide the Park Service over $100 million annually. In some cases, the new revenues will as much as double the amount of money available for operating individual park units. In addition, $10 million from a special one-time appropriation from the Land and Water Conservation Fund has been made available for use by the Park Service in fiscal year 1998 to address the maintenance backlog. These new revenue sources are in addition to the $300 million in annual operating appropriations that are used for maintenance activities within the agency. In 1997, the Park Service estimated that its maintenance backlog was about $6.1 billion. Maintenance is generally considered to be work done to keep assets--property, plant, and equipment--in acceptable condition. Maintenance includes normal repairs and the replacement of parts and structural components needed to preserve assets. However, the composition of the maintenance backlog estimate provided by the Park Service includes activities that go beyond what could be considered maintenance. Specifically, the Park Service's estimate of its maintenance backlog includes not only repair and rehabilitation projects for existing facilities but also projects for the construction of new facilities or upgrades of present facilities. Of the estimated $6.1 billion maintenance backlog, most of it--about $5.6 billion, or about 92 percent--is for construction projects. These projects, such as building roads and utility systems, are relatively large, normally exceed $500,000 each, and involve multiyear planning and construction activities. According to the Park Service, the projects are intended to meet the following objectives: (1) repair and rehabilitation; (2) resource protection, involving such things as constructing or rehabilitating historic structures and trails and erosion protection activities; (3) health and safety, involving such things as upgrading water and sewer systems; (4) new facilities in older existing parks; and (5) new facilities in new and developing parks. Table 1 shows the dollar amounts and percentage of funds pertaining to each of the objectives. The Park Service's list of projects in the construction portion of the maintenance backlog reveals that over 21 percent, or $1.2 billion, of the $5.6 billion is for new facilities. We visited four parks to review the projects listed in the Park Service's maintenance backlog and found that the estimates included new construction projects as part of the backlog estimate. For example: Acadia National Park's estimate included $16.6 million to replace a visitor center and construct a park entrance. Colonial National Historical Park's estimate included $24 million to build a bicycle and walking trail along the Colonial Parkway. Delaware Water Gap National Recreation Area's estimate included $19.2 million to build a visitor center and rehabilitate facilities. Rocky Mountain National Park's estimate included $2.4 million to upgrade entrance facilities. While we do not question the need for any of these facilities, the projects are directed at adding new facilities or modifying and improving existing facilities to meet the objectives that park managers wish to achieve for their parks. These projects are not aimed at addressing the maintenance of existing facilities within the parks. For example, Colonial National Historical Park proposed to construct a new bicycle and walking trail on the 23-mile route along the Colonial Parkway between Jamestown and Yorktown, Virginia. The reason for the trail is to enhance bikers', joggers', and walkers' experience in the park and to increase safety for motorists and nonmotorists. The proposed project to upgrade facilities at Rocky Mountain National Park consists of constructing four new employee housing units and a 5,000-square-foot visitor center to provide information on park facilities and resources. According to the park's records, half of the 2.8 million visitors to the park enter via Fall River, an entrance road with no established information station or visitor center until visitors reach Fall River Pass, a distance of 21 miles. Including these types of enhancement projects in the maintenance backlog contributes to confusion about the actual maintenance needs of the national park system. While a portion of the projects listed as part of the Park Service's maintenance backlog are not maintenance items, it is clear from documentation and physical evidence that we noted at the parks that we visited that the Park Service does have a host of maintenance needs. For example, Acadia National Park proposed to spend over $2 million to rehabilitate historic bridges along the carriage road system that have been saturated by water and exhibit cracks, open joints, and waterborne deposits. Also, Rocky Mountain National Park proposed to spend $14.5 million to rehabilitate and replace park roads. On one road, we observed that the road bank was eroding and in need of rocks to rebuild the eroded area. (See fig. 1.) In addition to projects clearly listed as new construction, other projects on the $5.6 billion list that are not identified as new construction, such as the repair and rehabilitation of existing facilities, include amounts for new construction. Our review of the project proposals for the four parks that we visited showed that each of the proposals included large repair and rehabilitation projects containing tasks that would not be considered maintenance. These projects include new construction for adding, expanding, and upgrading facilities. For example, at Colonial National Historical Park, an $18 million project to protect Jamestown Island and other locations from erosion included about $4.7 million primarily for the construction of new items such as buildings, boardwalks, wayside exhibits, and an audio exhibit. Beyond construction items, the remaining part of the $6.1 billion backlog estimate--about 8 percent, or about $500 million--is for smaller maintenance projects, such as rehabilitating campgrounds and trails and repairing bridges, and other items that recur on a cyclic basis, for example reroofing or repainting buildings. The Park Service excluded daily, routine park-based operational maintenance, such as janitorial and custodial services, groundskeeping, and minor repairs, from the maintenance backlog figures. The Park Service has a maintenance management system that park managers can use to plan and manage these routine activities. However, recent Department of the Interior Inspector General report notes that this system is not uniformly used by park managers. The Park Service compiles its maintenance backlog estimates on an ad hoc basis in response to requests from the Congress or others; it does not have a routine, systematic process for determining its maintenance backlog. The January 1997 estimate of the maintenance backlog--the most recent estimate--was based largely on information that was compiled over 4 years ago. This fact, as well as the absence of a common definition of what should be included in the maintenance backlog, contributed to an inaccurate and out-of-date estimate. The $6.1 billion estimate, dated January 1997, was for the most part, compiled on the basis of information received from the individual parks in December 1993. A Park Service official said that the 1993 data were updated by headquarters to reflect projects that had been subsequently funded during the intervening years. However, we found that the Service's most recent maintenance backlog estimate for each of the parks we visited was neither accurate nor current. The four parks' estimates of their maintenance needs ranged from about $40 million at Rocky Mountain National Park to $120 million at Delaware Water Gap National Recreation Area. Our analysis of these estimates showed that they varied from the headquarters estimates by about $3 million and $21 million, respectively. The differences occurred because the estimates from headquarters were based primarily on 4-year-old data. Officials from the four parks told us that they had not been asked to provide specific updated data to develop the 1997 estimate. The parks' estimates, which were based on current information, included such things as recent projects, modified scopes, and more up-to-date cost estimates. For example, Acadia's estimate to replace the visitor center and construct a park entrance has been reduced from $16.6 million to $11.6 million; the Delaware Water Gap's estimate of $19.2 million to build a visitor center and rehabilitate facilities has been reduced to $8 million; and Rocky Mountain's $2.4 million project to upgrade an entrance facility is no longer a funding need because it is being paid for through private means. In addition, one of the projects on the headquarters list has been completed. The Park Service has no common definition as to what items should be included in an estimate of the maintenance backlog. As a result, the Park Service oficials that we spoke with in headquarters, two regional offices, and four parks had different interpretations of what should be included in the backlog. In determining the maintenance backlog estimate, some of these officials would exclude new construction; some would include routine, park-based maintenance; and some would include natural and cultural resource management and land acquisition activities. In addition, when headquarters developed the maintenance backlog estimate, it included both new construction and maintenance items. For example, nonmaintenance items, such as adding a bike path to a park where none now exists or building a new visitor center, are included. The net result is that the estimate is not a reliable measure of the maintenance needs of the national park system. In order to begin addressing its maintenance backlog, the Park Service needs (1) an accurate estimate of its total maintenance backlog and (2) a means for tracking progress so that it can determine the extent to which its needs are being met. Currently, the agency has neither of these things. Yet the need for an accurate estimate and a tracking system is more important now than ever before because in fiscal year 1998, over $100 million in additional funding is being made available for the Park Service, which it could use to address its maintenance needs. This additional funding comes from the recreational fee demonstration program and the Land and Water Conservation Fund. Furthermore, the Park Service requested an increase in funding for maintenance activities in fiscal year 1999. Park Service officials told us that they have not developed a precise estimate of the total maintenance backlog because the needs far exceed the funding resources available to address them. In their view, the limited funds available to address the agency's maintenance backlog dictate that managers focus their attention on identifying only the highest-priority projects on a year-to-year basis. Because the agency does not focus on the total needs but only on priorities for a particular year, it cannot determine whether the maintenance conditions of park facilities are improving or worsening. Furthermore, without information on the total maintenance backlog, it is difficult to measure what progress is being made with available resources. The recent actions by the Congress to provide the Park Service with substantial additional funding, which could be used to address its maintenance backlog, underscore the need to ensure that available funds are being used to address priority needs and to show progress in improving the conditions of the national park system. The Park Service estimates that the recreational fee demonstration program could provide over $100 million a year to address the parks' maintenance and other operational needs. For some parks, revenues from new and increased fees will as much as double the amount of money that has been previously available for operating individual park units. In addition to the fee demonstration program, the Park Service was allocated $10 million from the Land and Water Conservation Fund appropriations in fiscal year 1998 to help address the maintenance needs of the national park system. Furthermore, additional funds may be available for maintenance if the Congress appropriates the additional $62 million that the Park Service requested for maintenance activities in its fiscal year 1999 budget request. Several new requirements that have been imposed on the Park Service, and other federal agencies, can help the agency to address its maintenance backlog. These new requirements involve (1) changes in federal accounting standards, (2) the Government Performance and Results Act (the Results Act), (3) determining the need for some Park Service employee housing, and (4) a review of the Park Service's construction practices. In addition, the Department of the Interior and the Park Service are currently taking a number of steps to better manage the maintenance and construction program, including developing a 5-year plan for prioritizing maintenance and construction projects to be funded and evaluating alternative methods for maintaining historic structures. These requirements and actions should, if implemented properly, help the agency to better manage its maintenance backlog. Recent changes in federal accounting standards require federal agencies, including the Park Service, to develop better data on their maintenance needs. The standards define deferred maintenance and require that it be disclosed in agencies' financial statements beginning with fiscal year 1998. To implement these standards, the Park Service is part of a facilities maintenance study team established within Interior to provide the agency with information on deferred maintenance as well as guidance on standard definitions and methodologies for improving the ongoing accumulation of this information. In addition, as part of this initiative, the Park Service is doing an assessment of its assets to show whether they are in poor, fair, or good condition. This information is essential and will provide the Park Service with better data on its overall maintenance needs and help the Park Service prioritize its maintenance expenditures. Furthermore, it is important to point out that as part of the agency's financial statements, the Park Service's estimates of deferred maintenance will be subject to annual audits. As a result, Interior is reporting information on deferred maintenance in its fiscal year 1997 financial statements. This audit scrutiny is particularly important given the long-standing concerns reported by us and others about the validity of the Park Service's maintenance backlog estimates. The Results Act should also help the Park Service to better address its maintenance backlog. In carrying out the Results Act, the Park Service requires its park managers to measure progress in meeting a number of key goals, including whether and to what degree the condition of park facilities is being improved. In accordance with the Results Act, in February 1998, the Park Service has developed an annual performance plan for fiscal year 1999 that includes a number of goals to address the maintenance and construction backlog. For example, by September 30, 1999, 10 percent of employee housing units, classified as being in poor or fair condition in 1997, will be removed, replaced, or upgraded to good condition. If properly implemented, the Results Act should make the Park Service as a whole, as well as individual park managers, more accountable for how it spends maintenance funds to improve the condition of park facilities. Once in place, this process should permit the Park Service to better demonstrate what is being accomplished with its funding resources. This is an important step in the right direction, since our past work has shown that the Park Service could not hold park managers accountable for their spending decisions because they did not have a good system for tracking progress and measuring results in terms of how money was being spent at the park level. The other two requirements stem from congressional concerns regarding the number of employee housing units that the Park Service maintains as well as the extremely high costs to construct some new facilities. In September 1993 and August 1994, we recommended that the Park Service assess the need to retain all of its existing housing. In line with this and other recommendations, the Congress passed the Omnibus Parks and Public Lands Management Act of 1996, which contains a provision requiring the Park Service to conduct such a study. The Park Service awarded a contract in November 1997 to identify the need for park housing and the condition of the housing and assess the availability and affordability of housing in nearby communities. The study, which is expected to be completed in October 1998, may result in the elimination of some housing units and related maintenance costs. Concerns were expressed in an October 1997 hearing before the Subcommittee on Interior and Related Agencies, House Committee on Appropriations, regarding the high cost of constructing new facilities in light of the Park Service's $6.1 billion backlog of maintenance needs. Recent projects, such as new housing at Yosemite and Grand Canyon national parks and a high-cost outhouse at the Delaware Water Gap National Recreation Area, raised questions about the reasonableness of costs for construction projects. During the hearing, Interior's Inspector General testified that private sector construction of housing near Yosemite would be at least $334,000 less than the Park Service's $584,000 cost per house and at least $158,000 less than the Service's $390,000 cost per house at the Grand Canyon. Also during the hearing, Subcommittee members raised a number of questions regarding the $330,000 outhouse at the Delaware Water Gap National Recreation Area that cost more than 3 times the average cost of a new 2,000-square-foot home with three bedrooms and two baths in the same area. (See fig. 2.) In light of the above construction costs, the Conference Committee for Interior's fiscal year 1998 appropriations directed that an independent study of the Park Service's construction program be conducted. This study is being performed by the National Academy of Public Administration (NAPA). The NAPA study is examining the Park Service's construction program and practices, with the goal of identifying and recommending a comprehensive remedy for the causes of cost control problems. The study's tasks include determining the (1) effectiveness of the Park Service's decision-making process for constructing facilities; (2) adequacy of constraints on the scope and cost of housing and other projects; (3) appropriate role of the Denver Service Center in the design and oversight of construction projects, including repairing and rehabilitating facilities; and (4) potential for cost-saving incentives at the park and Denver Service Center levels. The study is expected to be completed by mid-June 1998. In addition to new requirements being imposed on the Park Service, Interior, including the Park Service, is currently taking a number of initiatives to better manage its maintenance and construction program. These initiatives include (1) developing a 5-year plan to prioritize maintenance and construction projects and (2) evaluating alternative methods for maintaining its historic structures. During recent congressional hearings focusing on maintenance issues within Interior, the Assistant Secretary for Policy, Management, and Budget acknowledged that the Department needs to improve the management and accountability of the maintenance and construction program and outlined a 5-year priority maintenance and construction program for the Park Service and other Interior agencies. The 5-year plan addresses the deferred maintenance, construction, and natural and cultural resource backlogs and will list priority maintenance and construction projects for the fiscal year 2000 budget. The criteria for selecting these projects involve (1) remedying maintenance deficiencies critical to health and safety and (2) pursuing natural and cultural resource protection. According to the Park Service's fiscal year 1999 annual performance plan, it expects to identify, by September 30, 1999, priority maintenance and construction projects amounting to $500 million and plans to allocate funds to address at least 20 percent of the high-priority needs. The Park Service is currently evaluating alternative methods for maintaining its historic structures. The cost to maintain its historic structures is a significant component of the maintenance backlog estimate. As of December 1997, the Park Service estimated that the cost for maintaining about 20,000 structures was about $1 billion. However, on the basis of identified maintenance, rehabilitation, and development needs, the Park Service recognizes that it does not have and likely never will have enough funds and staff to take care of all of its historic structures. Accordingly, the Park Service identified alternative methods for preserving many of its historic structures, such as public-private partnerships. Specifically, the alternatives include cooperative agreements, leasing, conveyance of historic structures, as well as philanthropic support. These proposed alternatives should help the Park Service reduce its maintenance backlog. The Park Service also classified its inventory of historic structures by level of significance and by whether the structures must, should, or may be preserved or may be disposed of or altered. Such classification can help park officials assess priority maintenance needs and whether some structures should be maintained. At the time of our review, the Park Service had not taken any actions with respect to the alternative methods for maintaining its historic structures. Appendix I provides additional information on the Park Service's inventory of historic structures. Given the substantial increase in funding that the Park Service will receive to address its maintenance backlog, now more than ever, the agency must be prepared to demonstrate what is being accomplished with these resources. To do so will require the Park Service to develop more accurate data on its maintenance backlog and to track the progress in addressing it. The new requirements being imposed on the Park Service and current initiatives being undertaken by Interior and the Park Service should, if implemented properly, help the agency to better manage this backlog. These efforts should also go a long way in addressing the concerns about the maintenance backlog that have been expressed by the Congress and others over the years. We provided a draft of this report to the Department of the Interior for review and comment. Interior said that it is in general agreement with the report's conclusion that new requirements and initiatives undertaken by Interior and the National Park Service should help the Service to better define and manage its maintenance backlog. (See app. III.) To respond to your request, we met with officials from the Park Service's headquarters office and the Philadelphia and Denver Park Service regional offices and from Acadia National Park, Colonial National Historical Park, Delaware Water Gap National Recreation Area, and Rocky Mountain National Park. We also obtained and reviewed pertinent documentation from these officials. Although the particular park units that were selected may not be representative of the entire national park system, the selection covers the various types, sizes, and geographical locations of park units to show problems relating to the maintenance backlog issues. We conducted our review from July 1997 through March 1998 in accordance with generally accepted government auditing standards. Appendix II provides a more detailed discussion of our objectives, scope, and methodology. As arranged with you office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the issue date. At that time, we will send copies of this report to the appropriate Senate and House committees. We will also make copies available to others on request. Please call me at (202) 512-3841 if you have any questions about this report. Major contributors to this report are listed in appendix IV. The National Park Service maintains an inventory of historic structures that is classified by management category and level of significance. These classifications were developed based on a compilation of legislative mandates and policy considerations indicating significance, use, condition, and location of the historic structures. According to the Park Service, this information was developed to reexamine management practices and to provide guidance to headquarters, regional, and park managers on how to set priorities in allocating resources to preserve historic structures. May be disposed of or altered The Park Service defines management category as follows: (1) Structures that must be preserved and maintained include structures that meet any one of the following criteria: preservation is specifically legislated, structure is related to the park's legislated significance, structure is significant as defined by the National Historic Landmark criteria, structure contributes to the park's national significance, or is a prehistoric structure. (2) Structures that should be preserved and maintained must meet all of the following criteria: may meet National Register criteria, is not incompatible with the park's legislated significance, and has a continuing or potential use based upon design and location. (3) Structures that may be preserved or maintained meet either of the following conditions: structure may meet the National Register criteria but because of condition, location, or other factors does not qualify for (2) above; structure does not meet National Register criteria but through the planning process, it is decided to manage the structure as a cultural resource. (4) Structures that may be disposed of or altered meet any one of several criteria: structure is an irreparable hazard to public health and safety; is a physical or visual intrusion on the park's legislated significance; or has lost its historical integrity. The Park Service defines significance as follows: National: structure is listed in the National Register as nationally significant or possess national significance by act of Congress or executive order. Contributing: structure does not possess national significance on an individual basis but contributes to the national significance of a park or historic district. State: structure qualifies for the National Register and possess significance at the state level. Local: structure qualifies for the National Register and possess significance at the local level. Not evaluated: structure known through direct observation, survey, testing, or inventory but does not have National Register documentation indicating significance. Not significant: structure known not to be significant but is managed as a cultural resource. Unknown: Data element not completed. The objectives of our review were to determine (1) the National Park Service's estimate of the maintenance backlog and its composition, (2) how the agency determined the maintenance backlog estimate and whether it is reliable, (3) how the agency manages the backlog, and (4) recent requirements that have been placed on the Park Service and other federal agencies that may have a positive impact on what is being done in this area and current initiatives being taken by the Park Service to deal with the backlog issues. To identify the estimate and composition of the maintenance backlog at national parks, we obtained agency reports, press releases, budget documents, and other relevant Park Service data citing unmet maintenance and repair needs. We also interviewed agency headquarters officials responsible for compiling and reporting the backlog estimate. We did not develop an independent overall maintenance backlog estimate but used the estimate and the composition reported by the Park Service. For information on how the Park Service determined its maintenance backlog estimate and on whether it is reliable, we obtained and analyzed the documentation used by the agency to compile the backlog estimate. We also interviewed officials at headquarters and at two Park Service regional offices and met with maintenance and other personnel at four park units--the Acadia National Park, Maine; Colonial National Historical Park, Virginia; Delaware Water Gap National Recreation Area, Pennsylvania; and Rocky Mountain National Park, Colorado. The parks were judgmentally selected to covers the various types, sizes, and geographical locations of park units. The Intermountain Region in Denver and the Northeast Region in Philadelphia were selected because they have jurisdiction over the parks we visited. To determine the reliability of the backlog estimate, we reviewed whether the agency has a common definition of "maintenance backlog" and whether the estimate was current. We did not question the validity of the maintenance needs reported by individual parks or by headquarters. To obtain information on how the Park Service manages its maintenance backlog, we interviewed headquarter officials to determine whether the agency has identified its total maintenance backlog needs and has tracked the progress in meeting those needs. We also reviewed Park Service documents to determine how the agency plans to handle increased funding resources that may be used to reduce the maintenance backlog. Finally, to identify new requirements that affect the reporting of agency maintenance needs, we reviewed (1) changes in federal accounting standards, (2) the Government Performance and Results Act, (3) the Park Service's study on employee housing needs, and (4) a study of the Park Service's construction practices. We also interviewed headquarters officials to identify actions currently underway by the Department of the Interior and the Park Service to better manage the maintenance and construction program. We performed our work from May 1997 through March 1998 in accordance with generally accepted government auditing standards. William Temmler The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the National Park Service's (NPS) efforts to identify and manage the maintenance backlog, focusing on: (1) NPS' estimate of the maintenance backlog and its composition; (2) how NPS determined the maintenance backlog estimate and whether it is reliable; (3) how NPS manages the backlog; and (4) what, if any, recent requirements or initiatives are being implemented by the NPS to help address its maintenance backlog problem. GAO noted that: (1) NPS' most recent estimate of its maintenance backlog does not accurately reflect the scope of the maintenance needs of the park system; (2) NPS estimated, as of January 1997, that its maintenance backlog was about $6.1 billion; (3) most of this amount--about $5.6 billion, or about 92 percent--was for construction projects, which, for the most part, are aimed at correcting maintenance problems at existing facilities; (4) however, over 21 percent of the $5.6 billion in construction projects, or $1.2 billion, was for the construction of new facilities, such as $24 million for a bike path at the Colonial National Historical Park in Virginia and $16.6 million to replace a visitor center and construct a park entrance at Acadia National Park in Maine; (5) while GAO does not question the need for these facilities, including these kinds of new construction projects or projects that expand or upgrade park facilities in an estimate of the maintenance backlog is not appropriate because such projects go beyond what could reasonably be viewed as maintenance; (6) including them in the maintenance backlog contributes to confusion about the park system's actual maintenance needs; (7) NPS estimates of its maintenance backlog are compiled on an ad hoc basis in response to requests from Congress or others; the agency does not have a routine, systematic process for determining its maintenance backlog; (8) the most recent estimate, as of January 1997, was based largely on information that was compiled by NPS in 1993 and has not been updated to reflect changing conditions in individual park units; (9) this fact, as well as the absence of a common definition of what should be included in the maintenance backlog, contributed to an inaccurate and out-of-date estimate; (10) NPS does not use the estimated backlog in managing park maintenance operations; (11) as such, it has not specifically identified its total maintenance backlog; (12) because the identified backlog far exceeds the funding resources being made available to address it, NPS has focused its efforts on identifying its highest-priority maintenance needs; (13) however, given that substantial additional funding resources are being made available--over $100 million starting in fiscal year 1998--NPS needs to more accurately determine its total maintenance needs so that it can better track progress in meeting them; and (14) NPS is taking actions to help address the maintenance backlog problem in response to several requirements.
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All international mail and packages entering the United States through the U.S. Postal Service and private carriers are subject to potential CBP inspection at the 13 International Mail Branches (IMBs) located at U.S. Postal Service international mail facilities and 29 express consignment carrier facilities operated by private carriers located around the country. CBP inspectors can target certain packages for inspection or randomly select packages for inspection. CBP inspects for, among other things, illegally imported controlled substances, contraband, and items--like personal shipments of prescription drugs--that may be inadmissible. CBP inspections can include examining the outer envelope of the package, using x-ray detectors, or opening the package to physically inspect the contents. Each year the IMBs and carrier facilities process hundreds of millions of pieces of mail and packages. Among these items are prescription drugs ordered by consumers over the Internet, the importation of which is prohibited under current law, with few exceptions. Two acts--the Federal Food, Drug, and Cosmetic Act and the Controlled Substances Import and Export Act--specifically regulate the importation of prescription drugs into the United States. Under the Federal Food, Drug, and Cosmetic Act, as amended, FDA is responsible for ensuring the safety, effectiveness, and quality of domestic and imported drugs and may refuse to admit into the United States, any drug that appears to be adulterated, misbranded, or unapproved for the U.S. market as defined in the act. Under the act and implementing regulations, this includes foreign versions of FDA-approved drugs because, for example, neither the foreign manufacturing facility nor the manufacturing methods and controls were reviewed by FDA for compliance with U.S. statutory and regulatory standards. The act also prohibits reimportation of a prescription drug manufactured in the United States by anyone other than the original manufacturer of that drug. According to FDA, prescription drugs imported by individual consumers typically fall into one of these prohibited categories. However, FDA has established a policy that allows local FDA officials to use their discretion to permit personal importation of prescription drugs that do not contain controlled substances under specified circumstances, such as importing for treatment of a serious condition a small quantity, generally not more than a 90-day supply, of a drug not available domestically. The importation of unapproved foreign versions of prescription drugs like Viagra (an erectile dysfunction drug) or Propecia (a hair loss drug), for example, would not qualify under the personal importation policy because approved versions are readily available in the United States. In addition, the Controlled Substances Import and Export Act, among other things, generally prohibits personal importation of those prescription drugs that are also controlled substances, such as Valium or codeine. (See app. II for general description of controlled substances.) Under the act, the importation of controlled substances is prohibited unless the importer is registered with DEA, and such registration is generally not available for importation for personal use. The act and implementing regulations permit an individual traveler under certain circumstances to carry a personal use quantity of a controlled substance (except a substance in Schedule I) across the U.S. border, but they do not make a similar exception for importation by mail or private carrier. CBP inspects packages for prescription drugs on behalf of DEA and FDA. Upon inspection, CBP is to seize illegally imported controlled substances on behalf of DEA. CBP may take steps to destroy the seized and forfeited substance or turn the seized substance over to other federal law enforcement agencies for further investigation. CBP is to turn over packages suspected of containing prescription drugs that are not controlled substances to FDA. FDA investigators may inspect such packages and hold those that appear to be adulterated, misbranded, or unapproved, but must notify the addressee and allow that individual the opportunity to present evidence as to why the drug should be admitted into the United States. If the addressee does not provide evidence that overcomes the appearance of inadmissibility, then the item is refused admission. Figure 1 illustrates the two acts that specifically govern the importation of prescription drugs into the United States. It also presents the roles of FDA, DEA, and CBP in implementing those acts. CBP and FDA officials said that the volume of unapproved prescription drugs illegally imported through the IMBs or carrier facilities is large and steadily increasing. However, complete data do not exist to document this observation. During special operations, CBP and FDA have attempted to determine the volume of imported prescription drugs entering through selected IMBs. Generally, these were one-time, targeted efforts to identify and tally all of the packages containing prescription drugs at certain time periods. The limited data collected have shown wide variations in volume. For example, CBP officials at one IMB estimated that approximately 3,300 packages containing prescription drugs entered the facility in one week. In 2004, CBP officials at another IMB determined that 4,300 packages containing prescription drugs entered the facility in one day. While these data may provide estimates regarding the volume entering selected IMBs for certain time periods, the data may not be representative of other time periods or projectable to other locations. FDA officials have stated that they cannot provide assurance to the public regarding the safety and quality of drugs purchased from foreign sources, which are largely outside of their regulatory system. Additionally, FDA officials indicated that consumers who purchase prescription drugs from foreign-based Internet pharmacies are at risk of not fully knowing the safety or quality of what they are importing. FDA officials also have stated that while some consumers may purchase genuine products, others may unknowingly purchase counterfeit products, expired drugs, or drugs that were improperly manufactured. CBP and FDA have conducted special operations to do limited assessments of the nature of some imported prescription drugs, and these operations have raised questions about the safety of some of the drugs analyzed. For example, during an operation undertaken in 2003 at four IMBs, CBP and FDA inspected 1,153 packages that contained prescription drugs. According to a CBP report, 1,019, or 88 percent, of the drug products were violative because they were prohibited for import, including Lipitor (a cholesterol-lowering drug), Viagra, and Propecia. A CBP laboratory analyzed 180 drug samples. This analysis showed that the majority of the drugs were never approved by FDA. Furthermore, the operation showed that many of the unapproved drugs could pose safety risks. The samples included drugs that were withdrawn from the U.S. market for safety reasons; animal drugs not approved for human use; and drugs that carry risks because they require careful dosing, initial screening, or periodic patient monitoring. In addition, other drugs tested were found to contain controlled substances prohibited for import, and some of the drugs contained no active ingredients. Figure 2 illustrates the results of the CBP laboratory analysis. In a recent report and testimony before this Subcommittee, we found that prescription drugs ordered from some foreign-based Internet pharmacies posed safety risks for consumers. Specifically, we identified several problems associated with the handling, FDA approval status, and authenticity of 21 prescription drugs samples purchased from Internet pharmacies located in several foreign countries--Argentina, Costa Rica, Fiji, Mexico, India, Pakistan, Philippines, Spain, Thailand, and Turkey. Our work showed that most of these drug samples, all of which we received via consignment carrier shipment or the U.S. mail, were unapproved for the U.S. market because, for example, the labeling or the foreign manufacturing facility, methods, and controls were not reviewed by FDA. Of the 21 samples: None included dispensing pharmacy labels that provided instructions for use, and only about one-third included warning information. Thirteen displayed problems associated with the handling of the drug; three samples that should have been shipped in a temperature- controlled environment arrived in envelopes without insulation; and five samples contained tablets enclosed in punctured blister packs, potentially exposing them to damaging light or moisture. Two were found to be counterfeit versions of the products we ordered, and two had a significantly different chemical composition than that of the product we had ordered. We found fewer problems among 47 samples purchased from U.S. and Canadian Internet pharmacies. Although most of the drugs obtained from Canada were of the same chemical composition as that of their U.S. counterparts, most were unapproved for the U.S. market. We stated that it was notable that we identified numerous problems among the samples received despite the relatively small number of drugs we purchased, consistent with problems recently identified by state and federal regulatory agencies. Our work thus far shows that while CBP and FDA interdicted some packages that contain prescription drugs, other similar packages were released--either not inspected and released or released after inspection. CBP officials told us that certain packages were targeted for inspection. However, packages that were not targeted typically bypass inspection and are released to the addressee without an assessment of their contents or admissibility. Many packages that were held by CBP officials for FDA at the IMBs were also subsequently released to the addressee. FDA has acknowledged that tens of thousands of packages have been released, although they may contain drug products that violate current laws and pose health risks to consumers. FDA officials at the IMBs said that the packages were released to the addressee because FDA investigators were unable to process the volume of packages turned over to them. FDA headquarters officials told us that this occurred because of limited available resources relative to the volume of unapproved prescription drugs entering the country. According to CBP and FDA officials at the IMBs we visited, CBP and FDA use various approaches to target certain incoming international mail packages for inspection. These include targeting packages from certain countries and/or packages suspected of containing certain prescription drugs. For example, at one IMB we visited, FDA provided CBP with a list of targeted countries--the composition of which changed periodically. A recent list targeted seven countries and specific areas in one other country. FDA officials asked that CBP hold the packages they suspected of containing prescription drugs that were from the targeted countries. Typically, CBP officials told us that when packages containing prescription drugs were detected, but were not from one of the targeted countries, they were released to the addressee without an assessment of their admissibility. Accordingly, CBP officials stated that packages containing prescription drugs unapproved for import were released daily without FDA review. According to CBP and FDA officials at the carrier facilities we visited, packages containing prescription drugs sent through these facilities may also be released without inspection. Unlike packages at IMBs, packages arriving at carrier facilities we visited were preceded by advance manifest information, which included the shipper's declaration describing the contents and its value. CBP and FDA officials review the manifest information to target packages for inspection before their arrival. Agency officials at two carrier facilities we visited told us that FDA officials were not typically on-site and electronically reviewed the manifests and targeted incoming packages declared as prescription drugs. FDA officials noted that packages containing prescription drugs could potentially avoid their review if the manifest information was not accurate. CBP and FDA officials told us there were no assurances that the shipper's declarations were accurate. For example, CBP and FDA officials at the carrier facility found eight packages containing a human growth hormone--unapproved for import--that were inaccurately manifested as glassware. FDA officials said that some packages that were inspected and determined to contain prescription drugs at the IMBs were released because they could not process them. For example, at one IMB, CBP officials held 16 bins containing roughly 3,000 packages for FDA investigators on a weekly basis. However, the FDA officials estimated that in one week, they could open and fully inspect about 140 packages. In making the decision regarding what to inspect, two FDA investigators considered whether the packages contained prescription drugs considered to be an enforcement priority, including injectable drugs and certain controlled substances, such as steroids. The FDA officials told us that they typically released packages that did not contain a priority drug, even though the packages were believed to contain other prescription drugs that were not approved for import. Figure 3 shows bins containing packages of suspected prescription drugs being held for FDA review and possible inspection. At another IMB, CBP officials said that they usually released packages containing prescription drugs that appeared to be a 90-day supply or less-- in line with one of the criteria in FDA's personal importation policy. For example, after viewing an x-ray image of a package, CBP performed a visual inspection of the outer container of a medication, labeled as a treatment for ulcers, determined that it appeared to contain 90 pills, and released it. At this same facility, FDA officials told us that every week CBP turned over to FDA hundreds of packages. CBP told us that these packages contained quantities of prescription drugs that appeared to be more than a 90-day supply. However, the FDA officials stated that they were able to process a total of approximately 20 packages per day. As a result, the FDA officials told us they returned many of the packages to CBP, citing an inability to process every package. The CBP officials said that most of the returned packages were released to the addressees. For example, CBP officials told us that several packages suspected of containing generic Viagra, unapproved for import, were returned by FDA and were released. FDA officials told us that for packages found to contain prescription drugs, processing requirements are time-consuming and can hamper their ability to process all of the packages that are detained by CBP. FDA processing requirements include identifying the drugs, measuring the volume, entering this information into a FDA database, taking pictures of the drugs, preparing the drugs for temporary storage, and sending notification to the addressees to provide evidence regarding the admissibility of the drug. Processing time varies depending on the quantity and variety of drugs in the package. In addition, processing time increases if research is required to determine the drug type. For example, FDA officials at one IMB stated that some prescription drugs are not immediately identifiable, particularly when shipped without labels or with labels in a foreign language. Figure 4 illustrates an example of drugs that was sent without labeling. FDA officials at the IMBs we visited stated that considering these many factors, processing a single package can take anywhere from a few minutes to several hours. FDA officials who are responsible for reviewing manifest information for drugs shipped through the private carriers stated that it can take several days to process a package, particularly if they need to obtain additional information regarding the shipment. FDA headquarters officials said that packages that contain prescription drugs that appear to be unapproved for import cannot be automatically refused and returned because of the statutory requirement that FDA hold the package and give the addressee the opportunity to provide evidence of admissibility. Officials said that this requirement applies to all drug imports with few exceptions. According to FDA investigators, in most instances, the addressees did not present evidence to support the drugs' admissibility, and the drugs were ultimately provided to CBP or the U.S. Postal Service for return to sender. CBP officials at two IMBs told us that they could not turn over all packages they suspected of containing prescription drugs because FDA officials were not able to process all of the packages. FDA officials at one IMB stated that the processing time affected the number of packages they could inspect and was the reason many of the packages that were held up by CBP were ultimately released to the addressee without inspection. A FDA headquarters official stated that considerable storage space is needed to hold the detained packages, while the notice, opportunity to respond, and the agency's decision are pending. For example, one FDA IMB official told us that space limitations have affected the number of packages they are able to store, including those packages held on-site awaiting a response from the addressee. Figure 5 shows drugs stored at one IMB as they pass through FDA's process, including those awaiting addressees' responses. Processing requirements for controlled substances can also be burdensome if an IMB receives a high volume of controlled substances in the mail. According to CBP officials, the seizure process requires that CBP inspectors record the contents of each package--including the type of drugs and the number of pills or vials in each package--before it is turned over to seized property staff for possible investigation by Immigration and Customs Enforcement, forfeiture, and eventual destruction. CBP officials at one IMB told us that in recent months they have observed substantial increases in the volume of prescription drugs containing controlled substances being sent through the international mail because, in their view, of the increased incidence of consumers ordering drugs over the Internet. Although CBP officials had been seizing substantially more of these drugs in recent months, they had also accumulated a sizable backlog of controlled substances awaiting seizure because, according to officials, they did not have the resources to begin the seizure process. By June 2004, CBP at this IMB had accumulated 123 bins of mail, containing over 40,700 packages of Schedule IV controlled substances--including the tranquilizer Valium, antidepressants, and painkillers. Figure 6 shows some of the bins of controlled substances that were being held awaiting formal seizure, as of May 14, 2004. According to CBP officials at this facility, as the controlled substances continued to accumulate, they became concerned that they would not be able resolve the backlog. In June, a CPB official said that CBP IMB officials asked CBP headquarters for permission to send the products back to the senders as an alternative to seizure, and to keep these drugs from entering U.S. commerce. According to this official, CBP's headquarters office granted them permission to send most of the drugs back to the sender because the backlog would have taken months to resolve. One CBP official said that the ability to return the controlled substances enabled CBP to clear the backlog in two to three weeks rather than the one to two years they projected it would have taken had CBP been required to begin seizure proceedings for each item. Officials at the facility said that they are now seizing controlled substances as they arrive at the facility. Our preliminary work revealed a number of efforts, including interagency initiatives that are being undertaken in response to concerns raised about the importation of prescription drugs. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed the Secretary of Health and Human Services, in consultation with appropriate government agencies, to conduct a study of the importation of drugs into the United States and submit a report to Congress (P.L. 108- 173). The conference report (House Report 108-391) enumerated questions to be addressed in this study including, among other things: assessing the scope, volume, and safety of unapproved drugs, including controlled substances, entering the United States via mail shipment; and estimating agency resources, including additional field personnel, needed to adequately inspect the current amount of pharmaceuticals entering the country. In February 2004, the Secretary of Health and Human Services appointed a task force, chaired by the Surgeon General, on drug importation. It included members representing the department, CBP, DEA, Department of Justice trial attorneys, and the Office of Management and Budget. Between March and May, the task force held public hearings to gather information to address the questions posed by Congress. According to an FDA official, as of July 2004, the task force staff was reviewing the testimony from the public hearings and the comments sent to the Federal Register docket to answer the questions posed in the conference report. The official said that the task force report is expected to be completed by this fall so that the Secretary of Health and Human Services can meet his December 2004 deadline for reporting to Congress. In addition, a CBP official told us that CBP is leading an interagency pharmaceutical task force, established in January 2004 to address various law enforcement issues related to the importation of prescription drugs and miscellaneous pharmaceuticals. The task force, which includes managers and senior managers from CBP, FDA, DEA, the Office of National Drug Control Policy, U.S. Immigration and Customs Enforcement, as well as legal counsel from the Department of Justice and other agencies, meets every two months. According to the CBP official, the task force has established five interagency working groups designed to tackle specific issues identified by the task force. The working groups, which meet more frequently, are focused on improving information sharing and law enforcement targeting criteria, increasing public awareness of potential dangers of imported pharmaceuticals, reviewing and enhancing mail and express mail consignment procedures, working cooperatively with industry, and legal issues. The groups report the results of their enforcement efforts to the task force, which makes suggestions for future efforts. Our preliminary discussions with CBP about the activities of the working groups revealed initiatives currently under way by two of the groups. In one instance, the working group on mail and express mail consignment procedures has been involved in recent interagency enforcement operations at selected international mail facilities. During these operations, the interagency group targeted and found mail containing nonscheduled prescription drugs as well as controlled substances. According to the CBP official, these operations resulted in investigations of commercial shipments of the prescription drugs by agents from the task force and working group and helped the law enforcement agencies identify Internet addresses for purposes of future investigations. The CBP official told us that, in another instance, the working group focused on increasing public awareness of the potential dangers of imported pharmaceuticals had developed public service announcements that are to be posted on the Internet. Appendix III shows one of these announcements that was recently posted on the CBP web site. Individual agencies are also taking steps to enhance their ability to deal with inspection and interdiction issues associated with imported prescription drugs. As discussed earlier, during our visits to the three IMBs, we noted that CBP and FDA officials at those facilities had adopted different approaches for targeting and interdicting prescription drugs. FDA headquarters officials also recognized this and in response indicated that a more uniform approach was needed. According to these officials, FDA has drafted a set of standard operating procedures that will apply to the handling of imported prescription drugs consistently across the 13 International Mail Branches. FDA officials said that these procedures have been developed to apply to the handling of prescription drugs nationwide, but will also give officials at individual facilities some flexibility to adopt procedures that address uniquely local conditions. FDA headquarters officials told us they have begun implementing the procedures at selected IMBs and plan to implement them at more locations. FDA officials also said that they were developing a similar set of standard operating procedures that would apply to the inspection and interdiction of imported prescription drugs at the consignment carrier facilities. CBP officials told us that CBP expects that these guidelines will also discuss CBP responsibilities for handling imported prescription drugs. In closing, Mr. Chairman, it has been discussed in the media and elsewhere that American consumers are purchasing prescription drugs for importation in increasing numbers. Our preliminary observations indicate that CBP and FDA face considerable challenges inspecting and interdicting these drugs to help ensure compliance with current law. Currently data are unavailable to estimate the volume of prescription drugs entering the country, and the overall health and safety risks of these drugs are unknown. CBP and FDA are inspecting and interdicting some of the unapproved prescription drugs that are entering the country, but others bypass inspection and are sent to consumers who purchased them, often because, according to CBP and FDA officials, time-consuming processing requirements and staffing constraints limit their ability to perform more inspections. Although agencies like CBP, FDA, and DEA have begun initiatives to deal with various aspects of the drug importation issue, it is too early to tell whether these efforts will adequately address every dimension of the law enforcement and safety issues associated with the importation of prescription drugs. This concludes my prepared statement. In the next several weeks we plan to follow up with CBP and FDA officials on their plans to enhance their enforcement activities. I would be pleased to answer any questions you and the Subcommittee members may have. For further information about this testimony, please contact Richard Stana, Director, Homeland Security and Justice Issues, on (202) 512-8777 or at [email protected]. Major contributors to this testimony included John Mortin, Yelena Harden, Barbara Stolz, Frances Cook, and James Russell. To understand importation restrictions and enforcement requirements, we reviewed current federal laws on the importation of prescription drugs and controlled substances. We reviewed current CBP and FDA policies, procedures, and guidance related to prescription drugs and controlled substance importation. We reviewed applicable importation and interdiction data from CBP and FDA. We conducted interviews with officials at CBP, FDA, U.S. Postal Service, U.S. Immigration and Customs Enforcement, and DEA. To understand inspection procedures, we visited three IMBs in Chicago, Los Angeles, and New York and two carrier facilities in Cincinnati (for the DHL Corporation) and in Memphis, (for the FedEx Corporation). We judgmentally selected these facilities based on the overall number of packages processed at the facilities and their geographic dispersion. At these locations, we observed inspection and interdiction practices; met with CBP and FDA management, inspectors, and investigators to discuss issues related to inspection, manifest reviews, and pharmaceutical importation volume; and reviewed relevant documents on inspection and interdiction procedures. At the IMBs we also met with officials from the U.S. Postal Service regarding mail handling and processing procedures. We did the work reflected in this statement from March to July 2004 in accordance with generally accepted government auditing standards. The drugs and drug products that come under the Controlled Substances Act are divided into five schedules. A general description and examples of the substances in each schedule are outlined below in table 1. 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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American consumers are increasingly drawn to the convenience, privacy, and cost advantages that might be accrued by purchasing prescription drugs over the Internet. However, there is growing concern about the safety of the drugs and the lawfulness of shipping the drugs into the United States through international mail and private carriers. Under current law, the importation of prescription drugs for personal use is illegal, with few exceptions. All prescription drugs offered for import must meet the requirements of the Federal Food, Drug, and Cosmetic Act, and those that are controlled substances also must meet the requirements of the Controlled Substances Import and Export Act. According to the agencies responsible for enforcing these laws, prescription drugs imported for personal use generally do not meet these requirements. The Department of Homeland Security's U.S. Customs and Border Protection (CBP) and the Department of Health and Human Service's Food and Drug Administration (FDA) are responsible for inspecting and interdicting unapproved prescription drugs that are being illegally imported via the U.S. mail or private carrier. This testimony reflects our preliminary observations from ongoing work to assess federal efforts to enforce the prohibitions on personal importation of prescription drugs. CBP and FDA officials said that the volume of imported adulterated, misbranded, or unapproved prescription drugs is large and increasing, but complete data do not exist to document these observations. FDA officials said that they cannot assure the public of the safety and quality of drugs purchased from foreign sources that are largely outside the U.S. regulatory system. GAO's recent report on a sample of drugs purchased from Internet pharmacies echoed these concerns. CBP and FDA officials at mail and private carrier facilities inspect and interdict some packages that contain prescription drugs. However, according to officials, because of resource constraints, many other packages containing prescriptions drugs are either not inspected and are released to addressees or are released after an inspection. CBP and FDA target certain packages for inspection based on the packages' countries of origin and whether the packages are suspected of containing certain prescription drugs. However, packages that are not targeted typically bypass inspection and are released to addressees without an assessment of their contents or admissibility. FDA officials have acknowledged that tens of thousands of packages, containing drug products that may violate current laws and pose health risks to consumers, have been released. They said that time-consuming processing requirements and resource constraints limit their ability to perform more inspections. Agency efforts to deal with imported prescription drugs are evolving. Two interagency task forces were established to study prescription drug importation and address related law enforcement issues, respectively. Also, to overcome differences in the way officials target and interdict shipments of unapproved prescription drugs at various mail and private carrier facilities, FDA has begun implementing new procedures to promote more uniformity across facilities. It is too soon to tell if these efforts are sufficient to address various health, safety, and law enforcement issues associated with the importation of prescription drugs.
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The base of the individual income tax covers income paid to individuals, such as wages, interest, dividends, realized net capital gains, various forms of business income, and income from pensions, annuities, trusts and estates. This tax base is reduced by personal exemptions for taxpayers and their spouses and children, as well as by numerous preferences-- statutorily defined as tax expenditures--such as the deduction for mortgage interest, the earned income tax credit, and the exclusion of the value of employer-provided health insurance from individuals' taxable income and taxable wage base. The statutory rates of tax on net taxable income range from 10 percent to 35 percent. Lower rates (5 percent and 15 percent, depending on taxable income) apply to long-term capital gains and dividend income. Individuals may also pay tax under the alternative minimum tax (AMT). The base of this tax equals regular taxable income, plus the value of various tax items, including personal exemptions and certain itemized deductions that are added back into the base. This AMT income base is then reduced by a substantial exemption and then taxed at a rate of 26 percent or 28 percent, depending on the taxpayer's income level. Taxpayers compare their AMT tax liabilities to their regular tax liabilities and pay the greater of the two. Although the income tax applies to all who have taxable income, nearly all workers pay social insurance taxes to fund retirement, disability and retiree health programs. According to Congressional Budget Office estimates, in 2000 over 40 percent of households paid more in just their portion of social insurance taxes than they paid in income taxes. Further, when both their contribution and their employers' is counted, over 70 percent of households paid more in social insurance taxes than they did in income taxes. The consensus among economists is that the employees ultimately bear the entire social insurance tax burden. In 2005 workers paid a total of $794 billion in social insurance taxes to fund federal social insurance, retirement, disability, and retiree health programs. This amount was in addition to their income tax liabilities. From the taxpayers' view, these taxes may not appear significantly different than income taxes. They reduce the workers' take-home pay each pay period and, although the taxes are set aside in a separate account to fund specific benefits, the portion of these taxes not immediately needed for current beneficiaries goes to fund current government expenses just like income taxes. Three long-standing criteria--equity; economic efficiency; and a combination of simplicity, transparency, and administrability--are typically used to evaluate tax policy. These criteria are often in conflict with each other and, as a result, there are usually trade-offs to consider and people are likely to disagree about the relative importance of the criteria. To the extent that a tax is not simple and efficient, it imposes costs on taxpayers beyond the payments they make to the U.S. Treasury. As shown in figure 1, the total cost of any tax from a taxpayer's point of view is the sum of the tax liability, the cost of complying with the tax system, and the economic efficiency costs that the tax imposes. In deciding on the size of government, we balance the total cost of taxes with the benefits provided by government programs. Over the long term, the United States faces a large and growing structural budget deficit primarily caused by known demographic trends and rising health care costs, and this deficit is exacerbated over time by growing interest on the ever larger federal debt. Continuing on this imprudent and unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Addressing the nation's long-term fiscal imbalances constitutes a major transformational challenge that may take a generation or more to resolve. Fiscal necessity may prompt a fundamental review of major program and policy areas. Many current federal programs and policies--including tax policies--were designed decades ago to respond to trends and challenges that existed then but may no longer suit our 21st century needs. Clearly, the individual income, social insurance, and corporate income taxes, which have been the federal government's three largest sources of revenue, will need to be considered in any plan for addressing the nation's long-term fiscal imbalance. Over the next few decades, as the baby boom generation retires, federal spending on retirement and health programs, such as Social Security, Medicare, and Medicaid, will grow dramatically and bind the nation's fiscal future. Absent policy changes on the spending and/or revenue sides of the budget, a growing imbalance between federal spending and tax revenues will mean escalating and ultimately unsustainable federal deficits and debt. In simple terms, the gap between projected spending and expected revenues grows larger every year. For example, as figure 2 indicates, if discretionary spending grows at the same rate as the economy, all expiring tax provisions are extended, and then federal revenues are held as a constant share of the economy, revenues could be adequate to cover little more than interest on the federal debt by 2040. We cannot grow our way out of this long-term fiscal challenge because the imbalance between spending and revenue is so large. We will need to make tough choices using a multipronged approach: (1) revise budget processes and financial reporting requirements; (2) restructure entitlement programs; (3) reexamine the base of discretionary spending and other spending; and (4) review and revise tax policy, including tax expenditures and tax enforcement programs. Individual income tax policy, tax expenditures, and enforcement need to be key elements of the overall tax review. One promising--and perhaps necessary--approach to tackling both the tax and entitlements part of our long-term fiscal challenge is a credible, capable, and bipartisan Tax and Entitlements Reform Commission. Such an approach would help ensure that any decisions made on taxes and spending are well coordinated and will produce a sustainable fiscal system that meets agreed-upon objectives. The individual income tax has long been the single largest source of federal tax revenue. In 2005, individual taxpayers paid $927 billion in income taxes. Figure 3 shows the relative importance of federal taxes. Since 1962, the individual income tax has ranged between a low of 7 percent (in 2004) and a high of 10.3 percent (in 2000) of gross domestic product (GDP). Over the same period, social insurance taxes have grown considerably in importance--from 3 percent of GDP in 1962 to 6.5 percent of GDP (or $794 billion) in 2005. Revenue from the individual income tax has historically accounted for between 40 percent and 50 percent of total federal tax revenue. In contrast, in the early 1960s, social insurance taxes accounted for less than 20 percent of the total; however, they have grown to represent 37.1 percent of revenue in 2005. Concerns about the complexity, efficiency, and equity of the individual income tax have motivated calls for a substantial restructuring of the tax or its replacement with some form of consumption tax. The widely recognized complexity of the tax results in (1) significant compliance costs, frustration, and anxiety for taxpayers; (2) decreased voluntary compliance; (3) increased difficulties for IRS in administering the tax laws; and (4) reduced confidence in the fairness of the tax. The individual income tax also causes taxpayers to change their work, savings, investment, and consumption behavior in ways that reduce their well- being. These reductions in well-being, known to economists as efficiency costs, are likely to be large--perhaps on the order of 2 percent of GDP or more. The success of our tax system hinges very much on the public's perception of its fairness and transparency. There are differences of opinion about the overall fairness of the individual income tax and concerns have been expressed about the equity of many specific features of the tax. If they are to take advantage of the many tax benefits in the tax code, virtually all taxpayers must familiarize themselves with, or pay someone to advise them on, the sometimes complex rules for determining whether they qualify (and, if so, to what extent). Moreover, in cases where multiple tax expenditures have similar purposes, taxpayers may have to devote considerable time to learn and plan in order to make optimal use of these tax benefits. For example, the IRS publication Tax Benefits for Education outlines 12 tax expenditures, including 4 different tax expenditures for educational saving. The use of one of these tax expenditures can affect whether (or how) a taxpayer is allowed to use the other tax expenditures. Adding to the taxpayer's challenge to select the best educational tax benefit, the use of one of these tax expenditures may affect a student's eligibility for other forms of federal assistance for higher education, such as Pell grants and subsidized loans. The tax benefits, or tax expenditures, available under the income tax are usually justified on the grounds that they promote certain social or economic goals. They grant special tax relief (through deductions, credits, exemptions, etc.) that encourages certain types of behavior by taxpayers or aids taxpayers in certain circumstances. Tax expenditures can promote a wide range of goals, like encouraging economic development in disadvantaged areas, financing postsecondary education, or stimulating research and development. For example, a wide range of tax provisions are intended to help individuals save for their retirement. These include traditional and Roth Individual Retirement Accounts (IRA) and various plans administered by employers or available to self-employed individuals. Again, individuals face complex choices to select the best options as well as complex rules to stay in compliance once they select a retirement savings option. From a public policy perspective, all of this complexity and the burden it imposes on taxpayers would most likely be worthwhile if the tax incentives are successful in achieving their intended purposes. However, in many cases this is questionable or unknown. Although research results vary, many studies suggest that IRAs result in little actual increase in retirement saving. One concern is that individuals can take a lump sum withdrawal and, depending on how the sum is used, the individual may not have a sufficient stream of income over his/her remaining lifetime. The sum of the revenue loss estimates associated with tax expenditures was more than $775 billion in 2005 and the vast majority of this loss was for tax expenditures provided to individuals, rather than to corporations. As the data in figure 4 indicate, revenue losses due to tax expenditures exceeded discretionary spending for half of the last decade. Much of the revenue loss due to individual income tax expenditures is attributable to a small number of large tax expenditures. The seven tax expenditures shown in figure 5--each with an annual revenue loss estimated at $36 billion or more--accounted for about half of the sum of revenue losses for all tax expenditures for fiscal year 2005. With revenue losses estimated at $4.9 billion, the earned income tax credit (EITC) does not appear on this list. The EITC has both revenue losses and outlays when a taxpayer's refund exceeds their tax liability. If $34.6 billion in associated outlays were included, this refundable credit would rank among the largest tax expenditures. The costs of complying with the individual income tax are large but unclear. IRS's most recent estimates suggest that these costs are roughly on the order of 1/2 to 1 percent of GDP. These costs include the time and money spent complying with the computational, reporting, planning, and recordkeeping requirements of the tax system. Estimates of compliance costs are uncertain because taxpayers generally do not keep relevant records documenting their time and money spent complying with the tax system and many important elements of the costs are difficult to measure because, among other things, federal tax requirements often overlap with recordkeeping and reporting that taxpayers do for other purposes. The available compliance cost estimates do not represent the potential cost savings to be gained by replacing the current federal individual income tax. Any replacement tax system will impose significant compliance costs of its own. Moreover, given that many state and local government income taxes depend upon the same compliance activities as the federal income tax does, taxpayers would still bear the costs of those activities unless those other governments replaced their own taxes to conform to the new federal system. In addition, if some of the subsidies, such as the earned income tax credit and child tax credit, which are provided by the current federal tax system, are replaced by spending programs under a reformed system, tax compliance costs may be reduced, but only as a result of their being shifted to those new programs. Similarly, if a replacement tax system no longer requires individuals to compute and document their incomes, individuals will still need to document their incomes for borrowing and other purposes, and government statistical agencies will incur expenses to replace the data that they currently obtain from income tax returns. Taxes impose efficiency costs by altering taxpayers' behavior, inducing them to shift resources from higher valued uses to lower valued uses in an effort to reduce tax liability. This change in behavior can cause a reduction in taxpayers' well-being that, for example, may include lost production (or income) and consumption opportunities. One important behavioral change attributable to the income tax arises from the fact that investment in housing is given more favorable treatment than investment in business activities. Economists generally agree that this differential tax treatment reduces the amount of money available to businesses for investment in productivity-enhancing technology. This in turn results in employees receiving lower wages because increases in wages are generally tied to increases in productivity. The tax exclusion for the exclusion of employer- provided health insurance from individuals' taxable income, discussed in text box 1, is another example of an income tax provision that clearly reduces economic efficiency. The exclusion encourages more extensive insurance coverage, but introduces a well-known problem with health insurance. Because much of the cost of medical treatment is paid for by the insurer, patients and doctors are generally unaware of, or disconnected from, the total costs of health care and have little incentive to economize on health care spending. Efficiency costs, along with the tax liability paid to the government and the costs of complying with tax laws, are part of the total cost of taxes to taxpayers. However, this does not mean that taxes are not worth paying. One reason people bear taxes is they desire the benefits of government programs and services. (The government does deliver some services effectively and often provides services that otherwise would not be available.) Taxpayers implicitly or explicitly balance the costs of taxes with the benefits of government. Nevertheless, minimizing efficiency costs is one criterion for a good tax. Economists agree that taxes with broad bases and low rates generally cause lower efficiency costs than do taxes with narrow bases and high rates. The goal of tax policy is to design a tax system that produces revenue needed to pay current bills and deliver on future promises while at the same time balancing economic efficiency with other objectives, such as equity, simplicity, transparency, and administrability. Moreover, as noted earlier, the failure to provide sufficient tax revenues to finance the level of spending we choose as a nation gives rise to deficits and debt. Large, sustained deficits could ultimately have a negative impact on economic growth, productivity, and potentially our national security. Large structural deficits also raise serious stewardship and intergenerational equity issues. Text Box 1: Tax Expenditure for Employer-Provided Medical Insurance Premiums and Medical Care The current U.S. tax system excludes employer-provided health insurance from individuals' taxable income even though such insurance is a form of income (noncash compensation). The Department of the Treasury estimates that the tax exclusion for employer-provided health insurance resulted in $118.4 billion in lost revenue during 2005, not including forgone social insurance taxes and state taxes. Including forgone federal social insurance taxes, an estimated $177.6 billion in revenue was forgone due to this exclusion. The tax exclusion increases the proportion of the population covered by health insurance. In 2004, nearly 46 million Americans were without health insurance. The tax exclusion encourages employers to offer and employees to participate in health insurance plans, increasing the proportion of workers covered. Because individuals may be better able to anticipate their health care needs than insurers, health care plans may attract customers with higher risk of poor health, resulting in higher premiums. By encouraging the pooling of high-and low-risk individuals, the tax exclusion may help to reduce premiums below those that individuals would face if they purchased insurance on their own. However, some question whether the tax subsidy for health insurance is the best way to increase health insurance coverage. For example, the tax exclusion provides the most assistance to taxpayers who have high marginal tax rates (those with high incomes)--the exclusion saves those taxpayers more in taxes owed than it saves those with lower marginal tax rates. The tax exclusion for health insurance also contributes to higher health care costs. The exclusion, by lowering premiums, encourages more extensive insurance coverage, which compounds another well-known problem with health insurance. Because much of the cost of medical treatment is paid for by a third party (the insurer), patients and doctors are generally unaware of, or disconnected from, the total costs of health care and have little incentive to economize on health care spending. Unlike the tax exclusion for employer-provided health insurance, an ideal health care payment system would foster the delivery of care that is both effective and efficient, resulting in better value for the dollars spent on health care. Estimating the efficiency costs of the federal tax system is an enormous, complicated, and uncertain task, given the complexity of existing tax rules, the breadth and diversity of the U.S. economy and population, and the limited empirical evidence available on how individuals and businesses change their behavior in response to tax rules. In practice, researchers have not been able to obtain and analyze all of the detailed data they need to produce efficiency cost estimates that are free from a large degree of uncertainty. The two studies that have made the most comprehensive estimates of the efficiency costs arising from the individual income tax in the past two decades suggest that those costs are considerable. The first study, which examined the combined efficiency costs of the individual income and payroll taxes, estimated those costs to have been on the order of 2 to 5 percent of GDP in 1994. Estimates from the second study indicate that the efficiency cost of the individual income tax was on the order of 2 percent of GDP in 1997. Efficiency cost estimates such as these are often quite sensitive to the assumed magnitude of key behavioral responses and those assumptions are often based on empirical research that continues to evolve over time or, in other cases, has yet to be undertaken. For example, the consensus of recent research is that individuals are less responsive to changes in taxes than the first study assumed them to be. The extent to which efficiency gains could be realized by switching to an alternative tax system depends critically on the detailed characteristics of the alternative. All of the alternative tax system proposals that have received serious consideration in recent decades would have imposed significant efficiency costs. Moreover, in assessing the potential efficiency gains from any tax reform proposal it is also important to consider compensating changes that may be made on the spending side of the federal budget. For example, if any tax expenditures in the current federal income taxes are replaced by grants, spending programs, regulations, or other forms of nontax subsidies, those subsidies can result in efficiency costs similar in magnitude to those associated with the tax expenditures they replaced. The success of our tax system hinges very much on the public's perception of its fairness and transparency. The myriad of tax deductions, credits, special rates, and so forth cause taxpayers to doubt the fairness of the tax system because they do not know whether those with the same ability to pay actually pay the same amount of tax. Fairness is ultimately a matter of personal judgment about issues such as how progressive tax rates should be and what constitutes ability to pay. Public confidence in the nation's tax laws and tax administration is critical because we rely heavily on a system of voluntary compliance. If taxpayers do not believe that the tax system is credible, easy to understand, and treats everyone fairly, then voluntary compliance is likely to decline. The latest available IRS estimates indicate that about 84 percent of total taxes due for tax year 2001 were paid voluntarily and on time. Complexity and the lack of transparency it can create exacerbate doubts about the current tax system's fairness. There are differences of opinion about the fairness of the individual income tax. Likewise, concerns have been expressed about the equity of many specific features of the tax, such as: marriage penalties (and bonuses) built into the tax under which the combined tax liabilities of two individuals differ, depending on whether or not those individuals are married; the inconsistent treatment between taxable wages and salaries and other components of total employee compensation, such as employer-provided health benefits that are not taxed; the fact that many low-income individuals face high effective marginal tax rates over certain income ranges as the benefits of tax preferences, such as the earned income tax credit, phase out; the provision of certain tax benefits in the form of deductions, which are more valuable to taxpayers in higher income brackets, rather than as tax credits; the requirement that a taxpayer must own a home in order to receive the significant advantage of tax-preferred borrowing; and the greater ease with which self-employed individuals can underreport income, compared to employees whose incomes are subject to withholding and third-party reporting. Judging the equity of the individual income tax can depend substantially on the frame of reference used. For example, for many, a progressive tax code is considered to be more equitable. When looked at in isolation, the individual income tax system is somewhat progressive. If the frame of reference is expanded, however, and payroll taxes are also taken into account, total progressivity drops. As mentioned earlier, more than 70 percent of taxpayers are estimated to pay more in payroll taxes than individual income taxes when the combined employee and employer shares are considered. These frames of reference, of course, look only at the payment of taxes. An even wider frame of reference would take into account the benefits taxpayers receive, which could alter yet again judgments about the equity of the tax system. In fact, it could be argued that the full effect of federal government policies on different groups of individuals can only be determined by examining the effects of all federal taxes, spending programs, and regulations. The extent of individual taxpayer noncompliance with the current tax laws is another factor that could motivate calls for reform. Ensuring compliance with our nation's tax laws is a challenging process for both taxpayers and IRS. The difficulty in ensuring compliance is underscored by the tax gap--the difference between the taxes that should be paid voluntarily and on time and what is actually paid--that arises every year when taxpayers fail to comply fully with the tax laws. Most recently, IRS estimated the gross tax gap for tax year 2001 to be $345 billion, including individual income, corporate income, employment, estate, and excise taxes. IRS estimated it would eventually recover about $55 billion of the gross tax gap through late payments and enforcement actions, resulting in a net tax gap of $290 billion. About 70 percent of the gross tax gap for tax year 2001, or an estimated $244 billion, was attributed to the individual income tax. As shown in table 1, individual taxpayers that underreported their income, underpaid their taxes, or failed to file an individual tax return altogether or on time (nonfiling) accounted for $197 billion, $23 billion, and $25 billion of the tax gap, respectively. Improving compliance and reducing the tax gap would help improve the nation's fiscal stability. Even modest progress would yield significant revenue; each 1 percent reduction would likely yield nearly $3 billion annually. However, the tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with our tax laws has changed little over the past three decades. As such, we need to consider not only options that have been previously proposed but also explore new and innovative approaches to improving compliance including fundamental reform of the tax system as well as providing IRS with additional enforcement tools and ensuring that significant resources are devoted to enforcement. Fundamentally reforming our tax system has the potential to improve compliance, especially if a new system has few tax preferences or complex tax code provisions and if taxable transactions are transparent to tax administrators. One factor that some believe contributes to the difficulty of achieving compliance is the complexity of our tax system. The complexity of, and frequent revisions to, the tax system make it more difficult and costly for taxpayers who want to comply to do so and for IRS to explain and enforce tax laws. Complexity also creates a fertile ground for those intentionally seeking to evade taxes, and often trips others into unintentional noncompliance. Likewise, the complexity of the tax system challenges IRS in its ability to administer our tax laws. Whether under our current income tax system or a reformed one, enforcement tools, particularly information reporting and tax withholding, are key to high levels of compliance. The extent to which individual taxpayers accurately report the income they earn has been shown to be related to the extent to which the income is reported to them and IRS by third parties or taxes on the income are withheld, as shown in figure 6. Taxpayers tend to report income subject to tax withholding or information reporting with high levels of compliance because the income is transparent to the taxpayers as well as to IRS. For example, employers report most wages, salaries, and tip compensation to employees and IRS through Form W-2. Also, banks and other financial institutions provide information returns (Forms 1099) to account holders and IRS showing the taxpayers' annual income from some types of investments. Findings from IRS's recent study of individual tax compliance indicate that nearly 99 percent of these types of income are accurately reported on individual tax returns. For types of income for which there is little or no information reporting, individual taxpayers tend to misreport over half of their income. Ensuring that significant resources are devoted to enforcement also has the potential to minimize the tax gap for our current income tax system as well as for reformed systems Congress may adopt. For the current system, devoting more resources has the potential to reduce the tax gap by billions of dollars in that IRS would be able to expand its enforcement efforts to reach a greater number of potentially noncompliant taxpayers. Importantly, expanded enforcement efforts could reduce the tax gap more than through direct tax revenue collection, as widespread agreement exists that IRS enforcement programs have an indirect effect through increases in voluntary tax compliance. However, determining the appropriate level of enforcement resources to provide IRS requires taking into account many factors, such as how effectively and efficiently IRS is currently using its resources, how to strike the proper balance between IRS's taxpayer service and enforcement activities, and competing federal funding priorities. Generally, when holding IRS accountable for the use of resources, it is also desirable to focus on the outcomes achieved rather than on how IRS allocates the resources it receives. Results are really what counts. If IRS, or any other agency, can figure out how to more cost effectively achieve a result, then reallocation of resources to other problem areas could be an appropriate strategy, within the restrictions applying to appropriation accounts, for making the best use of limited resources. In sum, regardless of the tax system, Congress needs to assure itself that the revenue agency has sufficient resources and reasonable flexibility to achieve desired outcomes and hold the agency accountable for those outcomes. In moving forward on tax reform, policymakers may find it useful to compare proposals on common dimensions. These comparisons can be helpful whether reform is of the individual income tax, the current tax system more broadly, or in considering new systems altogether. First, is the tax base as broad as possible? Broad-based tax systems with minimal exceptions have many advantages. Fewer exceptions generally means less complexity, less compliance cost, less economic efficiency loss, and by increasing transparency may improve equity or perceptions of equity. In terms of the individual income tax, this suggests that eliminating or consolidating the myriad of tax expenditures must be considered. We need to be sure that the benefits achieved from having these special provisions are worth the associated revenue losses just as we must ensure that outlay programs--which may be attempting to achieve the same purposes as tax expenditures--achieve outcomes commensurate with their costs. To the extent tax expenditures are retained, consideration should be given to whether they are better targeted to meet an identified need. Many tax expenditures are broadly available and, in fact, provide greater "assistance" to those that most would consider least in need. This is broadly true of any tax expenditure that is worth more to higher income taxpayers than to lower income taxpayers, like the exclusion for the value of employer-provided health insurance and the mortgage interest deduction. Broad based tax systems can yield the same revenue as more narrowly based systems at lower tax rates. The combination of less direct intervention in the marketplace from special tax preferences, and the lower rates possible from broad based systems, can have substantial benefits for economic efficiency. For instance, some economists estimate that the economic efficiency costs of tax increases rise proportionately faster than the tax rates. In other words, a 50 percent tax increase could more than double the economic efficiency costs of a tax system. Does the proposed system raise sufficient revenue over time to fund our expected expenditures? As I mentioned earlier, we will fall woefully short of achieving this end if current spending and/or revenue trends are not altered. The economic efficiency costs of our current tax system likely will become an even more important issue as we grapple with the nation's long-term fiscal challenges. Although we clearly must restructure major entitlement programs and the basis of other federal spending, it is unlikely that our long-term fiscal challenge will be resolved solely by cutting spending. If we must raise revenues, doing so from a broad base and a lower rate will help minimize economic efficiency costs. In this regard, the President's Advisory Panel on Tax Reform has taken a useful step forward for tax reform, helping, for example, to focus the debate on specific proposals. Those proposals incorporate broader bases, with lower rates. However, the Panel acted within the guidance it was given, and one result is that the proposed reforms, if implemented as proposed, appear to provide much less than the necessary revenue to fund expected government spending. Although we have not evaluated the revenue effects of these proposals, other respected analysts have and they point to future revenue yields that would worsen the already difficult fiscal challenges the nation faces. Does the proposal look to future needs? Like many spending programs, the current tax system was developed in a profoundly different time. We live now in a much more global economy, with highly mobile capital, and investment options available to ordinary citizens that were not even imagined decades ago. We have growing concentrations of income and wealth. More firms operate multi-nationally and willingly move operations and capital around the world as they see best for their firms. Do the revenues for the proposed system hold up in the future? As an adjunct to looking forward when making reforms, the revenue consequences of all major tax changes should be estimated well into the future. Such long-term projections undoubtedly will be subject to uncertainty, but at the very least we should have the best estimates possible of whether the revenue trend is likely to shift up or down over the long-term. Does the proposed system have attributes associated with high compliance rates? Because any tax system can be subject to tax gaps, the administrability of reformed systems should be considered as part of the debate for change. In general, a reformed system is most likely to have a small tax gap if the system has few tax preferences or complex provisions and taxable transactions are transparent. Transparency in the context of tax administration is best achieved when third parties report information both to the taxpayer and the tax administrator. What transition issues exist and have they been dealt with in an equitable fashion that minimizes additional complexity and any adverse effects on the benefits to be gained from the new tax system? Under the current individual income tax system, citizens have made fundamental life choices based at least in part on the incentives in the tax system. For many, the favorable tax treatment of owner-occupied housing has led to choices to invest disproportionately in housing. Others have made long-term investments in tax-favored college savings plans. Thus, changes to the tax system can materially affect citizens' futures. Still others make their livings advising taxpayers, helping them understand tax provisions and complete their tax returns, and helping them devise investment and other financial plans taking into account current tax rules. Our publication, Understanding the Tax Reform Debate: Background, Criteria, and Questions, may be useful in guiding policymakers as they consider tax reform proposals. It was designed to aid policymakers in thinking about how to develop tax policy for the 21st century. While not designed to break new conceptual ground, this report brings together a number of topics that tax experts have identified as those that should be considered when evaluating tax policy. It attempts to provide information about these topics in a clear, concise, and easily understandable manner for a non-technical audience. The problems that I have reviewed today relating to the compliance costs, efficiency costs, equity and tax gap associated with the current individual income tax system--many of which arise from the complex accumulation of tax preferences in that system--would seem to make an overwhelming case for a comprehensive review and reform of our tax policy. Further, we live a world that is profoundly different than when the individual income tax and many of its provisions were adopted. Despite numerous and repeated calls for such reform, progress has been slow. One reason why reform is difficult to accomplish is that the provisions of the tax code that generate compliance costs, efficiency costs, the tax gap and inequities also benefit many taxpayers and the individuals and companies that advise taxpayers and help them with their tax filing obligations. Reform is also difficult because, even when there is agreement on the amount of revenue to raise, there are differing opinions on the appropriate balance among the often conflicting objectives of equity, efficiency, and administrability. This, in turn, leads to widely divergent views on even the basic direction of reform. Fiscal necessity, prompted by the nation's unsustainable fiscal path, will eventually force changes to our spending and tax policies. We must fundamentally rethink policies and everything must be on the table. Tough choices will have to be made about the appropriate degree of emphasis on cutting back federal programs versus increasing tax revenue. Tax reform, if it broadens the tax base, could reduce the costs of raising a given amount of revenue by reducing the associated efficiency costs. Such a reform also likely would reduce inequities, compliance burden, and administrative costs. The recent report of the President's Advisory Panel on Federal Tax Reform recommended two different tax reform plans. Although each plan provides for significant simplification, neither of them addresses the growing imbalance between federal spending and revenues that I highlighted earlier. One approach for getting the process of comprehensive fiscal reform started would be through the establishment of a credible, capable, and bipartisan commission, to examine options for a combination of entitlement and tax reform. As policymakers consider proposals to reform the current individual income tax, or the entire tax system, they may find it useful to compare the proposals on common dimensions. Our publication, Understanding the Tax Reform Debate, may be useful when making these comparisons. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions you may have at this time. For further information on this testimony please contact James White on (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Michael Brostek, Director; Kevin Daly and Jim Wozny, Assistant Directors; Jeff Arkin; Elizabeth Fan; Tom Gilbert; Don Marples; and Jeff Procak. 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 federal government currently relies heavily on the individual income tax and payroll taxes for about 80 percent of its total annual revenue. Long-range projections show that without some form of policy change, the gap between revenues and spending will increasingly widen. The debate about the future tax system is partly about whether the goals for the nation's tax system can be best achieved by reforming the current income tax so that it has a broader base and flatter rate schedule, or switching to some form of consumption tax. This testimony reviews the revenue contribution of the current individual income tax as well as its complexity, economic efficiency, equity, and taxpayer compliance issues; discusses some common dimensions to compare tax proposals; and draws some conclusions for tax reform. This statement is based on previously published GAO work and reviews of relevant literature. The United States faces a large and growing structural budget deficit as current projected revenues are not sufficient to fund projected spending. The individual income tax has long been the largest source of federal revenue--amounting to $927 billion (7.5 percent of Gross Domestic Product (GDP)) in 2005. (Total revenues that year amounted to 17.5 percent of GDP.) Income tax policy, including existing tax expenditures, such as the exclusion of employer-provided health insurance from individual income, and enforcement approaches, need to be key elements of a multipronged approach that reexamines federal policies and approaches to address our nation's large and growing long-term fiscal imbalance. Concerns regarding the complexity, efficiency, and equity of the individual income tax have contributed to calls for a substantial restructuring of the individual income tax or its full or partial replacement with some form of consumption tax. The widely recognized complexity of the tax results in (1) significant compliance costs, frustration, and anxiety for taxpayers; (2) decreased voluntary compliance; (3) increased difficulties for the Internal Revenue Service (IRS) in administering the tax laws; and (4) reduced confidence in the fairness of the tax. The tax also causes taxpayers to change their work, savings, investment, and consumption behavior in ways that reduce economic efficiency and, thereby, taxpayers' well-being. Taxpayer noncompliance with the current individual income tax is another factor that could motivate reform. For tax year 2001, IRS estimated that noncompliance with the individual income tax accounted for about 70 percent of the $345 billion gross tax gap, which is the difference between the taxes that should have been paid voluntarily and on time and what was actually paid. Reducing this gap can improve the nation's fiscal stability, as each 1 percent reduction in the tax gap would likely yield about $3 billion annually. Reducing the tax gap within the current income tax structure will require exploring new and innovative administrative and legislative approaches. In moving forward on tax reform, policymakers may find it useful to compare alternative proposals along some common dimensions. These include, in part, whether proposed tax systems over time will generate enough revenue to fund expected expenditures, whether the base is as broad as possible so rates can be as low as possible, whether the system meets our future needs, and whether it has attributes that promote compliance. Our publication, Understanding the Tax Reform Debate (GAO-05-1009SP), provides background, criteria, and questions that policymakers may find useful.
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As you know, among its responsibilities for aviation safety, FAA's Aircraft Certification Service (Aircraft Certification) grants approvals (called type certificates) for new aircraft, engines, and propellers. Certification projects, which involve the activities to determine compliance of a new product with applicable regulatory standards and to approve products for certificates, are typically managed by one of Aircraft Certification's local Figure offices (generally known as aircraft certification offices, or ACOs).1 lists the key phases in FAA's process for issuing certificates for aviation products. As depicted in the figure, both the applicant company and Aircraft Certification staff are involved in each phase. Studies published since 1980, our prior work, industry stakeholders, and experts have long raised questions about the efficiency of FAA's certification processes and varying interpretations and applications of its regulations in making compliance decisions during certification. Over time, FAA has implemented efforts to address these issues, but as we reported in July 2014,demand and its overall workload has increased. In 2013, FAA published a detailed implementation plan for addressing the six certification process recommendations, and, in January 2015, published a detailed implementation plan for addressing the six regulatory consistency recommendations. they persist as FAA faces greater industry As of April 2015, FAA has made progress in addressing the Certification Process Committee's recommendations, but as we reported in January 2015, challenges remain that could affect successful implementation of the recommendations. FAA is implementing its plan for addressing the 6 certification process recommendations, which involves completing 14 initiatives. According to an April 2015 update that FAA provided to us, 13 initiatives were completed or were on track to be completed, and one will not meet planned milestones. Figure 2 illustrates the evolving status of the 14 initiatives based on the update reported by FAA. As figure 2 above indicates, 5 of the 14 certification process initiatives are related to improving FAA's organization designation authorization (ODA) program. As of April 2015, FAA had completed three of the five ODA- related certification process initiatives, while the remaining two are expected to be completed by the end of 2015. In January 2015, we noted that industry stakeholders had emphasized the need for FAA to expand its use of the ODA program to better leverage its available resources in other needed areas (e.g., staff and other resources for processing foreign approval applications--which will be discussed later in this statement). For example, one aircraft manufacturer told us it is a practical necessity for FAA to expand its ODA program to (1) better utilize private sector expertise to keep pace with the growing aviation industry, (2) allow more aerospace products to reach the market sooner, and (3) increase the efficiency of the agency's scarce resources. According to the General Aviation Manufacturers Association (GAMA), the key strength of ODA is FAA's ability to delegate, at its discretion, certain certification activities and test data reviews to qualified individuals or specific manufacturers' employees. In doing so, FAA can leverage its resources by delegating more of the lower priority work during the certification process, thereby enabling FAA to better concentrate its limited staff resources on the most pressing aspects of certification projects. Another manufacturer noted that without expanded use of the program by FAA, the additional cost associated with maintaining an ODA has begun to outweigh the benefits of having the authorization. As we found in July 2014, industry union representatives we spoke to also reported concerns about the lack of FAA resources to effectively expand the program. While one labor union agreed with the concept of ODA, representatives had concerns related to expanding the program in other areas because they contended that oversight of the program required significant FAA resources. Furthermore, the representatives told us that due to staffing shortages and increased workload, FAA did not have enough inspectors and engineers to provide the proper surveillance of the designees who had already been granted this authority. However, as we reported in January 2015, it is too soon for us to determine whether FAA's initiatives adequately address the recommendations as intended, and in this case, specifically for expanding the use of the ODA program. According to the January 2015 regulatory consistency implementation plan, FAA closed two recommendations--one as not implemented and one as implemented in 2013--and plans to complete the remaining 4 by July 2016. Table 1 provides a summary of the recommendations and FAA's plans for addressing them. As we found in January 2015, while FAA has made some progress, it is too soon for us to determine whether FAA's planned actions adequately address the recommendations. However, in that report, we also found that challenges remain that could affect the successful implementation of FAA's planned actions. Industry representatives continued to indicate a lack of communication with and involvement of stakeholders as a primary challenge for FAA in implementing the committees' recommendations, particularly the regulatory consistency recommendations. However, FAA noted that the processes for developing and updating its plans for addressing the certification process and regulatory consistency recommendations have been transparent and collaborative, and that FAA meets regularly with industry representatives to continuously update them on the status of the initiatives and for seeking their input. We also reported in January 2015 that several industry representatives told us that FAA had not effectively collaborated with or sought input from industry stakeholders in the agency's efforts to address the two sets of recommendations, especially the regulatory consistency recommendations. For instance, some stakeholders reported that FAA did not provide an opportunity for them to review and comment on the certification process implementation plan updates, and did not provide an opportunity for them to review and offer input on the regulatory consistency implementation plan. However, FAA reported meeting with various industry stakeholders in October 2014 to brief them on the general direction and high-level concepts of FAA's planned actions to address each regulatory consistency recommendation. Since we reported in January 2015, FAA officials met with stakeholders of the Regulatory Consistency Committee in March 2015 to brief them and further clarify the plan to implement the regulatory consistency recommendations. According to FAA, they are planning to conduct quarterly briefings with the Committee stakeholders, starting in June 2015, to provide updates on the progress for addressing the four remaining recommendations. FAA officials also noted that while the implementation plan lists a completion date of March 2016 for the recommendation for developing the Master Source Guidance System-- which FAA calls the Dynamic Regulatory System--this completion date is specifically for FAA's efforts to determine the feasibility of including Office of Chief Counsel letters in the system. In terms of completing the development of the system, the officials told us they are currently ahead of the schedule outlined in the implementation plan and are working on finalizing the design concept for the new system. Once this process is completed, they would be able to provide a more accurate completion date for deployment of the system. According to one Committee stakeholder, it is important that FAA remain committed to creating the Master Source Guidance System, which was the Committee's primary recommendation. In January 2015, we reported that, according to GAMA, the U.S. has historically been viewed as setting the global standard for the approval of aviation products internationally. Once U.S. aviation companies obtain a type certificate from FAA to use an aviation product in the United States, the companies often apply for approvals for the same products for use in other countries. In 2012, the U.S. aerospace industry contributed $118.5 billion in export sales to the U.S. economy, with this sector remaining strong in the European markets and growing in the emerging markets of Asia and the Middle East. Some countries accept the FAA approval outright as evidence that the product is safe for use in their country. Some other countries, however, do not accept the FAA certification and conduct their own approval processes for U.S. products, which can be lengthy, according to some U.S. industry stakeholders. These stakeholders have raised concerns that such practices provide no additional safety benefit and result in U.S. companies facing uncertainty and costly delays in delivering their products to foreign markets. FAA has taken steps to address these concerns, but FAA's authority to address some of the challenges is limited because each country retains control of its basic regulatory framework for approving aviation products and ensuring the safety of those products for use in their countries--effectively a recognition of the sovereignty of each country. As counterparts to FAA, other countries' civil aviation authorities--which we will refer to as foreign civil aviation authorities (FCAA)--approve domestically-manufactured aviation products for use in their respective countries. FCAAs also approve U.S. aviation products for use in their respective countries. These approvals are typically conducted within the parameters of bilateral aviation safety agreements (BASA), which are negotiated between FAA and other FCAAs. partnership agreements that provide a framework for the reciprocal approval of aviation products imported and exported between the U.S. According to FAA, it has 21 BASAs that affect 47 countries, including one BASA with the European Aviation Safety Agency that covers the European Union (EU) member nations. and other countries.approvals of U.S. aviation products from FCAAs. Representatives of the 15 selected U.S. aviation companies we interviewed for our January 2015 statement reported that their companies faced challenges related to process, communications, and cost in obtaining approvals from FCAAs. The processes involved included FCAAs' individual approval processes as well as the processes spelled out in the relevant BASAs. In our January 2015 statement, we identified some efforts FAA is making to address these challenges, such as holding regular meetings with some bilateral partners--i.e., countries for which FAA has a BASA in place--and setting up forums in anticipation of issues arising. Reported FCAA process challenges. Of the 15 companies we interviewed, representatives from 12 companies reported mixed or varied experiences with FCAAs' approval processes, and 3 reported positive experiences. Thirteen companies reported challenges related to delays, 10 reported challenges with approval process length, and 6 reported challenges related to FCAA staffs' lack of knowledge or uncertainty about the approval processes, including FCAA requests for data and information that, in the companies' views, were not needed for approvals. FAA has taken actions aimed at alleviating current and heading off future challenges related to foreign approval processes. For example, in September 2014, FAA--along with Brazil, Canada, and the EU--established a Certification Management Team to provide a forum for addressing approvals and other bilateral relationship issues. FAA also recently established a pilot program that allows a U.S. company to work concurrently with multiple FCAAs for obtaining approvals and to identify key FCAA approval needs and ensure adequate FAA support. Reported issues related to some BASAs. Although representatives from 11 of the 15 U.S. companies and the 3 foreign companies we interviewed reported being satisfied with the overall effectiveness of having BASAs in place or with various aspects of the current BASAs, representatives of 10 U.S. companies reported challenges related to some BASAs lacking specificity and flexibility, 2 raised concerns that there is a lack of a formal dispute resolution process, and 1 noted a lack of a distinction between approvals of simple and complex aircraft. Companies suggested several ways to address these issues, including updating BASAs more often and making them clearer. FAA has taken action to improve some BASAs to better streamline the approval process that those countries apply to imported U.S. aviation products. For instance, according to FAA officials, they meet regularly with bilateral partners to address approval process issues and are working with these partners on developing a common set of approval principles and to add specific dispute resolution procedures in the agreements with some countries. FAA officials also indicated that they are working with longstanding bilateral partners--such as Brazil, Canada, and the EU--to identify areas where mutual acceptance of approvals is possible. Reported Challenges in Communicating with FCAAs. Representatives from 12 U.S. companies reported challenges in communicating with FCAAs. Representatives from six U.S. companies reported, for example, that interactions with developing countries can be confusing and difficult because of language and cultural issues. Representatives from two companies noted that they hire local representatives as consultants in China to help them better engage the Civil Aviation Administration of China (CAAC) staff with their approval projects and to navigate the CAAC's process. One company's representative also reported having better progress in communications with FCAAs in some Asian countries, such as India Japan, and Vietnam, when a local "third-party agent" (consultant) is involved because it provides a better relationship with the FCAAs' staff. Representatives from three companies also reported that, in general, some FCAAs often do not respond to approval requests or have no back-ups for staff who are unavailable. They noted that potential mitigations could include a greater FAA effort to develop and nurture relationships with FCAAs. According to FAA officials, they are working with the U.S.-China Aviation Cooperation Program to further engage with industry and Chinese officials. Reported Challenges Related to Foreign Approval Costs. Representatives from 12 of the 15 U.S. companies and 2 of the 3 foreign companies indicated challenges with regard to approval fees charged by FCAAs. They specifically cited EASA--the EU's counterpart to FAA--and the Federal Aviation Authority of Russia. For example, they noted that EASA's fees are very high (up to 95 percent of the cost of a domestic EASA certification)--especially relative to the amount levied by other FCAAs--are levied annually, and are unpredictable because of the unknown amount of time it takes for the approval to be granted. The fees are based on the type of product being reviewed for approval and can range from a few thousand dollars to more than a million dollars annually. Representatives from two companies also noted that EASA lacks transparency for how the work it conducts to grant approvals aligns with the fees it levies for recovering its costs. FAA officials indicated to us that a foreign approval should take significantly less time and work to conduct than the work required for an original certification effort--roughly about 20 percent--and that they have initiated discussions with EASA officials about making a significant reduction in the fees charged to U.S. companies. However, recently, FAA indicated that it is more important to work with EASA to ensure its fees are commensurate with the actual costs of the services being provided and those incurred by EASA. As mentioned previously, FAA provides assistance to U.S. companies by facilitating the application process for foreign approvals of aviation products. Although FAA seeks to provide an efficient process, companies we interviewed for our January 2015 statement reported challenges that they faced related to FAA's role in this process. FAA-related challenges cited by the companies we interviewed fell into three main categories: process, resources, and staff expertise. Process for facilitating foreign approvals. Most of the U.S. companies in our selection (12 of 15) reported challenges related to FAA's process for handling foreign approvals. These included concerns about foreign approvals not being a high enough priority for FAA staff, a lack of performance measures for evaluating BASAs, and an insufficient use of FAA's potential feedback mechanisms. For example, representatives of three companies told us that sometimes FAA is delayed in submitting application packets to FCAAs because other work takes priority; one of these companies indicated that sometimes FAA takes several months to submit packets to FCAAs. In another example, representatives of four companies cited concerns that BASAs do not include any performance measures, such as any expectations for the amount of time that it will take for a company's foreign approval to be finalized. With regard to FAA using feedback mechanisms to improve its process for supporting foreign approvals, representatives of one company told us that applicant companies are not currently asked for post-approval feedback by FAA, even though it would be helpful in identifying common issues occurring with foreign approvals. Available resources. Most of the U.S. companies in our selection (10 of 15) reported challenges related to the availability of FAA staff and other resources. These include limited FAA travel funds and limited FAA staff availability to process foreign approval applications. According to FAA officials, FAA is responsible for defending the original type certification and, more broadly, for handling any disputes that arise with FCAAs during the foreign approval process. In doing so, FAA is also responsible for working with an FCAA in an authority- to-authority capacity, and communications should flow through FAA to the applicant company. However, representatives of five companies noted that due to a lack of FAA travel funds, FAA staff are generally not able to attend key meetings between U.S. companies and FCAAs conducted at the beginning of the foreign approval process. These representatives noted that this can complicate the process for companies, which then have to take on a larger role in defending the original type certificate issued for a product. Representatives of two companies also noted that when there is limited FAA staff availability at the time a foreign approval application is received, it contributes to delays in obtaining their approvals. In fact, the Certification Process Committee made recommendations to encourage FAA to include the expansion of delegation in its efforts for improving the efficiency of its certification process. As previously discussed, FAA does have initiatives under way related to expanding the use of delegation, but concerns continue to exist about the lack of FAA resources to effectively do so. Staff expertise. Some of the U.S. companies in our selection (7 of 15) reported issues related to FAA staff expertise. These issues cited included limited experience on the part of FAA staff in dispute resolution as well as limited expertise related to intellectual property and export control laws. For example, representatives of three companies told us that FAA staff sometimes lack technical knowledge due to having little or no experience with some aviation products, while a representative of another company argued that increased training for FAA staff in dispute resolution could be very helpful, especially for disputes involving different cultural norms. In another example, representatives of two companies described situations in which FAA staff were ready to share information with an FCAA that the applicant company considered proprietary, until the company objected and other solutions were found. In January 2015, we found that FAA has initiatives under way aimed at improving its process for supporting foreign approvals that may help address some of the challenges raised by the U.S. companies in our review. Specifically, FAA's current efforts to increase the efficiency of its foreign approval process could help address reported challenges related to FAA's process and its limited staff and financial resources. For example, FAA is planning to address its resource limitations by focusing on improving the efficiency of its process with such actions as increasing international activities to support U.S. interests in global aviation, and by implementing its 2018 strategic plan, which includes the possibility of allocating more resources to strengthening international relationships. FAA has also initiated efforts to improve the robustness of its data on foreign approvals, to further improve the efficiency of its process for supporting these approvals. With more complete data, FAA aims to track performance metrics, such as average timeframes for foreign approvals, and to better evaluate its relationships with bilateral partners. As we concluded in January 2015, to its credit, FAA has made some progress in addressing the Certification Process and Regulatory Consistency Committees' recommendations, as well as in taking steps to address challenges faced by U.S. aviation companies in obtaining foreign It will be critically important for FAA to follow approvals of their products.through with its current and planned initiatives to increase the efficiency and consistency of its certification processes, and its efforts to address identified challenges faced by U.S. companies in obtaining foreign approvals. Given the importance of U.S. aviation exports to the overall U.S. economy, forecasts for continued growth of aviation exports, and the expected increase in FAA's workload over the next decade, it is essential that FAA undertake these initiatives to ensure it can meet industry's future needs. It is also important that FAA continue to demonstrate that it is making progress on these important initiatives, as well as enhance its data tracking for monitoring the effectiveness of its bilateral agreements and partnerships. Going forward, we will monitor FAA's progress, highlight the key challenges that remain, and identify potential steps that FAA and industry can take to find a way forward on the issues covered in this statement as well as other issues facing the industry. As we noted in our October 2013 statement, however, some improvements to the certification processes will likely take years to implement and, therefore, will require a sustained commitment as well as congressional oversight. findings in these areas will assist this Subcommittee as it develops the framework for the next FAA reauthorization act. We are hopeful that our Chairwoman Ayotte, Ranking Member Cantwell, and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you or other members of the Subcommittee may have. GAO-14-142T. For future contacts regarding this statement, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Relations can be found on the last page of this statement. Individuals making key contributions to this testimony statement include Vashun Cole, Assistant Director; Jessica Bryant-Bertail; Jim Geibel; Josh Ormond; Amy Rosewarne; and Pamela Vines. Other contributors included Kim Gianopoulos, Director; Dave Hooper; Stuart Kaufman; and Sara Ann Moessbauer. 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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FAA issues certificates for new U.S.-manufactured aviation products, based on federal aviation regulations. GAO has previously reviewed the efficiency of FAA's certification process and the consistency of its regulatory interpretations. As required by the 2012 FAA Modernization and Reform Act, FAA chartered two aviation rulemaking committees in April 2012--one to improve certification processes and another to address regulatory consistency--that recommended improvements in 2012. FAA also assists U.S. aviation companies seeking approval of their FAA-certificated products in foreign markets. FAA has negotiated BASAs with many FCAAs to provide a framework for the reciprocal approval of aviation products. However, U.S. industry stakeholders have raised concerns that some countries conduct lengthy processes for approving U.S. products. This testimony focuses on (1) FAA's reported progress in implementing the aviation rulemaking committees' 2012 recommendations regarding its certification process and the consistency of its regulatory interpretations and (2) the challenges that selected U.S. companies reported they have faced when attempting to obtain foreign approvals of their products, and how FAA is addressing some of the reported challenges. It is based on GAO products issued from 2010 to 2015, selectively updated in April 2015 based on FAA documents and information from FAA officials and selected industry stakeholders. The Federal Aviation Administration (FAA) has made progress in addressing the Certification Process and the Regulatory Consistency Committees' recommendations, but as GAO reported in January 2015, challenges remain that could affect successful implementation of FAA's planned actions. FAA is implementing 14 initiatives for addressing 6 certification process recommendations. According to an April 2015 FAA update, 13 initiatives have been completed or are on track to be completed, and 1 will not meet planned milestones. In January 2015, FAA published a detailed implementation plan for addressing six regulatory consistency recommendations. According to the plan, FAA closed two recommendations--one as not implemented and one as implemented in 2013--and plans to complete the remaining four by July 2016. While FAA has made some progress, it is too soon for GAO to determine whether FAA's planned actions adequately address the recommendations. However, industry stakeholders indicated concerns regarding FAA's efforts, including concerns about a lack of communication with and involvement of stakeholders as FAA implements the two committees' recommendations. Since GAO reported in January 2015, FAA has been addressing these concerns. In January 2015, GAO also reported that representatives of 15 selected U.S. aviation companies that GAO interviewed reported facing various challenges in obtaining foreign approvals of their products, including challenges related to foreign civil aviation authorities (FCAA) as well as challenges related to FAA. Reported FCAA-related challenges related to (1) the length and uncertainty of some FCAA approval processes, (2) the lack of specificity and flexibility in some of FAA's bilateral aviation safety agreements (BASA) negotiated with FCAAs, (3) difficulty with or lack of FCAA communications, and (4) high fees charged by some FCAAs. Although FAA's authority to address some of these challenges is limited, FAA has been addressing many of them. For example, FAA created a certification management team with its three major bilateral partners to provide a forum for addressing approval process challenges, among other issues. FAA has also taken action to mitigate the challenges related to some BASAs by holding regular meetings with bilateral partners and adding dispute resolution procedures to some BASAs.
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The Head Start program was established in 1965 to deliver comprehensive educational, social, health, nutritional, and psychological services to low- income families and their children who are below the age of compulsory school attendance. These services include preschool education, family support, health screenings, and dental care. Head Start was originally aimed at 3- to 5-year-olds. A companion program, called Early Head Start, began in 1994, and focuses on making these services available to pregnant women and children from birth to 3 years of age. Head Start operates both full- and part-day programs--most only during the school year. The Migrant and Seasonal Head Start program is designed to meet the specific needs of migrant and seasonal farm worker families. OHS makes Head Start grants directly to approximately 1,600 local organizations, including community action agencies, school systems, tribal governments and associations, and for-profit and nonprofit organizations. To accomplish Head Start's goals, the Congress provided $7.2 billion in federal funds for fiscal year 2010, as well as $2.1 billion in Recovery Act funds. Head Start statutes and regulations establish several primary eligibility criteria, one of which a child must generally meet in order to enroll in the program. These primary criteria include: the child's family earns income below the federal poverty level; the child's family is eligible or, in the absence of child care, would potentially be eligible for, public assistance; the child is in foster care; or the child is homeless. However, Head Start programs may also fill up to 10 percent of their slots with children from families who do not meet any of the above criteria, but who "would benefit" from participation in the program. We refer to these children and their families as "over-income." There is no cap on the income level for the over-income families. If the Head Start program has implemented policies and procedures that ensure the program is meeting the needs of children eligible under the primary criteria and prioritizes their enrollment in the program, then the program may also fill up to 35 percent of their slots with children from families with income between the federal poverty line and 130 percent of the poverty line. Programs filling slots under this provision are subject to additional reporting requirements. Children from families with incomes below 130 percent of the poverty line, and children that qualify under one of the primary eligibility criteria, are referred to as "under-income" for the purposes of this testimony. In addition, unless a program applies for and receives a waiver, at least 10 percent of each program's total slots must be filled with children with disabilities who are determined to be eligible for special education and related services or early intervention services. To qualify for the Migrant and Seasonal Head Start program, families must have changed their residence within the preceding 24 months for the purpose of engaging in certain agricultural work, and the families' incomes must come primarily from this type of work. In enrolling families in Head Start, program staff are to review documentation of income and employment to certify that each family is eligible. Head Start services are to be provided free of charge to eligible families. OHS assigns each grantee a specific number of children and families it is required to serve, known as the funded enrollment. Head Start statutes and regulations require grantees to maintain enrollment at 100 percent of the funded enrollment level. If a child stops attending the program, after the grantee has attempted, unsuccessfully, to get the child back in regular attendance, the grantee must reopen that spot as a vacancy and no more than 30 calendar days may elapse before the grantee fills the vacancy; otherwise, OHS considers the grantee underenrolled. To facilitate the prompt filling of vacancies, Head Start statutes and regulations require each grantee to maintain a wait list that ranks children according to its selection criteria and to select those with the greatest need for services. Grantees report enrollment numbers monthly, and those that are underenrolled for 4 consecutive months must receive technical assistance from OHS and work to develop and implement a plan to eliminate underenrollment. A grantee that continues to operate with less than 97 percent of its funded enrollment level may have its grant amount recaptured, withheld, or reduced by OHS. According to HHS, funds for 30 grantees were reduced in 2006. A Head Start grantee may also be terminated from participation in the program for continuously failing to meet other performance, education, administrative, and financial management standards that have been established by HHS. We are currently investigating the two allegations of fraud and abuse that we received involving Head Start nonprofit grantees in the Midwest and Texas. In Texas, individuals we spoke with told us that the grantee encouraged enrollment of over-income families in order to meet enrollment requirements. We were able to confirm, through records obtained from the grantee, that 9 of the grantees' 28 centers had more than 10 percent over-income families enrolled. The percentage of over-income families in the 28 centers ranged from centers with no over-income enrollments to one center where 44 percent of the families it enrolled were over-income. Two families enrolled by this grantee had a reported income in excess of $110,000. However, the grantee as a whole did not report having more than 10 percent over-income families enrolled. An aggregate accounting of all centers operated directly by one grantee is permitted under the law for determination of the 10 percent over-income limit, therefore, we could not substantiate this allegation. Individuals we spoke with also told us that Head Start staff encouraged parents to report that they were homeless when they were not in order to qualify them for the program. Records we obtained indicate that 22 percent of all children enrolled by the grantee were classified as "homeless"--a group considered at-risk and categorically eligible for Head Start services regardless of income. Our concern, based on the allegation, is that some portion of these families classified as homeless in grantee records were actually over- income families that were not, in fact, homeless, but were encouraged to report that they were in order to qualify. In addition, we spoke with several individuals who described a number of fraudulent activities that they had witnessed. We are in the process of attempting to determine if other allegations are true, including classifying children as disabled when they were not, counting children in enrollment figures after they had left the program, and allowing staff to use company vehicles for personal use. For the Midwest Migrant and Seasonal Head Start program, we were able to confirm through documents obtained from the grantee that more than 50 children were moved from one center to other centers with vacancies during the last 60 days of the grant period. According to OHS regulations, if fewer than 60 days remain in the grantee's program year at the time a child leaves the program, the grantee can choose not to fill the vacancy without OHS considering the grantee underenrolled. By using this process, the grantee was able to make records appear that both centers had reached full enrollment, when in fact 63 children were counted at more than one center. In addition, we spoke with several individuals who alleged that numerous fraudulent activities were occurring at the program. We are in the process of attempting to determine if other allegations are true, including manipulating family income documentation to make over-income families appear to meet Head Start poverty guidelines, enrolling families who do not meet the specific program requirements for the Migrant Head Start program, including earning at least 51 percent of the household income through agricultural work and migrating for work within the past 24 months, and misappropriation of property purchased with Head Start funds. It is important to note that ultimate determination as to whether these allegations are true is a significant challenge because of the minimal requirement for records requested of families to be maintained by grantees. For example, there is no requirement for grantees to maintain support for income, such as pay stubs and Internal Revenue Service Form W-2. In addition, as the proactive testing in the next section discusses, and as alleged, it is possible the grantee records have been fraudulently altered including showing that children who are actually from over-income families are under-income. Our undercover tests determined that the types of eligibility and enrollment fraud schemes allegedly perpetrated by the two grantees are occurring at other Head Start locations around the country. Posing as fictitious families, we attempted to register children at Head Start centers in California, Maryland, New Jersey, Pennsylvania, Texas, Wisconsin, and the Washington, D.C. metropolitan area. For 13 of these tests our fictitious families were over-income or had disqualifying characteristics. For 2 additional tests, our fictitious families did not have any disqualifying characteristics and were under-income. These 2 tests were designed to determine whether a Head Start center would count our fictitious children toward enrollment numbers even if our children never attended the program. For our tests, we contacted each center in advance and were instructed in all cases to bring certain documents necessary for enrollment, which included income documentation. In 8 out of 13 eligibility tests, our families were told they were eligible for the program and instructed to attend class. In all 8 of these cases, Head Start employees actively encouraged our fictitious families to misrepresent their eligibility for the program. In at least 4 cases, documents we later retrieved from these centers show that our applications were doctored to exclude income information for which we provided documentation, which would have shown the family to be over-income. Employees at seven centers knowingly disregarded part of our families' income to help make over-income families and their children appear to actually be under- income. This would have had the effect of filling slots reserved for under- income children with over-income children. At two centers, staff indicated on application forms that one parent was unemployed, even though we provided documentation of the parents' income. A Head Start employee at one center even assured us that no one would verify that the income information submitted was accurate. For the 2 tests in which our family did not have disqualifying characteristics, we were accepted into the program once and not accepted in the other. In the test where our eligible child was accepted into the program, the scenario was designed to test how long the center would keep a child who never attended the program on enrollment records before counting the spot as a vacancy and attempting to fill it with another child. Due to our concerns about occupying a slot for an actual child, we were forced to contact the center and voluntarily withdraw our fictitious child before sufficient time elapsed that would have allowed us to make a determination regarding how long the center would have kept our child on enrollment records. However, the enrollment of our family that appeared eligible for the program as well as our other successful tests highlight the ease with which unscrupulous parents could fabricate documentation designed to make it appear as though their children were under-income or otherwise eligible for the program. Our fictitious pay stubs and W-2s were made using information found on the Internet, commercially available word processing software, and a printer. At no point during our registrations was any of the information contained in fictitious documentation submitted by our parents verified, which indicates that the program is vulnerable to beneficiary fraud in addition to grantee fraud. For all 9 cases in which we were told that we were eligible for the program, we are taking steps to determine whether our fictitious children were counted on enrollment or attendance records. Table 1 provides details on our approved applications, followed by our unsuccessful applications. We withdrew our fictitious families from the programs as soon as we documented that there were fewer than two openings at a center. To view selected video clips of these undercover enrollments, go to http://www.gao.gov/products/gao-10-733T. We also identified a key vulnerability during our investigation that could allow over-income children to be enrolled in other Head Start centers: income documentation for enrollees is not required to be maintained by grantees. According to HHS guidance, Head Start center employees must sign a statement attesting that the applicant child is eligible and identifying which income documents they examined, such as W-2s or pay stubs; however, they do not have to maintain copies of them. We discovered that the lack of documentation made it virtually impossible to determine whether only under-income children were enrolled in spots reserved for under-income children. We are concerned that eligible children at other centers do not receive services for which they are in need, given the vulnerabilities to fraud and abuse we found through our undercover tests. At 2 of the 9 centers where we enrolled fictitious children, we were later told, after withdrawing our children from the program, that the center was at full enrollment and was not accepting more children at that time. During the course of our work, we contacted approximately 550 Head Start centers to determine whether they had space for our fictitious children. We found that the majority of the centers stated that they had no open slots for enrollment, but maintained wait lists per program requirements. We found only 44 centers stated they had any openings. We interviewed 21 families on wait lists and found that the majority stated their income was at or below the federal poverty level. In some cases, families had experienced some type of domestic violence or were receiving some other type of public assistance, a group targeted specifically for assistance by Head Start program guidelines. We did not attempt to verify this information. The length of these wait lists varied considerably; however, several of the centers we contacted had lengthy wait lists. For example, one grantee we contacted in Texas, which serves approximately 4,260 children in 36 centers, had over 1,150 children on its wait list. Another Head Start grantee told us that they average around 500 children on their wait list. A representative from one Pennsylvania Head Start center we contacted stated that there were around 120 applicants on the center's wait list. Furthermore, a review of media sources reveals that Head Start centers around the country face similar challenges meeting their communities' demand for services. We queried a news media search engine and found numerous reports of lengthy waiting lists to enroll in Head Start programs in many parts of the country. For example, according to one Florida newspaper, the state of Florida has 8,000 students on wait lists for Head Start programs. Another newspaper in Indiana, reported that a program in Indiana that serves 380 students has 170 students on the wait list. It is important to note that we found a discrepancy in enrollment levels among the centers we called. While several grantees had lengthy wait lists, other grantees were eager to accept our fictitious, over-income children to fill their rolls. The center in New Jersey that accepted our fictitious over- income family told us that it had more than 30 openings. Another center in California, which did not accept our application, told us that it had 40 part- day openings. We contacted 21 families who at the time of interview were on wait lists for Head Start programs. We received a list of 1,600 wait list applicants from a Head Start grantee in Texas--of these we were able to speak to 11 applicants. We also received a wait list of 30 applicants for services in Pennsylvania--of these we were able to speak to 10 applicants. We asked applicants for information on the length of time they spent on the wait list, on the family's economic situation, and whether they had been affected by being waitlisted for Head Start services. Several of the applicants we spoke with described circumstances that made them especially strong candidates for Head Start, including receiving other types of public assistance, such as Medicaid or Supplemental Nutrition Assistance, or having histories of domestic abuse. Additionally, several applicants reported that family members were unable to accept work opportunities as a result of not enrolling in Head Start, or experienced additional financial strain because they had to pay child care costs. Many applicants also cited concerns that their children would not be adequately prepared for school. Given the fraud committed by several grantees we investigated, and the relative ease with which GAO employees posing as fictitious parents were able to qualify for Head Start services, it is likely that some over-income or otherwise ineligible children are currently enrolled in Head Start programs while low-income children are put on wait lists and do not receive necessary services. For example, when a center manipulates information to make it appear that an over-income family is a low-income family this takes up a Head Start slot set aside for a low-income family. Table 2 summarizes the experiences of 10 applicants we contacted. We did not attempt to verify the applicants' statements. On April 20 and April 23, 2010, we briefed OHS and HHS officials on the results of our work. Officials indicated that HHS would work quickly to address the weaknesses we identified. We suggested a number of potential actions the agency should consider to minimize Head Start fraud and abuse, including the following: Creating an OHS program management fraud hotline for individuals to report fraud, waste, and abuse. These tips could be investigated by the program, the HHS Inspector General, or both; Establishing more stringent income verification requirements, documentation requirements, or both by Head Start employees responsible for certifying family eligibility, such as maintaining income documentation provided by the applicant (e.g., pay stubs or W-2s); and Conducting undercover tests, such as the ones we describe in our report, as a management oversight function. Agency officials indicated that they would consider these suggestions. They also told us that they would make sure that grantee staff received training regarding the proper way to validate income documentation. 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 additional information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Head Start program, overseen by the Department of Health and Human Services and administered by the Office of Head Start, provides child development services primarily to low-income families and their children. Federal law allows up to 10 percent of enrolled families to have incomes above 130 percent of the poverty line--GAO refers to them as "over-income." Families with incomes below 130 percent of the poverty line, or who meet certain other criteria, are referred to as "under-income". Nearly 1 million children a year participate in Head Start, and the American Recovery and Reinvestment Act provided an additional $2.1 billion in funding. GAO received hotline tips alleging fraud and abuse by grantees. In response, GAO investigated the validity of the allegations, conducted undercover tests to determine if other centers were committing fraud, and documented instances where potentially eligible children were put on Head Start wait lists. The investigation of allegations is ongoing. To perform this work, GAO interviewed grantees and a number of informants and reviewed documentation. GAO used fictitious identities and bogus documents for proactive testing of Head Start centers. GAO also interviewed families on wait lists. Results of undercover tests and family interviews cannot be projected to the entire Head Start program. In a corrective action briefing, agency officials agreed to address identified weaknesses. GAO received allegations of fraud and abuse involving two Head Start nonprofit grantees in the Midwest and Texas. Allegations include manipulating recorded income to make over-income applicants appear under-income, encouraging families to report that they were homeless when they were not, enrolling more than 10 percent of over-income children, and counting children as enrolled in more than one center at a time. GAO confirmed that one grantee operated several centers with more than 10 percent over-income students, and the other grantee manipulated enrollment data to over-report the number of children enrolled. GAO is still investigating the other allegations reported. Realizing that these fraud schemes could be perpetrated at other Head Start programs, GAO attempted to register fictitious children as part of 15 undercover test scenarios at centers in six states and the District of Columbia. In 8 instances staff at these centers fraudulently misrepresented information, including disregarding part of the families' income to register over-income children into under-income slots. The undercover tests revealed that 7 Head Start employees lied about applicants' employment status or misrepresented their earnings. This leaves Head Start at risk that over-income children may be enrolled while legitimate under-income children are put on wait lists. At no point during our registrations was information submitted by GAO's fictitious parents verified, leaving the program at risk that dishonest persons could falsify earnings statements and other documents in order to qualify. In 7 instances centers did not manipulate information. To see selected video clips of GAO enrollments, see http://www.gao.gov/products/gao-10-733T . In addition, GAO found that most of the 550 Head Start centers contacted had wait lists. GAO also found that 2 centers where it enrolled fictitious children later became full and developed wait lists after the fictitious children had been withdrawn. Only 44 centers reported that they had openings. GAO interviewed families on wait lists from other centers and found that many stated that their incomes were at or below the federal poverty level. In some cases, families stated they had experienced some type of domestic violence, or were receiving some type of public assistance, a group automatically eligible for Head Start. GAO did not attempt to verify family statements.
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The Food Stamp Program provides a safety net to the millions of low-income individuals and families nationwide who do not otherwise have the means to obtain a healthy diet. Food stamp benefits are calculated to ensure that households have the resources needed to purchase a model diet plan based on the National Academy of Sciences' Recommended Dietary Allowances. USDA's Food and Nutrition Service (FNS) administers the program in partnership with the states, funding all of the program's benefits and about 50 percent of the states' administrative costs. FNS develops program policy and guidance, such as nationwide criteria for determining who is eligible for assistance and the amount of benefits recipients are entitled to receive, and oversees the states' activities. The states are responsible for the day-to-day operation of the program, including meeting with applicants and determining their eligibility and benefit levels. Food stamp recipients must use their benefits only to purchase allowable food products from retail food stores that FNS authorizes to participate in the program. Recipients use food stamp coupons or an electronic benefit transfer (EBT) card to pay for these items. EBT systems use the same electronic funds transfer technology that many grocery stores use for their debit card payment systems. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement EBT systems by October 1, 2002, unless USDA waives the requirement. As of March 1998, 16 states had implemented EBT systems statewide, with all other states in some earlier stage of implementation. Collectively, about 40 percent of all food stamp benefits are now delivered through EBT systems. Fraud and abuse in the Food Stamp Program generally occurs in the form of either overpayments to food stamp recipients or trafficking. Overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive. In 1996, the latest year for which data are available, the states overpaid recipients an estimated $1.5 billion, or 7 percent of the approximately $22 billion in food stamps issued. Approximately 57 percent of the overpayments were caused by recipient errors (36 percent unintentional and 21 percent intentional), and 43 percent were caused by caseworkers' errors. It should also be noted that recipient and caseworker errors can result in underpayments. According to FNS' data, food stamp recipients were underpaid by about $518 million in fiscal year 1996. In March 1997, we reported on one specific kind of food stamp overpayment--payments to households that included inmates of correctional institutions. Federal regulations prohibit prisoners from participating in the Food Stamp Program. By matching automated food stamp records and prison records in four states--California, Florida, New York, and Texas--we identified over 12,000 inmates who were included in the households receiving food stamps in calendar year 1995. These households improperly collected an estimated $3.5 million in food stamps in 1995. Subsequently, in August 1997, the Balanced Budget Act of 1997 (P.L. 105-33, Aug. 5, 1997) included a provision directing the states to ensure that individuals who are under federal, state, or local detention for more than 30 days are not participating in the Food Stamp Program. In February 1998, we reported on another type of food stamp overpayment--payments made to households that included deceased individuals as members. By matching automated food stamp records from the four states previously mentioned with death information from the Social Security Administration's (SSA) Death Master File, we identified nearly 26,000 deceased individuals who were included in households receiving food stamps in 1995 and 1996. These households improperly collected an estimated $8.5 million in food stamp benefits. Subsequently, in March 1998, you, Mr. Chairman, introduced legislation that would require the Commissioner of SSA to use all of SSA's death information to notify state agencies when an individual receiving food stamp benefits is deceased. At your request, Mr. Chairman, we are currently reviewing the extent to which individuals are included in food stamp households in more than one state during the same time period, referred to as "duplicate participation." While some states conduct matches of their food stamp rolls with neighboring states, our review is focussed on non-neighboring states. For example, we will determine whether duplicate participation occurs between New York and Florida or between California and Texas. Our preliminary results indicate that such duplicate participation is occurring on a significant scale and that there is no national mechanism in place to identify and eliminate it. Regarding trafficking--the second main area of fraud and abuse in the Food Stamp Program--a 1995 FNS study estimated that up to $815 million,or about 4 percent of the food stamps issued, was exchanged for cash by authorized retailers during fiscal year 1993. The study found that the trafficking rate was highest, 13 percent of food stamps redeemed, among small, privately owned food retailers that generally do not stock a full line of food. In contrast, supermarkets and large grocery stores had an average trafficking rate of less than 2 percent of the benefits redeemed. Data on the extent to which food stamps are exchanged between individuals prior to reaching authorized retailers are unavailable. In our March 1998 report on food stamp trafficking, conducted at your request, Mr. Chairman, we found that retail store owners and retail store clerks share almost equal responsibility for the food stamp trafficking problem. Specifically, in the 432 trafficking cases we reviewed, store owners alone were caught trafficking in about 40 percent of the cases, clerks alone were involved in 47 percent of the cases, and store owners and clerks together were caught in 13 percent of the trafficking cases. FNS took administrative action against all the store owners that were trafficking but took no actions against the store clerks because it lacks the authority to do so. However, some clerks were subject to court-ordered actions, including financial penalties or jail sentences. The Food Stamp Program is inherently susceptible to some level of fraud and abuse because of the sheer number of program participants (about 23 million in fiscal year 1997), the basic approach used to determine a household's eligibility and benefit amount, and the process used to authorize and monitor a sufficient number of retailers to accept food stamps. In making eligibility decisions, state caseworkers rely on applicants to provide accurate information on, among other things, household composition, and to report subsequent changes, such as the loss of a household member. Only "questionable" cases are investigated. In general, the agencies take this approach in an effort to make the program convenient for clients and simple to administer, and to ensure accurate payments; consequently, controls over determining household composition are not as rigorous as they could be. For example, FNS' regulations do not require caseworkers to verify client-provided information on household composition, unless such information is deemed "questionable," as defined by the state agency. Investigators attempt to verify this information through techniques such as visiting the home and/or contacting neighbors and landlords, however, they characterize these efforts as time-consuming, costly, and often unreliable. With respect to trafficking, it is difficult to track the flow of food stamps after they are issued to recipients. Federal and state officials agree that food stamps have essentially become a second currency exchanged by some recipients for cash or non-food items. Trafficked food stamps may change hands several times, but all food stamps must eventually pass through an FNS-authorized retailer because only such a retailer can redeem food stamps for cash from the government. FNS is responsible for monitoring program compliance by the approximately 185,000 stores that currently are authorized to redeem food stamps. Our 1995 report found that, at that time, FNS' controls and procedures for authorizing and monitoring the retailers that participate in the Food Stamp Program did not deter or prevent retailers from trafficking in food stamps. Since our report, FNS has initiated several actions to reduce trafficking in the program, such as contracting with different companies to make 35,000 to 40,000 store visits by the end of fiscal year 1998. These visits are being made to verify that the stores are bonafide grocery operations. In addition, FNS is improving its Store Tracking and Redemption System by, for example, developing a profile that enables FNS to better identify stores that may be trafficking. USDA's data show that overpayments in the Food Stamp Program have declined since 1993. According to the data, the overpayment error rate at the national level has decreased from 8.27 percent of the total benefits provided in fiscal year 1993 to 6.92 percent in fiscal year 1996, the lowest error rate ever achieved in the program. With the support of the Congress, FNS has increased its emphasis on achieving payment accuracy and has employed various initiatives to assist the states in reducing the number of errors. For example, FNS sponsored national, regional, and state conferences, provided direct technical assistance to the states, and facilitated the exchange of state information on effective strategies for determining accurate payments. While these efforts have been useful in reducing fraud and abuse, we believe that FNS could achieve even greater success by taking a leading role in promoting the use and sharing of automated information by state agencies. Given the program's strong reliance on applicants, clients and retailers to comply with program regulations and provide accurate and timely information, state agencies need to have access to information that will allow them to independently and cost effectively verify the information they are provided and identify noncompliance. Our reviews have demonstrated that useful information can be obtained from (1) matching state food stamp rolls against other state databases, such as prisoner rolls, and (2) reconfiguring existing federal databases to provide additional useful information to state agencies, such as death notices. Additional opportunities to use computerized resources to verify information exist, as seen in our ongoing review of duplicate participation in non-neighboring states. Both an FNS study and our own experiences demonstrate that automated data matches by the states using food stamp records provides a cost-effective means of reducing fraud and improving program integrity. The cost of conducting computer matches is relatively low for the return generated, which includes identifying ineligible individuals in the application process before any benefits are issued and preventing additional issuance once an ineligible participant is identified. State agencies have already implemented computerized matches on their own initiative, such as neighboring state matches for duplicate participation. Two state agencies we visited have taken steps to obtain information from credit reporting services to ensure that applicants are eligible for benefits. In addition to recouping overpayments, matching efforts help the program realize savings by identifying erroneous information during the application process, according to states. Furthermore, the states said that these efforts have a deterrent effect on applicants who may be considering fraudulent activities. Relatedly, while EBT will not eliminate all types of fraud, it shows promise as a means to identify redemption patterns that indicate potential trafficking. By eliminating paper coupons that may be lost, stolen, or sold without any record of sale and creating an electronic record of transactions, EBT can help identify and reduce food stamp trafficking. However, because EBT systems are simply another vehicle for distributing benefits, they cannot correct fraud and abuse that occurs during the process of determining eligibility and benefit levels. Also, like any computer system, food stamp EBT systems can be susceptible to security breaches that result in new forms of fraud and abuse. FNS can further expand on its recent successes in reducing overpayments by actively encouraging the states to identify ways to use computerized information to verify information provided by applicants and to encourage states to share their techniques and information with each other. FNS can demonstrate its leadership in this regard by identifying sources of information that would be useful to the states and ensuring that states have access to that information. Thank you again for the opportunity to appear before you today. We would be pleased to answer any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed fraud and abuse in the Food Stamp Program, focusing on the: (1) nature and extent of the problem; (2) reasons it often goes undetected; and (3) ways computerized information can be used to identify and reduce it. GAO noted that: (1) fraud and abuse in the Food Stamp Program generally occurs in the form of either overpayments to food stamp recipients or trafficking; (2) overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive; (3) overpayments are caused by inadvertent and intentional errors made by recipients and errors made by state caseworkers; (4) the latest available information indicates that overpayments in 1996 totalled about $1.5 billion, or about 7 percent of the food stamp benefits issued that year; (5) errors also result in underpayments; in fiscal year 1996, such underpayments totalled about $518 million; (6) with regard to trafficking, the Department of Agriculture (USDA) estimated that in 1993 about $815 million in food stamps, approximately 4 percent of the food stamps issued, were traded for cash at retail stores; (7) no one knows the extent of trafficking between individuals before the food stamps are redeemed at authorized retailers; (8) participation in the Food Stamp Program by ineligible recipients occurs, and often goes undetected, because the information used to determine a household's eligibility and benefit amount for the program is not always accurate; (9) state agencies that administer the program determine household membership on the basis of unverified information provided by food stamp applicants; (10) food stamp trafficking takes place when recipients collaborate with unscrupulous retailers to convert food stamp benefits to cash or other non-food items; (11) these retailers make a profit by giving the recipients a discounted cash payment for the stamps, then redeeming the stamps at full face value to the government; (12) while USDA has reduced the overpayment rate in recent years, further reductions could result if food stamp rolls were matched against computerized information held by various sources; (13) computer matching provides a cost-effective mechanism to accurately and independently identify ineligible participants; (14) some states already conduct data matching programs; (15) by taking a leading role in promoting the use and sharing of information among federal and state agencies, USDA can enhance the states' effectiveness in identifying ineligible participants and reducing overpayments; and (16) in addition, the congressionally mandated use of electronic benefit transfers, while not the answer to eliminating all fraud, has the potential to reduce trafficking by providing an electronic trail of transactions.
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The Medicare Part D program offers beneficiaries an outpatient prescription drug benefit through various plan sponsors who offer coverage through drug plans, which may vary in terms of their benefits and costs. Enrollment in Part D consists of several steps and requires coordination among various organizations, such as CMS, plan sponsors, and SSA. If beneficiaries are not satisfied with certain aspects of the Part D program, they may file a complaint with CMS, a grievance with their respective plan sponsors, or they can file with both. CMS oversees the complaints and grievances processes and may rely on complaints and grievances data to undertake compliance actions against specific plan sponsors. The Medicare Part D benefit is provided through private organizations-- such as health insurance companies--that offer one or more drug plans with different levels of premiums, deductibles, and cost sharing. Part D plan sponsors offer outpatient prescription drug coverage either through stand-alone prescription drug plans (PDPs) for those in traditional fee-for- service Medicare, or through Medicare Advantage prescription drug (MA-PD) plans for beneficiaries enrolled in Medicare's managed care program, known as Medicare Advantage. In 2007, CMS entered into more than 600 individual contracts with about 250 plan sponsors to provide Part D benefits. Under these contracts, PDP sponsors offered about 1,900 individual plan benefit packages and sponsors of MA-PDs offered about 1,700. The majority of Part D enrollees, about 70 percent, were enrolled in PDPs during this time. Enrollment across contracts varies widely, and is highly concentrated--the 4 largest contracts accounted for nearly 40 percent of total Part D enrollment in 2007. Beneficiaries enroll in the Part D program when they first become eligible for Medicare or during an annual coordinated election period and, once enrolled in a drug plan, typically have one opportunity each year to change their plan selection. Processing a Part D enrollment involves multiple, timely, and accurate electronic data exchanges among federal agencies, private health plans, and pharmacies. For instance, data exchanges occur between plan sponsors and CMS to verify benefit eligibility. Pharmacies rely on this information to ensure that payments for beneficiaries filling their prescriptions are processed appropriately. During the enrollment process, beneficiaries choose one of three options for paying their share of their Part D premiums--direct billing, automated withdrawal from financial accounts, or automatic deductions from social security payments, called premium withholds. As of January 2008 about 20 percent of Part D enrollees--4.8 million beneficiaries--opted to have premiums withheld from their social security payments, which requires coordination among plan sponsors, CMS, and SSA. When a beneficiary elects this option, CMS provides enrollment and payment information it receives from plan sponsors to SSA for processing. SSA then deducts premium amounts from beneficiaries' monthly social security payments and provides CMS with information on the amount of premiums it deducted in order for CMS to pay the appropriate plan sponsors. Beneficiaries can express dissatisfaction with any aspect of the Part D program, other than coverage determinations, by filing a complaint with CMS or filing a grievance directly with their respective plan sponsors (see fig. 1). The processes for resolving complaints and grievances are independent of one another and the status of individual complaints and grievances is tracked separately. Although CMS encourages beneficiaries to first file a grievance with their respective plan sponsors, a beneficiary can choose to seek resolution by directly contacting CMS first to file a complaint or by filing a complaint and grievance simultaneously. Beneficiaries typically file complaints by calling CMS's 1-800-Medicare toll-free number or by contacting one of CMS's 10 regional offices through telephone, fax, mail, or e-mail. For complaints filed through the toll-free number, customer service representatives (CSRs) enter details about the complaints into the 1-800-Medicare database, and assign the complaint to specific contracts administered by plan sponsors. CSRs also categorize the complaint in several ways, including by (a) the nature of the complaint using 20 categories and over 180 subcategories, such as whether the complaint relates to enrollment, pricing, or customer service; and (b) the complaint's issue level or level of urgency, which corresponds to one of three issue levels---immediate need, urgent, or routine--depending on the beneficiary's risk of exhausting his or her medication supply while resolution of the complaint is pending. The information included in the 1-800-Medicare database is uploaded each day into the CTM--CMS's centralized database of complaints information. For complaints filed with the CMS regional offices, regional staff similarly categorize complaints by their nature and issue level and input them directly into the CTM. Most complaints in the CTM are assigned to specific contracts administered by plan sponsors who utilize their own staff to resolve beneficiaries' concerns. For complaints beyond the control of plan sponsors, such as those involving premium withholding and certain enrollment issues, plan sponsors request, through the CTM, that CMS resolve the complaint. Once complaints are resolved, the resolution date must be entered into the CTM. CMS requires that immediate need complaints be resolved within 2 calendar days, and encourages that urgent and routine complaints be resolved within 10 and 30 calendar days respectively. According to CMS policy, beneficiaries should be notified once their complaints are resolved. Beneficiaries also have the right to express dissatisfaction by filing a grievance directly with their plan sponsors via telephone, fax, mail, or e-mail. Plan sponsors enter information about the grievances in their internal tracking systems and assign individual grievances to their staff, who work to resolve them. Plan sponsors are required to resolve grievances within 30 days, but can allow for a 14-day extension in some cases. Plan sponsors must inform beneficiaries of the outcome of the grievances process, and beneficiaries who are dissatisfied may choose to file a complaint with CMS on the same issue. CMS is responsible for overseeing the Part D program, which includes overseeing the complaints and grievances processes and ensuring that beneficiaries' problems are addressed. To oversee the complaints process, CMS staff monitor data within the CTM, including calculating complaint rates and resolution times for each Part D contract administered by a plan sponsor. Specifically, CMS monitors resolution time frames to determine whether plan sponsors resolve complaints assigned to their contracts within applicable time frames. To aid its oversight of the grievances process, CMS requires plan sponsors to categorize grievances into 1 of 11 categories, which differ from CTM categories, and submit quarterly reports for each of their contracts on the number of grievances by category (see app. I). CMS uses these data to calculate grievance rates to identify plan sponsors with outlier contracts. According to CMS officials, the agency can initiate a range of actions against plan sponsors it determines have noncompliant processes (see fig. 2). For example, CMS can make a formal compliance call to plan sponsors to discuss identified issues. However, if CMS's monitoring indicates that plan sponsors are not taking corrective actions in response to the compliance call, CMS may pursue more stringent compliance actions. For example, the agency may send formal written notices of noncompliance, which notify plan sponsors of their noncompliance and explicitly inform them that they must address the problems. For plan sponsors that remain noncompliant, CMS can send warning letters that notify plan sponsors that their performance is unacceptable; request that plan sponsors submit written corrective action plans that show formal plans to come into compliance; or audit the plan sponsors. In the most extreme cases of noncompliance, CMS can impose intermediate sanctions, which include suspension of enrollment, payment, or marketing activities. CMS can also impose a civil monetary penalty or terminate or decline to renew a Part D contract. Most complaints related to enrollment issues and while both the number of complaints and the time needed to resolve them decreased as the Part D program matured, ongoing challenges continued to pose problems for some beneficiaries. The majority of complaints were related to delays and errors in processing beneficiaries' enrollment and disenrollment requests and were resolved. In addition, a small proportion of complaints involved cases where beneficiaries were at risk of depleting their medication supplies. Further, trends in complaints data suggest that beneficiaries reported fewer complaints over time and their problems were resolved more quickly as they, plan sponsors, and CMS gained experience with the Part D benefit. However, the complaints data also revealed some ongoing challenges facing the program, including problems related to data system coordination between CMS and plan sponsors and between CMS and SSA, which continued to present difficulties for some beneficiaries. During the 18-month period from May 1, 2006, through October 31, 2007, 629,792 complaints were filed with CMS--an average monthly complaint rate of 1.5 complaints per 1,000 beneficiaries. The majority of complaints--about 63 percent--were related to problems beneficiaries experienced when trying to enroll in or disenroll from a plan, and about 21 percent were related to pricing and coinsurance issues. The remaining 15 percent of complaints were spread among the other 18 CTM categories, and included complaints related to customer service and marketing of plans (see fig. 3). The vast majority--about 73 percent of the enrollment and disenrollment complaints, or 290,000 complaints--were assigned to five CTM subcategories and were related to delays and errors in processing beneficiaries' enrollment or disenrollment requests. According to CMS officials, such problems occurred when enrollment records between CMS and plan sponsors differed or contained errors, and thus extra time was needed for CMS and plan sponsors to identify and correct the errors and ensure beneficiaries were enrolled in their plans of choice. Approximately 47,000 (or more than 35 percent) of the complaints that were categorized as pricing and coinsurance issues were related to beneficiaries who experienced problems having their premiums automatically deducted from their social security payments. Specifically, these complaints included cases in which the wrong amounts were deducted from beneficiaries' social security payments, the correct amounts were being deducted but were not forwarded to the appropriate plan sponsor for payment, or premiums had not yet been deducted when beneficiaries expected otherwise. According to CMS officials, many of the complaints related to accurately deducting premiums and forwarding payments to plan sponsors were due to problems with data exchanges between CMS and SSA. In addition, CMS officials indicated that beneficiaries are not always aware that it can take several months for SSA to process a request for premium deductions; therefore, they may file complaints when premiums are not immediately deducted from their social security payments. Many of the remaining pricing and coinsurance complaints were filed because some beneficiaries complained they were charged too high of a coinsurance amount for their prescriptions. In addition to complaint categories, the CTM also contains information on the "issue level" of complaints (immediate need, urgent, routine), and the dates complaints were filed and resolved. We found that about 73 percent of complaints were unrelated to beneficiaries at risk of depleting their supplies of medication and were considered routine. About 20 percent of complaints were considered immediate need, meaning beneficiaries had between 0 and 2 days of medication remaining, and about 7 percent of complaints were considered urgent, meaning beneficiaries had 3 to 14 days of medication remaining. Further, using CTM dates, we found that 99 percent of all complaints filed between May 2006 and October 2007 were resolved, on average, in 25 days. Although immediate need and urgent complaints were resolved, on average, much more quickly--12 days for immediate need complaints and 16 days for urgent complaints--these average resolution times still exceeded CMS's resolution time frames. Finally, we found that 44 percent of all complaints involved issues, such as those related to premium deductions from social security payments, which were beyond the control of plan sponsors, and thus required CMS intervention for resolution. When compared to complaints that plan sponsors could resolve independently, these complaints took, on average, twice as long--34 days compared to 17 days----to resolve. According to CMS officials, the lengthier resolution times for complaints requiring CMS intervention reflected the fact that these complaints were often related to delays associated with reconciling data between the agency and plan sponsors or SSA. Trends in the complaints data indicate that beneficiaries reported fewer problems and their problems were resolved more quickly. For example, while the average monthly complaint rate was 1.5 per 1,000 beneficiaries during the period, the monthly complaint rate declined by 74 percent from its peak of 2.86 complaints per 1,000 beneficiaries in May 2006 to .73 in October 2007 (see fig. 4). In addition, the average time needed to resolve beneficiaries' complaints declined by 73 percent, from a peak of 33 days in July 2006 to 9 days in October 2007 (see fig. 5). The decline in average resolution time for complaints CMS resolved during this period was even more pronounced, falling from 51 days to 11 days. According to CMS officials, the decline in monthly complaint rates and average resolution times reflected improved implementation of the Part D program since the initial election period, and improved familiarity of the program among beneficiaries, plan sponsors, and CMS itself. While trends in the complaints data highlighted declines in the monthly complaint rate and average resolution times, they also revealed some ongoing challenges facing the program. Specifically, the data confirmed information-processing issues related to beneficiaries' requests for enrollment changes and automatic premium withholds from their Social Security payments remained. For example, despite the trend in the overall complaint rate discussed earlier and as shown in figure 4, the complaint rate nearly doubled, from .72 in December 2006 to 1.40 in January 2007. This was due largely to a spike in the number of complaints related to delays or errors when CMS and plan sponsors processed beneficiaries' enrollment and disenrollment requests following the end of the 2007 annual coordinated election period. More specifically, according to CMS officials this increased complaint rate was due largely to the sheer volume of transactions processed during this time each year. The officials told us that while they expect to continue to see an increase in complaints each year following the annual coordinated election period, they expect the magnitude of such increases to diminish as the program matures. In addition, the general trend of increasing complaint rates from January 2007 through May 2007 reflected increasing numbers of complaints related to beneficiaries' requests for automatic withholding of premiums that can occur when beneficiaries elect to change plans. According to CMS officials, the timing of when SSA processes the premium withhold request may affect the accuracy of the deduction, and result in complaints. For example, as required by law, SSA must process cost-of-living adjustments for beneficiaries' social security payments on an annual basis, and according to SSA, they begin this processing in November of each year. To process these adjustments for recipients who are also enrolled in Part D and have chosen the premium withholding option, SSA must rely on CMS enrollment information to determine the amount to deduct for Part D premiums. However, because beneficiaries may have elected to change plans during the Part D annual coordinated election period, which runs from November 15 through December 31 of each year, SSA's calculations may not account for premium differences related to beneficiaries' subsequent enrollment changes. CMS officials indicated that there is no easy solution to the data coordination and timing issues between CMS and SSA at the root of this problem. However, CMS and SSA have formed several work groups to identify improvements, including improved data system exchanges, which could help reduce complaints related to this issue. In the interim, CMS has undertaken outreach efforts to plan sponsors and beneficiaries to inform them of potential delays related to requests for automatic premium withholds, letting them know that such requests may take several months to process. Finally, while we found that CMS and plan sponsors resolved complaints, including immediate need and urgent complaints, more quickly as the Part D program matured, a substantial percentage of such complaints were not resolved within CMS's time frames. Specifically, during the period from May 2006 through October 2007, 53 percent of immediate need complaints (66,001) and 27 percent of urgent need complaints (10,476) were not resolved within the applicable time frames. Further, progress in meeting the time frames, particularly for immediate need cases, largely stagnated from March 2007 to October 2007, as the proportion of cases not meeting the time frame hovered around 30 percent each month (see fig. 6). Grievances data reported by plan sponsors for their contracts contained limitations and anomalies and did not yield sufficient insight into beneficiaries' experiences with Part D. In contrast to the data CMS collects on complaints, CMS only requires plan sponsors to submit quarterly reports on the total number of grievances they received in 11 CMS-defined categories for each of their Part D contracts. Therefore, CMS does not have information about whether a grievance is related to a beneficiary's medication supply or whether it was ultimately resolved. As a result, we were unable to determine the extent to which beneficiaries' grievances related to medication supply issues, the extent to which plan sponsors were resolving grievances, or whether they were resolving them in a timely manner. In addition to their limited nature, we identified a number of anomalies in the grievances data that raise questions about their accuracy and usefulness in drawing conclusions about beneficiaries' experiences with Part D. Among these anomalies, we found that grievances were concentrated in a small number of contracts, and at a rate that was significantly disproportionate to their respective enrollments, raising questions about whether plan sponsors were reporting grievances data for their contracts in a comprehensive and consistent manner. For example, in 2006 plan sponsors reported grievances data for 522 contracts, 19 of which accounted for 80 percent of all grievances but only 49 percent of enrollment. The concentration was more pronounced in 2007, when 11 of the 604 contracts for which grievances data were reported accounted for 90 percent of all grievances but only 42 percent of enrollment. We also found significant variations in the number of grievances reported for contracts with similar levels of enrollment, and in the number of grievances filed between 2006 and 2007. For example, in 2006, while the two largest contracts each averaged about 3 million enrollees, one contract had more than 140,000 grievances, for an average monthly grievance rate of 4.22 per 1,000 beneficiaries, while the other contract had fewer than 4,000 grievances, for a grievance rate of .11 per 1,000 beneficiaries. In addition, in contrast to the decline in the monthly complaint rate that we identified, available data show an increase in the average monthly grievance rate between 2006 and 2007. Specifically, while a total of 310,215 grievances were reported in 2006, for an average monthly grievance rate of 1.23 per 1,000 beneficiaries, there were a total of 726,440 grievances reported for the first 3 quarters of 2007 alone, for a rate of 3.38 per 1,000 beneficiaries. We found that this variation was predominately due to differences in the number of grievances reported for three contracts, which had a total of 70 grievances for 2006, and 495,961 for the first 3 quarters of 2007, despite having nearly identical levels of total enrollment in each year. Finally, the proportion of grievances assigned to categories varied significantly between 2006 and 2007, a change that is inconsistent with trends in the complaints data. For example, while over 60 percent of the 2006 grievances were assigned to the enrollment and disenrollment category--a percentage generally similar to the complaints data filed with CMS--they assigned approximately 5 percent of the 2007 grievances to this category. In commenting on a draft of this report, CMS indicated that the variation between the two years was likely due to data collection issues that existed during the early implementation of Part D. For example, CMS suggested that the grievances data reported by plan sponsors in 2006 included nongrievances or erroneously categorized grievances in the enrollment and disenrollment category. While CMS has a systematic oversight process for complaints, it lacks a similar oversight framework for plan sponsor-reported grievance processes. To oversee the complaints process, CMS has established a framework consisting of several key elements, which include standard operating policies and procedures and a centralized repository of complaints data, and staff that routinely review and assess the complaints data and take actions against plan sponsors it determines have noncompliant processes. In contrast to complaints, CMS's oversight of plan sponsors' grievances processes has been more limited. CMS developed guidance for classifying grievances, required plan sponsors to report summary grievances data for each of their Part D contracts, and periodically reviewed these data. However, limitations in these oversight elements have resulted in plan sponsors reporting incomplete and inconsistent data to CMS, and there is little assurance that beneficiaries' grievances are resolved or that they are resolved in a consistent fashion. To ensure a level of consistency in how complaints are tracked and resolved, CMS developed standard operating procedures for both its caseworkers and plan sponsors. These procedures provide guidance on how complaints should be entered into the CTM as well as how caseworkers and plan sponsors should resolve them. For example, CMS's guidance includes requirements to enter key dates for each complaint, such as the dates complaints were filed and resolved, and information about how individual complaints should be categorized by their nature and issue level. Specifically, CMS's guidance to plan sponsors provides information about how they can utilize the CTM to access, review, and document case resolution, or request CMS assistance in the event they are unable to achieve resolution. Through its guidance, CMS has been able to ensure consistency in terms of the information the CTM contains about each complaint. Further, it has allowed the agency to create, through the CTM, a reliable source of data from which it can monitor the complaints process. CMS also dedicated significant resources to ensure that beneficiaries' complaints are addressed. Specifically, CMS officials estimated that several hundred staff members throughout the agency have some responsibility for the oversight of the complaints process. For example, some regional staff members are responsible for reviewing plan sponsors' case notes included in the CTM to verify their resolution of complaints or for directly resolving complaints beyond the control of plan sponsors. In addition, other CMS staff members routinely analyze CTM data to identify trends in complaint rates and track issues related to the performance of individual plan sponsors, such as resolution times. For example, on a quarterly basis, CMS staff members analyze complaint rates for individual contracts both by overall complaints and by three CTM categories, and then compare complaint rates among contracts. Based on this comparison, CMS staff assign a star rating to each contract. Further, CMS has dedicated staff in the Office of the Medicare Beneficiary Ombudsman (OMO) who utilize complaints data to identify systemic problems affecting the implementation of Part D. When OMO staff identify problems, such as those related to delays in processing enrollment requests and withholding premiums from Social Security payments, they alert high-level CMS managers, who in turn are responsible for initiating corrective actions. CMS officials informed us that the agency may rely on a variety of actions, ranging from formal compliance calls to the termination of a plan sponsor's Part D contract when it identifies a plan sponsor that is noncompliant with requirements for the complaints process. CMS officials indicated that their use of such actions has been limited because informal conference calls with plan sponsors have frequently been sufficient to correct problems identified through complaints. For example, although CMS officials said that they would require plan sponsors with contracts that received a one or two star rating for 2 consecutive quarters to submit a business plan describing how they would improve their performance, they have never had to do so because their informal calls to such plan sponsors have thus far been sufficient to correct problems. However, in some cases, CMS has taken more stringent actions. For example, as of February 2008, CMS had issued 144 notices of noncompliance and 22 warning letters, and initiated 3 audits against plan sponsors that did not meet their contractual performance requirement to resolve 95 percent of immediate need complaints within 2 days.45, 46 Additionally, CMS had not terminated any plan sponsors' Part D contract or levied civil monetary penalties in response to issues related to compliance with the complaints process. To determine compliance with the performance requirement, CMS measures the number of days that have elapsed between the date the complaint was assigned to the contract and when it was resolved. CMS officials noted that they will consider developing additional performance requirements, such as a requirement related to complaint rates, in the future. However, the officials noted that they would want to examine data trends from at least a 3-year period before doing so. medication. CMS also does not have a mechanism to verify that plan sponsors have effectively resolved complaints. While CMS caseworkers review plan sponsors' notes in the CTM, they do not routinely take a sample of complaints and follow up with beneficiaries to validate the plan sponsors' resolution actions. CMS officials indicated that the agency does not have the resources to perform such a comprehensive check and stated that beneficiaries who are dissatisfied with their plan sponsor's resolution could file another complaint directly with CMS. In contrast to complaints, CMS's oversight of plan sponsor grievances processes has been more limited. CMS provided plan sponsors with general guidance for determining whether beneficiaries' problems were grievances or coverage determinations, which are addressed through a separate process. CMS also provided plan sponsors with time frames for resolving grievances, periodically reviewed plan sponsor grievances data, and began auditing plan sponsors' grievances processes in 2007. However, although CMS's guidance to plan sponsors included examples of how they could classify beneficiaries' problems, several plan sponsors we interviewed said that this guidance was not detailed enough and raised concerns about whether plan sponsors were accurately differentiating among inquiries (i.e., general questions about the Part D program), grievances, or coverage determinations. CMS officials acknowledged that some plan sponsors have incorrectly classified inquiries as grievances. Further, in its 2007 audits of plan sponsors' grievances processes, CMS found numerous cases where plan sponsors did not correctly differentiate between grievances and coverage determinations, supporting plan sponsors' concerns about the adequacy of the existing guidance. Such confusion about how to classify grievances increases the likelihood that plan sponsors report erroneous or inconsistent information to CMS and that they rely on the wrong processes to address beneficiaries' concerns. CMS does not require plan sponsors to report certain information on grievances for each of their Part D contracts, such as resolution dates, that is essential for determining whether beneficiaries' grievances are being resolved, and devotes few resources to reviewing what plan sponsors have reported for their contracts. Instead, on a quarterly basis, each plan sponsor reports the total number of grievances for 11 categories for each of its contracts. CMS officials also could not explain many of the anomalies we identified in the grievances data, such as substantial variation in the enrollment category from 2006 to 2007 and considerable variation in the grievance rates between contracts with similar levels of enrollment. Further, they acknowledged that they had not undertaken efforts to review the data in detail or to assess their overall reliability. In fact, more than a year into the program, CMS officials were still uncertain as to whether grievances had been reported for all contracts, and as of May 2008, agency analysis was limited to calculating annual grievance rates for each contract that did report grievances. CMS officials recognized that their efforts to oversee the grievances process have been limited, as they have chosen to focus their attention on other oversight issues such as appeals and coverage determinations and have devoted resources to program implementation issues, such as enrollment of dual-eligible beneficiaries. In the event that plan sponsors are not properly responding to beneficiaries' grievances, CMS officials stated that the issues could be resolved through the complaints process. Therefore, by focusing its attention largely on complaints, the agency expressed confidence that plan sponsors are addressing beneficiaries' issues. While the agency strongly believes in providing plan sponsors the latitude to implement their individual grievances processes, CMS expects to devote more resources to the oversight of grievances processes as the program matures. January 1, 2006, marked a new era in the Medicare program as the federal government began offering outpatient prescription drug coverage to eligible Medicare beneficiaries. The program is currently in its third year of operation, and millions of individuals have chosen to enroll. While trends in complaints data suggest that CMS and plan sponsors have improved program operations over time, lingering operational issues continue to pose challenges to some beneficiaries. This has hindered their ability to enroll in their plans of choice, have their premiums accurately deducted from their social security payments, or ensure that their problems related to critical medication supply issues are resolved in a timely manner. While CMS is taking action to address some of these operational issues related to complaints, its continued effort to address these operational challenges will be key to achieving further improvement. Furthermore, CMS does not have reliable grievances data to identify problems and needed improvements and ultimately ensure that beneficiaries' concerns are addressed. This is particularly important given that CMS encourages beneficiaries to utilize the grievances process as their first line of redress when trying to resolve problems. Without reliable grievances data, CMS cannot ensure that plan sponsors are fulfilling their obligations and provide a full assessment of beneficiaries' experiences with the program. To improve oversight of the Medicare Part D grievances process, and provide added assurance that beneficiaries' grievances are being resolved, we recommend that CMS undertake efforts to improve the consistency, reliability, and usefulness of grievances data reported by plan sponsors for each of their contracts. Such efforts include enhancing its existing guidance for determining whether beneficiaries' problems are grievances, requiring plan sponsors to report information regarding the status and issue level of grievances, and conducting systematic oversight of these data. We provided a draft of this report for comment to the Administrator of CMS. In its written comments (see app. II.), CMS remarked that our report did an "impressive job" describing the complex processes employed to monitor complaints and grievances regarding Medicare Part D. The agency concurred with the report's recommendation to undertake efforts to improve the consistency, reliability, and usefulness of grievances data reported by plan sponsors for each of their contracts, and highlighted steps it already has taken to implement it. CMS took issue with the report's conclusion that its oversight activities were focused almost exclusively on resolving complaints with little attention devoted to plan sponsors' grievances processes, and noted that it felt some information, such as details concerning attestations made as part of sponsors' Part D applications, had been omitted from our report. In addition to these comments, CMS provided detailed, technical comments that we incorporated as appropriate. Consistent with the recommendation to improve the consistency, reliability, and usefulness of grievances data, CMS noted that it has been working to provide Part D sponsors with more comprehensive guidance, enhance its oversight activities, and undertake corrective actions as needed. CMS stated that it recently provided guidance to plan sponsors regarding statutory definitions of grievances, coverage determinations, and appeals to facilitate accurate reporting of these data to CMS. For example, CMS cited its 2008 Reporting Requirements Technical Specifications, released this spring, as part of its efforts to further educate plan sponsors about the differences between coverage determinations and grievances. CMS further stated that it would consider adding data elements related to plan sponsors' timeliness and quality of grievances resolution to its calendar year 2010 Reporting Requirements. CMS took issue with the report's conclusion that its oversight activities were focused almost exclusively on resolving complaints with little attention devoted to plan sponsors' grievances processes. The agency noted that it considered this conclusion misleading and felt it did not appropriately weigh all components of CMS's oversight of plan sponsors' grievances processes, such as plan sponsor audits, which include a review of grievances processes. In addition, CMS noted that the report did not consider a component of the Part D application, in which sponsors must attest that they will establish and maintain grievances processes in accordance with federal regulations. Finally, while agreeing with the report's statement that the average resolution time for immediate need and urgent complaints exceeded CMS's required time frames, CMS noted that its analysis of more recent complaints data demonstrated that case resolution time frames had improved and were trending towards CMS's standard time frames. We recognize that CMS has audited the grievances processes of some plan sponsors, and the report highlighted key findings from these audits. While we believe CMS can rely on such audits to improve its oversight in the future, the agency did not begin auditing plan sponsors until 2007, and has yet to audit a number of plan sponsors. Further, while we recognize the attestation component of the application requirement, we believe that such attestations provide only limited assurance that beneficiaries' grievances are being resolved appropriately. We do not believe CMS will be able to ensure that plan sponsors are abiding by their statements until CMS audits the grievances processes of all plan sponsors. Finally, we did not evaluate CMS's findings on resolution time frames from its more recent data, because the data CMS used to conduct their analyses of resolution time frames were from a time frame beyond the scope of our work. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Secretary of Health and Human Services and other interested parties. We will also 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 about this report, please contact Kathleen King at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Susan Anthony, Assistant Director; Jennie Apter; Shirin Hormozi; David Lichtenfeld; and Jennifer Whitworth made key contributions to this report. Beneficiaries and providers (including pharmacies and physicians) can file complaints with the Centers for Medicare and Medicaid Services (CMS) regarding Medicare Part D. Within the Complaint Tracking Module (CTM), beneficiary complaints are assigned to 14 categories and provider complaints to 6 categories, which are further delineated into 186 subcategories. CMS requires that plan sponsors report grievances based on 11 CMS-defined categories, which are somewhat similar to the CTM categories, but do not include subcategories. A description of the complaints and grievances categories is listed below.
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Medicare Part D coverage is provided through plan sponsors that contract with the Centers for Medicare & Medicaid Services (CMS). As of April 2008, about 26 million beneficiaries were enrolled in Part D. When beneficiaries encounter problems with Part D, they can either file a complaint with CMS or a grievance with their plan sponsors. CMS centrally tracks complaints data and plan sponsors must report summary data on grievances for each of their contracts. GAO provided information on (1) complaints and what they indicate about beneficiaries' experiences with Part D, (2) whether grievances data provide additional insight about beneficiaries' experiences, and (3) CMS's oversight of the complaints and grievances processes. To conduct its work, GAO reviewed CMS's complaints and grievances data and interviewed the plan sponsors of eight, judgmentally selected contracts, which accounted for 40 percent of 2006 enrollment. While the number of complaints filed with CMS and the time needed to resolve them has diminished as the Part D program has matured, complaints data indicate that ongoing challenges pose problems for some beneficiaries. From May 1, 2006, through October 31, 2007, about 630,000 complaints were filed; most complaints were related to problems in processing beneficiaries' enrollment and disenrollment requests. The monthly complaint rate declined by 74 percent over the period, and the average time needed to resolve complaints decreased from a peak of 33 days to 9 days. However, trends in the complaints data also indicate ongoing implementation issues, such as information-processing issues related to beneficiaries' requests for enrollment changes and automatic premium withholds from Social Security payments. In addition, CMS and plan sponsors did not resolve a significant proportion of complaints related to beneficiaries at risk of depleting their medications in accordance with applicable time frames. Due to limitations and anomalies, the grievances data that plan sponsors reported for their contracts did not provide sufficient insight into beneficiaries' experiences with Part D. Specifically, these data did not include information about whether beneficiaries who filed grievances were at risk of depleting their medications or whether plan sponsors were resolving grievances in a timely manner. In addition, GAO identified a number of anomalies in the grievances data, raising questions about whether plan sponsors were reporting these data consistently and accurately. For example, reported grievances were concentrated in a small number of plan sponsors' contracts and at a rate that was significantly disproportionate to their respective enrollment levels; varied considerably among contracts with similar levels of enrollment; and increased from 2006 to 2007, in contrast to patterns in complaints data. CMS's oversight efforts thus far have focused almost exclusively on resolving complaints with little attention devoted to plan sponsors' grievances processes. CMS routinely monitors the status of complaints and has taken actions against plan sponsors who failed to comply with requirements for the complaints process. In contrast, CMS oversight of plan sponsor grievances processes has been more limited. CMS provided plan sponsors with general guidance for classifying grievances and periodically reviewed these data. However, several plan sponsors indicated that the guidance was insufficient, increasing the likelihood that plan sponsors report erroneous and inconsistent information to CMS and that they rely on the wrong processes to address beneficiaries' concerns. Further, CMS could not explain many of the anomalies in the grievances data that GAO identified.
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NRC issues licenses under the Atomic Energy Act of 1954, as amended, to individuals and entities such as hospitals, research and fuel cycle facilities, and manufacturers that use radioactive materials. The license--termed a "materials license"--permits the licensee to possess, use, and/or transfer radioactive materials under controlled conditions intended to limit the public's exposure to harmful radiation. According to NRC's August 1994 annual report, NRC regulates about 6,850 active licenses. Over 38,000 licenses have been terminated for sites previously involved in activities related to radioactive materials. NRC terminates about 350 materials licenses annually. According to NRC, the majority of the licensed operations cause little or no contamination. As a result, most site cleanups are routine and generally take less than 4 years to complete. Cleanups at other NRC-licensed sites, however, are highly complex, and many have been under way for an extended period of time--over 20 years in one case. At the conclusion of the licensees' operations, NRC currently requires them to decontaminate their facilities, including land, buildings, and equipment, to a level that would allow the site to be used safely for any purpose in the future (unrestricted use). This process is known as "decommissioning." Decommissioning generally involves many steps. Among other steps, (1) the licensee must develop a site characterization plan documenting the extent and location of contamination, (2) NRC must review and approve the licensee's plan for decommissioning the site, (3) the licensee must remediate the site and prepare a final site survey documenting the results, and (4) NRC must conduct a survey to confirm that the site has been adequately cleaned up before terminating the license. In our 1989 review of NRC's decommissioning procedures and criteria, we found that NRC had improperly terminated licenses at two of the eight sites we reviewed. The two sites were released for unrestricted use despite the presence of radioactive contamination in excess of NRC's decommissioning guidelines. Radioactive contamination at one site was 3 to 320 times higher than the guidelines allow; at the other site, contamination was 2 to 4 times higher than NRC allows. Because of inadequate information, we were unable to determine whether similar problems existed at the other six sites. During congressional deliberations on this topic in August 1989, NRC agreed to (1) review documentation on materials licenses terminated between 1965 and 1985 to assess whether past operations had been properly cleaned up and, if not, (2) identify sites requiring additional cleanup. NRC initiated the review in September 1990 and subsequently expanded it to include all terminated licenses. According to NRC, contractors had examined documentation on about 29,000 (about 75 percent) of an estimated 38,500 terminated licenses through December 1994. NRC has determined that 22 of the 29,000 licenses involved sites that exceed radioactive guidelines for unrestricted use and, consequently, require additional cleanup. Documentation on another 895 of the former licenses was inadequate to determine whether the sites meet NRC's guidelines. As a result, as of March 15, 1995, NRC was in the process of obtaining additional information about the 895 terminated licenses using, among other things, the personal knowledge of cognizant NRC staff, site visits, and states' and former licensees' records of the affected sites. NRC does not expect that a large number of former sites will require additional cleanup, although the total number of these sites will not be known for several years. According to NRC, the contractor will complete its review of the remaining 9,500 terminated licenses in 1996. However, NRC officials told us that it will take several more years to review the contractor's work and conduct any site inspections that may be needed to assess contamination resulting from these licenses. In March 1990, NRC established a program--termed the Site Decommissioning Management Plan (SDMP)--to help ensure the timely cleanup of sites facing difficult and/or prolonged decommissioning. NRC originally identified 40 sites for increased oversight, guidance, and assistance to help ensure their timely cleanup. The sites, known as SDMP sites, were selected on the basis of the personal experience of the NRC regional and headquarters staff considered most knowledgeable of and familiar with sites facing problematic cleanups. NRC staff included sites within the SDMP program if they met one or more of the following criteria: A licensee's financial ability or willingness to perform the cleanup was questionable, or other problems existed. The site contained large amounts of contaminated soil, unused settling ponds, or buried waste that could be difficult to dispose of. The site contained unused facilities that had been contaminated for a long time. The license had previously been terminated, but residual contamination at the site still exceeded NRC's guidelines for unrestricted use. Groundwater at the site was contaminated, or potentially contaminated, by radioactive waste. By 1992, 2 years after the SDMP program was initiated, eight new sites had been added to the program, and only one site had been cleaned up and removed from the program. Dissatisfied with the slow pace of cleanups at the SDMP sites, NRC's management directed its staff to accelerate those cleanups. As a result, in April 1992 NRC developed an action plan that, among other things, (1) summarized NRC's existing guidance and criteria for site cleanups, (2) established time frames for major decommissioning milestones, and (3) described the process that NRC would use to establish schedules for timely site cleanups. According to NRC officials, the 1992 action plan represented NRC's first attempt to explain and formalize its cleanup process. Before the 1992 plan, NRC officials said, the decommissioning process was operated on an adhoc basis. Site owners lacked clear guidance about NRC's decommissioning requirements, and NRC staff were unclear about how they could best fulfill their decommissioning responsibilities. Since issuing the 1992 action plan, NRC has taken additional action to clarify its requirements for decommissioning. In July 1993, NRC issued new regulations that required licensees and others who use or possess radioactive materials to prepare and maintain adequate documentation on activities that could affect decommissioning at their sites. Furthermore, in July 1994 NRC issued regulations that established time frames for completing decommissioning activities. Under the regulations, licensees are required to complete decommissioning within about 50 to 62 months. The new regulations primarily affect the timeliness of decommissioning future sites. For example, many SDMP sites have encountered delays resulting from inadequate information about past operations. Because little can be done to reconstruct this information, the new requirement for adequate recordkeeping will not apply to these sites. In addition, according to NRC officials, because many SDMP sites face extenuating circumstances that necessitate longer cleanups, they may need to be exempted from the decommissioning time frames. To date, NRC's efforts have not resulted in the timely cleanup of existing SDMP sites. In fact, little progress has been made. Since 1990, the number of sites in the SDMP program has fluctuated between 40 and 57. In 1993, NRC projected that a total of 11 SDMP sites would be cleaned up by April 1994 and, consequently, removed from the SDMP program. However, only three sites were cleaned up and removed from the SDMP program during that period. Furthermore, interim progress toward the final cleanup at most of the 50 sites in the SDMP program in November 1994, is also behind schedule. According to NRC officials, since April 1993 NRC has, among other things, reviewed numerous (1) plans for decommissioning SDMP sites and (2) reports on the status of decommissioning activities at the sites. According to NRC, these efforts represent substantial progress in remediating SDMP sites. While progress is being made at some SDMP sites, our comparison of NRC's October 1993 and November 1994 projections for completing interim decommissioning activities found that only two sites had completed their planned activities on schedule. Decommissioning activities at 31 sites were projected to exceed their milestones by 2 to 42 months, and 17 of the 31 sites were expected to exceed their milestones by 12 months or more. We could not determine whether activities at the remaining 17 sites were on schedule because of changes in the scope of decommissioning activities between October 1993 and November 1994. According to NRC's records, most of the 50 SDMP sites in the program in November 1994 have large amounts of contaminated soil--up to 10 million cubic feet. The contamination resulted from a variety of operations, such as nuclear fuel research, chemical manufacturing, uranium processing, and landfill disposal activities. (App. I provides additional information about the sites, including the location and a description of the contamination present at each of the sites.) According to NRC officials, delays in cleaning up SDMP sites increase the likelihood, over the long term, for human exposure to radiation through the further release and spread of contamination into the environment. However, NRC officials and representatives of the contaminated SDMP sites told us that the sites do not pose any imminent health or safety risk because controls exist to limit the public's access to contaminated areas. For example, they said fences and posted danger signs have been erected around contaminated property and buildings. In addition, they said the public has little reason to access areas that are obviously contaminated. However, we found that the extent of contamination is not always obvious. Figures 1 and 2 illustrate how a radioactively contaminated site appeared in 1976 and in 1994. Although the site appears to be cleaner in the 1994 photograph, it is not. The barrels of chemical and radioactive waste obvious in the 1976 photograph are still there but, over time, have been covered by top soil. And although most people probably have no reason to access property contaminated with radioactive waste, the representative for this SDMP site told us that hunters sometimes enter the property despite fences and signs alerting them to the danger. Delays in cleaning up contaminated sites can also result in more difficult cleanups. For example, over time, radioactive materials can seep into the water table beneath a site and contaminate the groundwater both on and off the site. Eight SDMP sites have already contaminated the groundwater, and according to a contractor performing NRC's review of formerly licensed sites, about 1 percent of the former sites (nearly 400) may need to be examined for groundwater contamination. The spread of radioactive waste through soil and water also results in more costly cleanups, a factor that can have a great impact on an owner's ability and willingness to pay for site cleanups. Finally, according to NRC, continued cleanup delays erode the public's confidence in NRC's ability to protect the public from adverse health and safety consequences. A variety of factors have delayed and even halted cleanups at the SDMP sites. For example, at 14 SDMP sites, large volumes of thorium waste cannot be disposed of on-site without an exemption from NRC's existing requirements, and disposal elsewhere may not be practical or feasible because of the high cost and limited availability of off-site disposal facilities. Litigation, coordination, and negotiations between affected parties also have delayed cleanups at many SDMP sites. Finally, lengthy time frames for NRC's review and approval of key decommissioning documents have contributed to cleanup delays at nine SDMP sites. NRC permits site owners to bury contaminated waste on-site if radiation levels can be reduced to a point that permits the site to be used for unrestricted purposes. If NRC's guidelines for decommissioning cannot be met through on-site burial, owners may have to remove the waste and transfer it to a facility licensed to accept low-level radioactive waste. However, neither disposal option is viable for many SDMP sites contaminated with large quantities of radioactive waste. Many SDMP sites cannot meet NRC's guidelines for on-site disposal, yet off-site disposal may not be feasible or practical because of the limited availability of waste facilities and the high cost of off-site disposal. According to NRC, 30 SDMP sites are contaminated with large amounts of radioactive waste. Fourteen of these sites are contaminated with thorium. Over time, thorium decays to thallium, a radioactive isotope which emits gamma rays that can penetrate and harm the body. In the past, NRC allowed licensees to bury large quantities of thorium, subject to restrictions on the future use of the sites. NRC eliminated this disposal option in 1992. Because of the nature and large quantities of thorium at the 14 sites, radiation doses at the sites would exceed NRC's guidelines for unrestricted use if the waste were buried. According to NRC, it is too early to tell whether the other 16 sites with large volumes of radioactive waste can meet NRC's guidelines for on-site disposal because efforts to characterize the sites are still under way. Off-site disposal of large amounts of radioactive waste also may not be feasible. Specifically, only one facility in Utah is currently available to accept large volumes of waste from existing SDMP sites; however, it cannot accept materials that exceed the specified concentration levels established for various radioactive materials. According to NRC, access to waste disposal facilities will continue to be a problem and could even get worse over the next 5 to 10 years until state-sponsored facilities are available to accept the waste. And even when these facilities are available, the manager of the SDMP program acknowledged that it is uncertain whether the facilities will accept the quantities of contaminated materials present at some SDMP sites. Off-site disposal also may not be practical because of the costs involved. For example, the owner of one site contaminated with thorium estimated that on-site disposal would cost less than $2 million, compared to between $135 million and $467 million to dispose of the same waste off-site. In another case, an SDMP site representative estimated that on-site disposal of his site's waste would cost between $1 million and $6 million, compared to over $100 million for off-site disposal. According to NRC officials, the high cost of off-site disposal is an important consideration because it raises concern about the ability and willingness of owners to pay the costs of decommissioning sites. For example, as a result of the high cost of off-site disposal, owners of one site have threatened to declare bankruptcy if required to transfer their waste off-site. When decommissioning costs exceed an owner's financial capability, according to NRC officials, NRC has no other recourse but to turn the site over to the Environmental Protection Agency for cleanup under the Superfund program. NRC is taking action to provide additional disposal options for sites with radioactive contamination. In August 1994, NRC solicited views from interested parties on the appropriateness of revising its existing regulations to allow site owners to retain private ownership of their contaminated properties for a 100-year period, subject to land-use restrictions. Comments on NRC's proposal were overwhelmingly negative. As a result, according to the NRC official responsible for handling comments on the proposal, NRC staff do not intend to pursue this regulatory change. NRC has also proposed a regulation to replace its existing decommissioning guidelines. If adopted, the regulation would permit site owners to exceed regulatory limits for radioactive contamination in certain cases, subject to restrictions on the future use of their properties. According to NRC, a number of significant issues will need to be resolved before this regulatory change can be adopted. Issues include (1) the amount of radiation that will be allowed at the sites, (2) whether existing SDMP sites should be held to new requirements, and (3) the conditions and time frames for returning sites to unrestricted use. Finally, NRC is studying on-site disposal issues at four SDMP sites contaminated with large volumes of thorium. When completed, NRC officials said, the studies may be used to evaluate the appropriateness of on-site disposal at other sites contaminated with large volumes of thorium. NRC expects the studies will take at least 2 years to complete. Litigation, coordination, and negotiations between affected parties also have delayed cleanups at many SDMP sites. According to NRC, for example, litigation has delayed cleanups at six SDMP sites, including one case that has been unresolved for more than 5 years. Litigation has occurred for a variety of reasons. For example, owners of one SDMP site--a sewage treatment facility--have filed a lawsuit against the owners of another SDMP site involved in the manufacturing of medical equipment. According to the owners of the sewage facility, discharges of radioactive waste in the manufacturer's sewage lines have contaminated the sewage facility. According to NRC, outside parties, such as environmental groups, have also filed lawsuits to stop or impede cleanups at SDMP sites because of environmental and health concerns. Finally, owners of SDMP sites who are embroiled in disputes about NRC's decommissioning policies and regulations have filed lawsuits against NRC. In addition to litigation, nearly half of the SDMP sites face management and disposal issues that must be coordinated with other federal and state agencies that have jurisdiction over specific aspects of cleanups. In some cases, coordination requirements are perfunctory and have little impact on timely site cleanups. However, in other cases, particularly when states' requirements differed from those imposed by NRC, substantial delays have occurred. For example, under state regulations the radioactive waste at one SDMP site in Ohio also must be treated as solid waste. As a result, even though the site can meet NRC's requirements for on-site burial, delays have occurred because of the state's concerns about whether the company's proposed disposal cell (waste receptacle) complies with the state's requirements for the disposal of solid waste. Coordination on this issue has already contributed to cleanup delays of about 3 years, and additional delays will occur until the issue is resolved. Finally, negotiations between current and previous site owners about who is responsible for cleaning up SDMP sites have resulted in delays. For example, at one SDMP site negotiations between the former licensee and the current site owner to determine which one is the responsible party delayed cleanup by at least 2 years; negotiations between parties at another site delayed cleanup by about 6 months. According to the manager of the SDMP program, NRC expects that most future SDMP sites will be identified from NRC's ongoing review of past cleanups at sites with terminated materials licenses. Consequently, negotiations about who is responsible for site cleanups will likely become a larger issue in the future. NRC's lengthy time frames for reviewing and approving key decommissioning documents, such as site decommissioning plans, also have contributed to cleanup delays at many SDMP sites. For example, according to NRC documentation, excessive time frames for reviewing and approving documents submitted by SDMP site owners contributed to delays of between 6 months and 22 months at nine sites during 1993. Representatives of owners at 10 of the 14 SDMP sites we contacted also identified concerns about the timeliness of NRC's reviews. Specifically, they said that NRC's reviews were "rarely" or "not usually" timely. For example, one representative said that inaction on his site's application for a materials license was significantly delaying cleanup at the site. In November 1994, NRC estimated that the license would be approved in July 1995--2 years after the owner submitted the application. Decommissioning activities cannot begin at the site until the license is approved. According to NRC, lengthy time frames for reviewing and approving decommissioning documents are the result of a variety of factors, including the availability of staff to perform the reviews. Several SDMP site representatives agreed that NRC staffing, particularly staff turnover, is a problem. For example, one site owner said that during a 4-year period, he had to educate three NRC staff who, at various times, were responsible for overseeing the cleanup of the site, thereby delaying the cleanup. In addition, we found that NRC does not assign staff to work exclusively on the SDMP program or ensure that priorities are set consistently for SDMP's cleanup activities. Instead, the responsibility for overseeing SDMP sites within NRC has been divided between many headquarters and regional organizations with varying missions and priorities that, according to NRC, often have taken precedence over SDMP's program activities. According to NRC, it has acted to improve the timeliness of its document reviews. For example, because of a recent reorganization within NRC, additional staff are now available to perform the reviews. Furthermore, between October 1994 and December 1994, NRC tested a system for tracking and assigning staff resources to the reviews. Although NRC is currently reviewing the test's results, early indications are that the system is more costly than can be justified. As a result, NRC officials said that they will probably need to pursue other methods for managing staff resources for SDMP activities. NRC's efforts to provide increased assistance to sites facing difficult and lengthy cleanups, while laudable, are unlikely to resolve the numerous and complex issues encountered at existing SDMP sites. Many SDMP site cleanups have been delayed by issues involving litigation, coordination, and negotiation between affected parties, which are issues largely beyond NRC's control. In addition, in the short term, little can be done to resolve the pressing problems experienced by sites that cannot meet current decommissioning guidelines for on-site disposal without an exemption from NRC's existing requirements. The limited availability and high cost of off-site waste disposal facilities may be addressed when state-sponsored facilities are available to accept the waste. However, even when these facilities become available, it is unclear whether they will be able to accept the types and quantities of contaminated waste present at a large number of SDMP sites. NRC is exploring additional disposal options for sites that cannot meet its existing requirements. While additional disposal options may facilitate decommissioning at many SDMP sites, a wide variety of difficult issues will need to be thoroughly addressed before any regulatory change can be adopted. For example, because sites would be allowed to have greater concentrations of radioactive contamination than currently permitted, issues about the possibility of future waste migration will need to be resolved to ensure that additional sites do not experience migration problems. NRC will also need to ensure that controls at the sites will be adequate over the long term to safeguard the public from greater exposure to radiation. Decommissioning issues are likely to become even more problematic as the magnitude of NRC's decommissioning effort grows. NRC's ongoing review of terminated licenses already has identified 22 sites requiring additional cleanup. Another 895 licenses require additional review to determine if the sites require further cleanup. More sites are likely to be identified as NRC completes its review of the remaining 9,500 licenses. On March 15, 1995, we met with NRC officials, including the Deputy Executive Director for Nuclear Materials Safety, Safeguards and Operations Support, and the Director of the Office of Nuclear Material Safety and Safeguards to discuss and clarify NRC's written comments on a draft of our report. (NRC's written comments are included as app. II.) NRC officials agreed that little progress has been made in removing sites from the SDMP program--the ultimate objective of the program. However, they cited several actions by NRC that they believe will contribute to the eventual cleanup of SDMP sites. We have included details on these actions, as appropriate, in the body of this report. We have also clarified and updated information in our draft report on the basis of NRC's comments. NRC officials stressed that SDMP sites, such as the one illustrated in this report, do not represent an immediate hazard to infrequent intruders. While all SDMP sites exceed NRC's guidelines for unrestricted use, they said that an individual's risk of exposure to radiation would occur only if controls at the sites broke down and people took up residence or worked at the sites without adequate precautions. Furthermore, they said that covering barrels of contaminated waste with soil, as was done at the site discussed in this report, helps reduce the overall hazard. We agree that health consequences related to an individual's exposure to radiation are considered a long-term--not an immediate--risk, provided that an individual's exposure is controlled and limited. However, we do not fully agree with NRC's comments about the site discussed in our report. As demonstrated in our report, controls can and do break down. Furthermore, we believe that it is too early to assess the health risk associated with this site. The site, which was used as a landfill, has not yet been characterized to determine the extent and nature of contamination. In addition, records are incomplete or nonexistent about the (1) sources of contamination, (2) adequacy of efforts to cover the contaminated waste, and (3) frequency and duration of any intruder's access to the property. To assess NRC's progress in identifying former materials licensees' sites that require additional cleanup, we interviewed contractor officials performing the work and the NRC manager responsible for overseeing the review. We also examined documentation related to the project, including the contract governing the scope of the work. To assess progress in cleaning up the high-priority SDMP sites and to identify major factors contributing to decommissioning delays in the 21 states in which nuclear materials are regulated by NRC, we interviewed the manager of the SDMP program and other cognizant headquarters and regional NRC officials, including 48 project mangers in three NRC divisions (Low-Level Waste Management and Decommissioning, Fuel Cycle Safety and Safeguards, and Industrial and Medical Nuclear Safety) responsible for providing increased oversight, guidance, and assistance to SDMP sites during 1993. We also contacted owners or their representatives at 14 SDMP sites to obtain their views about the effectiveness of the SDMP program. The sites represent a cross-section of SDMP sites facing difficult decommissioning issues. In addition, we reviewed NRC's documentation of the origin, intent, and goals of the SDMP program, including NRC's site selection criteria, the 1992 action plan, annual status reports on the program, and memorandums and policy papers about possible changes in NRC's decommissioning regulations and policies. Finally, we visited five sites in Michigan, Oklahoma, and Ohio to observe the extent of contamination at some SDMP sites. We conducted our work between May 1993 and March 1995 in accordance with generally accepted government auditing standards. As agreed with your office, we plan no further distribution of this report until 15 days from the date of this letter. At that time, we will send copies to appropriate congressional committees, the Chairman of NRC, and other interested parties. We will also make copies available to others upon request. If you have questions, please call me at (202) 512-3841. Major contributors to this report are listed in appendix III. Thorium in slag and soil Uranium in soil and buildings Thorium and uranium in soil and settling ponds Thorium and hazardous wastes in landfill Thorium contamination in ponds and ground Uranium in buildings, soil, settling ponds Depleted uranium in soil and sand Uranium and thorium in sludge Uranium and thorium burial sites Thorium in soil and slag Cobalt-60 in sewage sludge and ash (continued) Anthony A. Krukowski, Regional Management Representative Odell W. Bailey, Jr., Evaluator-in-Charge Joanna C. Allen, 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 effectiveness of the Nuclear Regulatory Commission's (NRC) decommissioning program, focusing on: (1) NRC progress in identifying all former licensees' sites that require additional cleanup; (2) NRC progress in ensuring that sites on its Site Decommissioning Management Plan (SDMP) are cleaned up in a timely manner; and (3) factors that impede the timely cleanup of sites. GAO found that: (1) NRC has reviewed about 75 percent of its terminated licenses to identify sites that need additional cleanup and has found 22 sites that exceed its radioactive contamination guidelines; (2) NRC is seeking additional information on another 895 terminated licenses to determine if those sites need additional remediation; (3) NRC will not know the total number of sites that will require additional cleanup until it completes its review; (4) NRC expects to complete its initial review in 1996, but it will take several more years to conduct site inspections to determine contamination levels; (5) although NRC established SDMP in 1990 to ensure the timely remediation of sites facing difficult or prolonged cleanups, it has made little progress in cleaning up those sites; (6) NRC has issued additional regulations that require licensees to document their activities that could affect decommissioning operations; (7) the delays in cleaning up contaminated sites increase the risk of human exposure to radioactive wastes; and (8) factors that have delayed or halted cleanup at SDMP sites include difficulties in disposing of large quantities of a certain radioactive waste, litigation, coordination and negotiations between affected parties, and time consuming administrative reviews of decommissioning documents.
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FAMS was originally established as the Sky Marshal program in the 1970s to counter hijackers. In response to 9/11, the Aviation and Transportation Security Act expanded FAMS's mission and workforce and mandated the deployment of federal air marshals on high-security risk flights. Within the 10-month period immediately following 9/11, the number of air marshals grew significantly. Also, during subsequent years, FAMS underwent various organizational transfers. Initially, FAMS was transferred within the Department of Transportation from the Federal Aviation Administration to the newly created TSA. In March 2003, FAMS moved, along with TSA, to the newly established DHS. In November 2003, FAMS was transferred to U.S. Immigration and Customs Enforcement (ICE). Then, about 2 years later, FAMS was transferred back to TSA in the fall of 2005. FAMS deploys thousands of federal air marshals to a significant number of daily domestic and international flights. In carrying out this core mission of FAMS, air marshals are deployed in teams to various passenger flights. Such deployments are based on FAMS's concept of operations, which guides the agency in its selection of flights to cover. Once flights are selected for coverage, FAMS officials stated that they must schedule air marshals based on their availability, the logistics of getting individual air marshals in position to make a flight, and applicable workday rules. At times, air marshals may have ground-based assignments. On a short- term basis, for example, air marshals participate in Visible Intermodal Prevention and Response (VIPR) teams, which provide security nationwide for all modes of transportation. After the March 2004 train bombings in Madrid, TSA created and deployed VIPR teams to enhance security on U.S. rail and mass transit systems nationwide. Comprised of TSA personnel that include federal air marshals--as well as transportation security inspectors, transportation security officers, behavioral detection officers, and explosives detection canines--the VIPR teams are intended to work with local security and law enforcement officials to supplement existing security resources, provide a deterrent presence and detection capabilities, and introduce an element of unpredictability to disrupt potential terrorist activities. FAMS's budget request for fiscal year 2010 is $860.1 million, which is an increase of $40.6 million (or about 5 percent) over the $819.5 million appropriated in fiscal year 2009. The majority of the agency's budget provides for the salaries of federal air marshals and supports maintenance of infrastructure that includes 21 field offices. FAMS's operational approach (concept of operations) for achieving its core mission is based on assessments of risk-related factors, since it is not feasible for federal air marshals to cover all of the approximately 29,000 domestic and international flights operated daily by U.S. commercial passenger air carriers. Specifically, FAMS considers the following risk- related factors to help ensure that high-risk flights operated by U.S. commercial carriers--such as the nonstop, long-distance flights targeted on 9/11--are given priority coverage by federal air marshals: Threat (intelligence): Available strategic or tactical information affecting aviation security is considered. Vulnerabilities: Although FAMS's specific definition is designated sensitive security information, DHS defines vulnerability as a physical feature or operational attribute that renders an entity open to exploitation or susceptible to a given hazard. Consequences: FAMS recognizes that flight routes over certain geographic locations involve more potential consequences than other routes. FAMS attempts to assign air marshals to provide an onboard security presence on as many of the flights in the high-risk category as possible. FAMS seeks to maximize coverage of high-risk flights by establishing coverage goals for 10 targeted critical flight categories. In order to reach these coverage goals, FAMS uses a scheduling process to determine the most efficient flight combinations that will allow air marshals to cover the desired flights. FAMS management officials stressed that the overall coverage goals and the corresponding flight schedules of air marshals are subject to modification at any time based on changing threat information and intelligence. For example, in August 2006, FAMS increased its coverage of international flights in response to the discovery, by authorities in the United Kingdom, of specific terrorist threats directed at flights from Europe to the United States. FAMS officials noted that a shift in resources of this type can have consequences because of the limited number of air marshals. The officials explained that international missions require more resources than domestic missions partly because the trips are of longer duration. In addition to the core mission of providing an onboard security presence on selected flights, FAMS also assigns air marshals to VIPR teams on an as-needed basis to provide a ground-based security presence. For the first quarter of fiscal year 2009, TSA reported conducting 483 VIPR operations, with about 60 percent of these dedicated to ground-based facilities of the aviation domain (including air cargo, commercial aviation, and general aviation) and the remaining VIPR operations dedicated to the surface domain (including highways, freight rail, pipelines, mass transit, and maritime). TSA's budget for fiscal year 2009 reflects support for 225 VIPR positions at a cost of $30 million. TSA plans to significantly expand the VIPR program in fiscal year 2010 by adding 15 teams consisting of 338 positions at a cost of $50 million. However, questions have been raised about the effectiveness of the VIPR program. In June 2008, for example, the DHS Office of Inspector General reported that although TSA has made progress in addressing problems with early VIPR deployments, it needs to develop a more collaborative relationship with local transit officials if VIPR exercises are to enhance mass transit security. After evaluating FAMS's operational approach for providing an onboard security presence on high-risk flights, the Homeland Security Institute, a federally funded research and development center, reported in July 2006 that the approach was reasonable. In its report, the Homeland Security Institute noted the following regarding FAMS's overall approach to flight coverage: FAMS applies a structured, rigorous approach to analyzing risk and allocating resources. The approach is reasonable and valid. No other organizations facing comparable risk-management challenges apply notably better methodologies or tools. As part of its evaluation methodology, the Homeland Security Institute examined the conceptual basis for FAMS's approach to risk analysis. Also, the institute examined FAMS's scheduling processes and analyzed outputs in the form of "coverage" data reflecting when and where air marshals were deployed on flights. Further, the Homeland Security Institute developed and used a model to study the implications of alternative strategies for assigning resources. We reviewed the institute's evaluation methodology and generally found it to be reasonable. Although the institute's July 2006 report concluded that FAMS's operational approach was reasonable and valid, the report also noted that certain types of flights were covered less often than others. Accordingly, the institute made recommendations for enhancing the operational approach. For example, the institute recommended that FAMS increase randomness or unpredictability in selecting flights and otherwise diversify the coverage of flights. To address the Homeland Security Institute's recommendations, FAMS officials stated that a broader approach for determining which flights to cover has been implemented--an approach that opens up more flights for potential coverage, provides more diversity and randomness in flight coverage, and extends flight coverage to a variety of airports. Our January 2009 report noted that FAMS had implemented or had ongoing efforts to implement the institute's recommendations. We reported, for example, that FAMS is developing an automated decision-support tool for selecting flights and that this effort is expected to be completed by December 2009. To better understand and address operational and quality-of-life issues affecting the FAMS workforce, the agency's previous Director--who served in that capacity from March 2006 to June 2008--established various processes and initiatives. Chief among these were 36 issue-specific working groups to address a variety of topics, such as tactical policies and procedures, medical or health concerns, recruitment and retention practices, and organizational culture. Each working group typically included a special agent-in-charge, a subject matter expert, air marshals, and mission support personnel from the field and headquarters. According to FAMS management, the working groups typically disband after submitting a final report, but applicable groups could be reconvened or new groups established as needed to address relevant issues. The previous Director also established listening sessions that provided a forum for employees to communicate directly with senior management and an internal Web site for agency personnel to provide anonymous feedback to management. Another initiative implemented was assigning an air marshal to the position of Ombudsman in October 2006 to provide confidential, informal, and neutral assistance to employees to address workplace- related problems, issues, and concerns. These efforts have produced some positive results. For example, as noted in our January 2009 report, FAMS amended its policy for airport check-in and flight boarding procedures (effective May 15, 2008) to better ensure the anonymity of air marshals in mission status. In addition, FAMS modified its mission scheduling processes and implemented a voluntary lateral transfer program to address certain issues regarding air marshals' quality of life--and has plans to further address health issues associated with varying work schedules and frequent flying. Also, our January 2009 report noted that FAMS was taking steps to procure new personal digital assistant communication devices--to replace the current, unreliable devices--and distribute them to air marshals to improve their ability to communicate effectively with management while in mission status. All of the 67 air marshals we interviewed in 11 field offices commented favorably about the various processes and initiatives for addressing operational and quality-of-life issues, and the air marshals credited the leadership of the previous FAMS Director. The current FAMS Director, as noted in our January 2009 report, has expressed a commitment to sustain progress and reinforce a shared vision for workforce improvements by continuing applicable processes and initiatives. In our January 2009 report, we also noted that FAMS plans to conduct a workforce satisfaction survey of all employees every 2 years, building upon an initial survey conducted in fiscal year 2007, to help identify issues affecting the ability of its workforce to carry out its mission. We reported that a majority (79 percent) of the respondents to the 2007 survey indicated that there had been positive changes from the prior year, although the overall response rate (46 percent) constituted less than half of the workforce. The 46 percent response rate was substantially less than the 80 percent rate encouraged by the Office of Management and Budget (OMB) in its guidance for federal surveys that require its approval. According to the OMB guidance, a high response rate increases the likelihood that the views of the target population are reflected in the survey results. We also reported that the 2007 survey's results may not provide a complete assessment of employees' satisfaction because 7 of the 60 questions in the 2007 survey questionnaire combined two or more issues, which could cause respondents to be unclear on what issue to address and result in potentially misleading responses, and none of the 60 questions in the 2007 survey questionnaire provided for response options such as "not applicable" or "no basis to judge"-- responses that would be appropriate when respondents had little or no familiarity with the topic in question. In summary, our January 2009 report noted that obtaining a higher response rate to FAMS's future surveys and modifying the structure of some questions could enhance the surveys' potential usefulness by, for instance, providing a more comprehensive basis for assessing employees' attitudes and perspectives. Thus, to increase the usefulness of the agency's biennial workforce satisfaction surveys, we recommended that the FAMS Director take steps to ensure that the surveys are well designed and that additional efforts are considered for obtaining the highest possible response rates. Our January 2009 report recognized that DHS and TSA agreed with our recommendation and noted that FAMS was in the initial stages of formulating the next workforce satisfaction survey. More recently, by letter dated July 2, 2009, DHS informed applicable congressional committees and OMB of actions taken in response to our recommendation. The response letter noted that agency plans include (1) ensuring that questions in the 2009 survey are clearly structured and unambiguous, (2) conducting a pretest of the 2009 survey questions, and (3) developing and executing a detailed communication plan. Federal air marshals are an important layer of aviation security. FAMS, to its credit, has established a number of processes and initiatives to address various operational and quality-of-life issues that affect the ability of air marshals and other FAMS personnel to perform their aviation security mission. The current FAMS Director has expressed a commitment to continue relevant processes and initiatives for identifying and addressing workforce concerns, maintaining open lines of communications, and sustaining progress. Similarly, this hearing provides an opportunity for congressional stakeholders to focus a dialogue on how to sustain progress at FAMS. For example, relevant questions that could be raised include the following: In implementing the agency's concept of operations, how effectively does FAMS use new threat information and intelligence to modify flight coverage goals and the corresponding flight schedules of air marshals? In managing limited resources to mitigate a potentially unlimited range of security threats, how does FAMS ensure that federal air marshals are allocated appropriately for meeting in-flight security responsibilities as well as supporting new ground-based security responsibilities, such as VIPR team assignments? What cost-benefit analyses, if any, are being used to guide FAMS decision makers? To what extent have appropriate performance measures been developed for gauging the effectiveness and results of resource allocations and utilization? How does FAMS foster career sustainability for federal air marshals given that maintaining an effective operational tempo is not necessarily compatible with supporting a better work-life balance? These types of questions warrant ongoing consideration by FAMS management and continued oversight by congressional stakeholders. Mr. Chairman, this completes my prepared statement. I look forward to answering any questions that you or other members of the subcommittee may have. For information about this statement, please contact Steve Lord, Director, Homeland Security and Justice Issues, at (202) 512-4379, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals making key contributions to this testimony include David Alexander, Danny Burton, Katherine Davis, Mike Harmond, and Tom Lombardi. 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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By deploying armed air marshals onboard selected flights, the Federal Air Marshal Service (FAMS), a component of the Transportation Security Administration (TSA), plays a key role in helping to protect approximately 29,000 domestic and international flights operated daily by U.S. air carriers. This testimony discusses (1) FAMS's operational approach or "concept of operations" for covering flights, (2) an independent evaluation of the operational approach, and (3) FAMS's processes and initiatives for addressing workforce-related issues. Also, this testimony provides a list of possible oversight issues related to FAMS. This testimony is based on GAO's January 2009 report (GAO-09-273), with selected updates in July 2009. For its 2009 report, GAO analyzed policies and procedures regarding FAMS's operational approach and a July 2006 classified assessment of that approach. Also, GAO analyzed employee working group reports and related FAMS's initiatives for addressing workforce-related issues, and interviewed FAMS headquarters officials and 67 air marshals (selected to reflect a range in levels of experience). Because the number of air marshals is less than the number of daily flights, FAMS's operational approach is to assign air marshals to selected flights it deems high risk--such as the nonstop, long-distance flights targeted on September 11, 2001. In assigning air marshals, FAMS seeks to maximize coverage of flights in 10 targeted high-risk categories, which are based on consideration of threats, vulnerabilities, and consequences. In July 2006, the Homeland Security Institute, a federally funded research and development center, independently assessed FAMS's operational approach and found it to be reasonable. However, the institute noted that certain types of flights were covered less often than others. The institute recommended that FAMS increase randomness or unpredictability in selecting flights and otherwise diversify the coverage of flights within the various risk categories. In its January 2009 report, GAO noted that the Homeland Security Institute's evaluation methodology was reasonable and that FAMS had taken actions (or had ongoing efforts) to implement the institute's recommendations. To address workforce-related issues, FAMS's previous Director, who served until June 2008, established a number of processes and initiatives, such as working groups, listening sessions, and an internal Web site for agency personnel to provide anonymous feedback to management. These efforts have produced some positive results. For example, FAMS revised its policy for airport check-in and aircraft boarding procedures to help protect the anonymity of air marshals in mission status, and FAMS modified its mission scheduling processes and implemented a voluntary lateral transfer program to address certain quality-of-life issues. The air marshals GAO interviewed expressed satisfaction with FAMS's efforts to address workforce-related issues. The current FAMS Director has expressed a commitment to continue applicable processes and initiatives. Also, FAMS has plans to conduct a workforce satisfaction survey of all employees every 2 years, building upon an initial survey conducted in fiscal year 2007. GAO's review found that the potential usefulness of future surveys could be enhanced by ensuring that the survey questions and the answer options are clearly structured and unambiguous and that additional efforts are considered for obtaining the highest possible response rates. To its credit, FAMS has made progress in addressing various operational and quality-of-life issues that affect the ability of air marshals to perform their aviation security mission. However, sustaining progress will require ongoing consideration by FAMS management--and continued oversight by congressional stakeholders--of key questions, such as how to foster career sustainability for air marshals given that maintaining an effective operational tempo can at times be incompatible with supporting a work-life balance.
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The Forest Service manages about 193 million acres of land, encompassing 155 national forests and 20 national grasslands. Laws guiding the management of the forests require that the Forest Service manage its lands for various purposes--including recreation; rangeland; wilderness; and the protection of watersheds, fish, and wildlife--and to ensure that the agency's management of the lands does not impair their long-term productivity. In managing its lands in accordance with these principles, the agency provides a variety of goods and services. Goods include timber, natural gas, oil, minerals, and range for livestock to graze. Watersheds on Forest Service lands provide drinking water to thousands of communities, and the national forests themselves offer recreational opportunities to the public, such as camping, hiking, and rafting. In recent years, appropriations for the Forest Service have totaled about $5 billion annually, with wildland fire management activities--such as reducing potentially flammable vegetation, preparing for and fighting fires, and rehabilitating burned lands--consuming a substantial portion of the agency's budget. The Forest Service employs about 30,000 people and operates hundreds of regional, forest, and ranger district offices nationwide. Over the past decade, we and others have identified numerous management challenges facing the Forest Service and made many recommendations to improve the agency and its programs. While the agency has improved some areas, progress has been lacking in other key areas, and management challenges remain. Addressing these challenges is becoming more pressing in the face of certain emerging issues. Perhaps the most daunting challenge facing the Forest Service is the dramatic worsening of our nation's wildland fire problem over the past decade. The average annual acreage burned by wildland fires has increased by about 70 percent since the 1990s, while the Forest Service's wildland fire-related appropriations have more than doubled in that time, from about $1 billion in fiscal year 1999 to almost $2.2 billion in fiscal year 2007, representing over 40 percent of the agency's total 2007 appropriations. As we have previously reported, a number of factors have contributed to worsening fire seasons and increased firefighting expenditures, including an accumulation of fuels due to past land management practices; drought and other stresses, in part related to climate change; and an increase in human development in or near wildlands. The Forest Service shares responsibility for wildland fire management with four agencies of the Department of the Interior (Interior)--the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service. Since 1999, we have issued numerous reports calling for various improvements in the Forest Service's approach to wildland fire management. Most recently, we have focused on four primary steps we believe the agency, in conjunction with Interior, needs to take to better understand the extent of, and address, the nation's wildland fire problems and to help contain rising federal expenditures for responding to wildland fires. Specifically, we have called on the Forest Service to: Develop a cohesive strategy that identifies options and associated funding to reduce potentially hazardous vegetation and address wildland fire problems. Despite our repeated calls for a cohesive wildland fire strategy, the Forest Service has yet to develop one. In 1999, to address the problem of excess fuels and their potential to increase the severity of wildland fires and cost of suppression efforts, we recommended that a cohesive strategy be developed to identify the available long-term options for reducing fuels and the associated funding requirements. By laying out various potential approaches for addressing wildland fire, the estimated costs associated with each approach, and the trade-offs involved, such a strategy would help Congress and the agencies make informed decisions about effective and affordable long-term approaches to addressing the nation's wildland fire problems. Six years later, in 2005, we reiterated the need for a cohesive strategy and broadened our recommendation's focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. The Forest Service, along with the other wildland fire agencies, has generally agreed that such a strategy is necessary but has yet to develop one. In January 2009, agency officials told us they were working to create such a cohesive strategy, although they had no estimate of when the strategy would be completed. Establish clear goals and a strategy to help contain wildland fire costs. In 2007 and 2008, we reported that the Forest Service was taking a number of steps intended to help contain wildland fire costs, including improving its decision-support tools for helping officials select strategies for fighting wildland fires, but that the agency had not clearly defined its cost-containment goals or developed a strategy for achieving those goals-- steps that are fundamental to sound program management. Forest Service officials identified several documents they argue provide clearly defined goals and objectives that make up the agency's strategy to contain costs. In our view, however, these documents lack the clarity and specificity needed by officials in the field to help manage and contain wildland fire costs, and we therefore continue to believe that our recommendations in this area, if effectively implemented, would help the Forest Service better manage its cost-containment efforts and improve its ability to contain wildland fire costs. Continue to improve its processes for allocating fuel reduction funds and selecting fuel reduction projects. Also in 2007 and 2008, we reported on several shortcomings in the Forest Service's processes for allocating fuel reduction funds to field units and selecting fuel reduction projects, shortcomings that limited the agency's ability to ensure that funds are directed where they will reduce risk most effectively. The Forest Service has taken steps to improve its processes for allocating fuel reduction funds, including the use of a newly developed computer model to assist in making allocation decisions, rather than relying primarily on historical funding patterns and professional judgment. The agency is also taking steps to improve the information it uses in allocating funds and selecting projects--including information on wildland fire risk and fuel treatment effectiveness--and to clarify the relative importance of the various factors it considers when making allocation decisions. We believe the Forest Service must continue these efforts so that it can more effectively use its limited fuel reduction dollars. Take steps to improve its use of a new interagency budgeting and planning tool. In 2008, we reported on the Forest Service's and Interior's development of a new planning tool known as fire program analysis, or FPA. FPA was intended, among other things, to allow the agencies to analyze potential combinations of firefighting assets, and potential strategies for reducing fuels and fighting fires, to determine the most cost- effective mix of assets and strategies. While recognizing that FPA represents a significant step forward and shows promise in achieving certain of its objectives, we believe the agencies' approach to FPA's development hampers the tool in meeting other key objectives. First, FPA has but limited ability to project the effects of different levels of fuel reduction treatments and firefighting strategies over time, depriving agency officials of information that could help them analyze the long-term impact of changes in their approach to wildland fire management. Second, FPA, as the agencies have developed it, cannot identify the most cost- effective mix and location of firefighting assets for a given budget. Rather, it analyzes a limited number of combinations of assets and strategies to identify the most cost-effective among them. The Forest Service is now beginning to use FPA to help develop its fiscal year 2011 budget request. We made a number of recommendations designed to enhance FPA and the agencies' ability to use it, and the Forest Service--in conjunction with Interior--has identified several steps it is considering taking to do so. It is not yet clear how successful these steps will be, however--and, further, the steps the agencies have outlined do not address all the shortcomings we identified. We continue to believe that agency improvements are essential if the full potential of FPA is to be realized. In addition to these issues, we have also reported on the Forest Service's difficulties funding fire suppression activities within its appropriated wildland fire budget; in many years, the agency has transferred money from other Forest Service programs to pay suppression costs. We reported in 2004 that such transfers between programs had caused projects to be delayed or canceled, strained relationships among land managers at different agencies, and created management disruptions within the Forest Service, and we recommended several measures to minimize the impacts of funding transfers and to improve the estimates on which the agencies base their wildland fire budgeting requests. Nevertheless, fire-related funding transfers continue, occurring in fiscal years 2006, 2007, and 2008-- with the Forest Service transferring $400 million from other programs in fiscal year 2008 alone. Long-standing data problems have plagued the Forest Service, hampering its ability to manage its programs and account for its costs and reflecting deep-rooted and persistent shortcomings in the agency's management of its activities. Without complete and accurate data, the agency has difficulty carrying out tasks that are intrinsic to its land management responsibilities--including recognizing and setting priorities for needed work, tracking activities, and understanding the true costs of its operations. Further, without an effective managerial cost-accounting system, the agency will have difficulty monitoring revenue and spending levels and making informed decisions about future funding needs. We have made numerous recommendations aimed at the Forest Service's data shortcomings regarding both activities and costs. In recent years we have identified several land management programs for which the Forest Service lacks sufficient data, keeping the agency from effectively overseeing its activities and understanding whether it is using its appropriated dollars most efficiently. For example, in 2005, we reported on data problems in the Forest Service's program for reforestation--the planting and natural regeneration of trees--and treatments to improve timber stands, such as thinning trees and removing competing vegetation. Reforestation and subsequent timber stand improvement are critical to restoring and improving the health of our national forests after timber harvests--yet the agency lacked sufficiently reliable data to accurately quantify its specific needs, establish priorities among treatments, or estimate a budget. A year later we reported on a similar shortfall in the agency's program for rehabilitating and restoring lands unlikely to recover on their own after wildland fires, noting that the agency lacked nationwide data on the amount of needed rehabilitation and restoration work it had completed for recent wildland fires. And in 2008, we reported that the Forest Service did not maintain complete nationwide data on its use of stewardship contracting authority, under which the agency can trade goods (such as timber) for services (such as thinning forests or rangelands) that it would otherwise pay for with appropriated dollars, and can enter into stewardship contracts lasting up to 10 years. Although the Forest Service had recently updated its timber sale accounting system to include certain data on stewardship contracts, other data--such as the value of products sold and services procured through agreements rather than contracts--were not systematically collected or were incomplete. In addition to data on its activities, the Forest Service also lacks complete data on their costs. In 2006, we reported that the agency did not have a managerial cost-accounting system in place with which it could routinely analyze cost information. Managerial cost accounting, rather than measuring only the cost of "inputs" such as labor and materials, integrates financial and nonfinancial data, such as the number of hours worked or number of acres treated, to measure the cost of outputs and the activities that produce them. Such an approach allows managers to routinely analyze cost information and use it in making decisions about agency operations and permits a focus on managing costs rather than simply managing budgets. Such information is crucial for the Forest Service, as for all federal agencies, to make difficult funding decisions in this era of limited budgets and competing program priorities. In 2012, the Department of Agriculture is scheduled to replace its current Foundation Financial Information System with a new Financial Management Modernization Initiative system. The new system is expected to incorporate managerial cost-accounting capabilities, but the department has delegated responsibility for implementation of managerial cost accounting to its component agencies. The Forest Service's Chief Financial Officer stated at the time of our 2006 review that implementation of a managerial cost- accounting system would not be a priority until outstanding financial reporting issues had been resolved and that reliable and timely financial information was necessary before pushing to develop managerial cost- accounting information. Without a managerial cost-accounting system, however, the Forest Service will continue to have difficulty developing realistic and useful budgets and related cost-benefit analyses of its activities--essential tools for present and future land management activities. In addition to its shortcomings in accounting for its overall costs, the Forest Service's shortcomings in tracking of the costs associated with its timber sales program--such as obligations and expenditures for personnel and equipment--have been the subject of several of our previous reports. In 2001 we reported that serious accounting and financial reporting deficiencies precluded an accurate determination of the total costs associated with the timber sales program and, in fact, rendered the agency's cost information unreliable. In 2003, we reported that it was unclear how accurately the agency would be able to report on the actual costs of individual work activities. And more recently, in 2007, we reported that the Forest Service tracks the funds it spends on timber sales in a way that does not provide the detail that many field managers, such as district rangers and national forest supervisors, said they need in order to make management decisions--for example, deciding how to allocate or redirect resources among sales. The agency does not track timber sales- related obligation or expenditure data by individual sale but rather aggregates these data by the programs that fund the sales. Neither does it track obligations and expenditures at the ranger district level, where timber sales are generally carried out, but tracks them instead at the national forest level--making it more difficult and resource intensive for field managers to oversee activities occurring in their units. Limited cost data also hampered the agency's implementation of the competitive-sourcing program, as we reported in 2008. Competitive sourcing is aimed at promoting competition between federal entities and the private sector by comparing the public and private costs of performing certain activities (typically those performed in both government and the commercial marketplace, such as information technology, maintenance and property management, and logistics) and determining who should perform those activities. Although Congress had limited the funds the Forest Service could spend on competitive-sourcing activities, we found that for fiscal years 2004 through 2006, the Forest Service lacked sufficiently complete and reliable cost data to determine whether it had exceeded these congressional spending limitations. Additionally, the Forest Service did not consider certain costs in calculating competitive- sourcing savings and as a result could not provide Congress with an accurate measure of the savings produced by its competitive-sourcing program during this time. We recommended that the agency take several actions to improve its management of the program. The program's future, however, now appears uncertain. Over the years, the Forest Service has struggled to provide adequate financial and performance accountability. Regarding financial accountability, the agency has had shortcomings in its internal controls and has had difficulty generating accurate financial information. Regarding its performance, the agency has not always been able to provide Congress and the public with a clear understanding of what its 30,000 employees accomplish with the approximately $5 billion the agency receives every year. Our long-standing concerns over the Forest Service's financial accountability resulted in our including the agency in our High-Risk Series from 1999 through 2004, citing, among other issues, "a continuing pattern of unfavorable conclusions about the Forest Service's financial statements." We also had concerns about internal control weaknesses within the agency; in a 2003 report, we noted that internal control weaknesses in the Forest Service's purchase card program--under which purchase cards are issued to federal employees to make official government purchases--left the agency vulnerable to, and in some cases resulted in, improper, wasteful, or questionable purchases. Subsequently, in a 2008 report, we noted that internal control weaknesses continued and that from 2000 through 2006 a Forest Service employee had embezzled over $642,000 from the Forest Service's national fire suppression budget. Another area where we have raised concerns about the agency's internal controls is in the Recreational Fee Demonstration Program, under which the Forest Service and other agencies can collect fees for using agency sites, including entrance fees for basic admission to an area and user fees for specific activities such as camping or boat launching. We reported in 2006 that the Forest Service not only lacked adequate controls and accounting procedures over collected recreation fees, but also lacked effective guidance even for establishing such controls. The agency has since updated its policies and procedures for handling collected recreation fees, although we have not evaluated their implementation. We removed the Forest Service from our high-risk list in 2005 in response to its efforts to resolve many of the financial management problems we identified. Nevertheless, the agency continues to struggle with financial accountability. In 2007, the Department of Agriculture's Inspector General reported that significant deficiencies existed in the Forest Service's ability to produce accurate financial information; in 2008, the Inspector General reported that certain deficiencies had been corrected but that others remained--including the agency's failure to comply with the Federal Financial Management Improvement Act of 1996. As with financial accountability, our concerns about the Forest Service's performance accountability shortcomings date back over a decade. In 2003 we reported that the agency had made little real progress in resolving its long-standing performance accountability problems--which included its inability to link planning, budgeting, and results reporting--and was years away from implementing a credible performance accountability system. We concluded that the agency was essentially in the same position it had been in more than a decade earlier--studying how it might achieve performance accountability. We recommended that the agency appoint a senior executive with decision-making authority and responsibility for developing a comprehensive plan to ensure the timely implementation of an effective performance accountability system and that the agency report annually to Congress on its progress in implementing such a system. While the agency responded that it would follow our recommendations, problems persisted; in our 2007 survey of federal managers' use of performance information in management decision making, the Forest Service scored lowest of 29 federal agencies and components we surveyed in six of nine key management activities. Equally troubling are our survey findings related to leadership commitment to results-oriented management, which we have identified as perhaps the single most important element in successfully implementing organizational change. In our survey, we asked federal managers about their views on agency leadership's commitment to using performance information to guide decision making. Only 21 percent of Forest Service managers we surveyed agreed that their agency's leadership demonstrated such a commitment to a great or very great extent, compared with 50 percent of their counterparts in the rest of the federal government. More recent work by the Department of Agriculture's Inspector General noted that the Forest Service continues to need improvements in its management controls to effectively manage resources, measure progress toward goals and objectives, and accurately report accomplishments. In fact, in 2008--only 7 months ago, and more than 5 years after our 2003 report on the problem--the Inspector General echoed our earlier findings, stating, "Some of these issues have been reported in multiple reports for over a decade, but their solutions are still in the study and evaluation process by ." Several emerging issues are likely to have profound implications for the agency, complicating its management responsibilities and underscoring the importance of addressing the management challenges we have highlighted so that the agency is well positioned to meet these new issues. Among the most significant: Climate change. In August 2007, we reported that according to experts, federal land and water resources are vulnerable to a wide range of effects from climate change, some of which are already occurring. These effects include, among others, (1) physical effects, such as droughts, floods, glacial melting, and sea level rise; (2) biological effects, such as increases in insect and disease infestations, shifts in species distribution, and changes in the timing of natural events; and (3) economic and social effects, such as adverse impacts on tourism, infrastructure, fishing, and other resource uses. These effects are also likely to lead to increased wildland fire activity. We noted that federal resource managers, including those at the Forest Service, had not yet made climate change a high priority and recommended that the Secretary of Agriculture (along with Interior and the Department of Commerce) develop clear, written communication to resource managers that explains how managers are expected to address the effects of climate change, identifies how managers are to obtain any site-specific information that may be necessary, and reflects best practices shared among the relevant agencies. The Forest Service has since issued guidance on incorporating climate change information in land management planning activities. Increased human settlement in or near wildlands. Rapid development in the outlying fringe of metropolitan areas and in rural areas is increasing the size of the wildland-urban interface, defined as the area where structures and other human development meet or intermingle with undeveloped wildland. Experts estimate that almost 60 percent of all new housing units built in the 1990s were located in the wildland-urban interface and that this growth trend continues. They also estimate that more than 30 percent of housing units overall are located in the wildland- urban interface, including about 44 million homes in the lower 48 states, and that the interface covers about 9 percent of the nation's land. This development has significant implications for wildland fire management because it places more structures at risk from wildland fire at the same time that it increases the complexity and cost of wildland fire suppression. Other land management challenges result as well; for example, as we reported in 2008, private subdivisions may seek access across public lands via roads that were not designed for public use, complicating agency management of those lands. And researchers have also noted that the wildland-urban interface is an area of widespread habitat fragmentation, introduction of invasive species, and biodiversity loss, further adding to the agency's land management challenges. The aging of the federal workforce. Earlier this year we reported on the looming challenge facing federal agencies as retirements of federal workers threaten to leave critical gaps in leadership and institutional knowledge. In fact, we reported that about one-third of federal career employees on board at the end of fiscal year 2007 were eligible to retire by 2012, a trend especially pronounced among the agencies' executives and supervisors--with nearly two-thirds of career executives projected to be eligible for retirement by 2012. Facing such a potential exodus of its most experienced employees, the Forest Service--like other federal agencies-- will need to focus on strategic workforce planning to help forecast who might retire, when they might retire, and the impact of their retirement on the agency's mission and, using this information, develop appropriate strategies to address workforce gaps. Our nation's long-term fiscal condition. We have reported that our nation, facing large and growing structural deficits, is on an unsustainable long-term fiscal path. As a result, all federal agencies may be called upon to carry out their responsibilities with static or even shrinking budgets over the long term--making it especially important that the Forest Service address the challenges we have identified and ensure that it is spending its limited budget effectively and efficiently. Effective and efficient spending will also be critical in the short term, as the agency identifies projects to undertake with funds provided under the American Recovery and Reinvestment Act of 2009. Mr. Chairman, these issues are not new. In fact, not only are we repeating many of the same issues we have brought up over the years, but some of our concerns date back well over a decade. The Forest Service's mission is, without question, a difficult one: managing millions of acres of diverse lands for often competing purposes while ensuring that current uses do not impair long-term productivity. This is an enormous and complex task, and we do not seek to minimize its difficulty. Nevertheless, the repetitive and persistent nature of the shortcomings we and others have surfaced over the years points to the Forest Service's failure to fully resolve-- perhaps even to fully grasp--its problems. Absent better data, better internal controls and accountability, and a more strategic approach to wildland fire, the agency cannot hope to improve upon its performance-- and may ultimately be unable to respond effectively to the new challenges it faces. If, on the other hand, the Forest Service is to face these challenges head-on, it will require a sustained commitment by agency leadership to rooting out and resolving the agency's long-standing problems. As a new administration takes office and begins to chart the agency's course, it will be important for Congress and the Forest Service to remain vigilant in focusing on these issues. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Steve Gaty, Assistant Director; David P. Bixler; Arthur W. Brouk; Andrea Wamstad Brown; Ellen W. Chu; Laura Craig; Elizabeth Curda; Jonathan Dent; Charles T. Egan; Barry Grinnell; Richard P. Johnson; and Jack Warner. Wildland Fire Management: Interagency Budget Tool Needs Further Development to Fully Meet Key Objectives. GAO-09-68. Washington, D.C.: November 24, 2008. Wildland Fire Management: Federal Agencies Lack Key Long- and Short- Term Management Strategies for Using Program Funds Effectively. GAO-08-433T. Washington, D.C.: February 12, 2008. Wildland Fire Management: Better Information and a Systematic Process Could Improve Agencies' Approach to Allocating Fuel Reduction Funds and Selecting Projects. GAO-07-1168. Washington, D.C.: September 28, 2007. Wildland Fire Management: Lack of Clear Goals or a Strategy Hinders Federal Agencies' Efforts to Contain the Costs of Fighting Fires. GAO-07-655. Washington, D.C.: June 1, 2007. Wildland Fire Management: Update on Federal Agency Efforts to Develop a Cohesive Strategy to Address Wildland Fire Threats. GAO-06-671R. Washington, D.C.: May 1, 2006. Wildland Fire Management: Important Progress Has Been Made, but Challenges Remain to Completing a Cohesive Strategy. GAO-05-147. Washington, D.C.: January 14, 2005. Wildland Fires: Forest Service and BLM Need Better Information and a Systematic Approach for Assessing the Risks of Environmental Effects. GAO-04-705. Washington, D.C.: June 24, 2004. Wildfire Suppression: Funding Transfers Cause Project Cancellations and Delays, Strained Relationships, and Management Disruptions. GAO-04-612. Washington, D.C.: June 2, 2004. Wildland Fire Management: Additional Actions Required to Better Identify and Prioritize Lands Needing Fuels Reduction. GAO-03-805. Washington, D.C.: August 15, 2003. Western National Forests: A Cohesive Strategy Is Needed to Address Catastrophic Wildfire Threats. GAO/RCED-99-65. Washington, D.C.: April 2, 1999. Federal Land Management: Use of Stewardship Contracting Is Increasing, but Agencies Could Benefit from Better Data and Contracting Strategies. GAO-09-23. Washington, D.C.: November 13, 2008. Forest Service: Better Planning, Guidance, and Data Are Needed to Improve Management of the Competitive Sourcing Program. GAO-08-195. Washington, D.C.: January 22, 2008. Federal Timber Sales: Forest Service Could Improve Efficiency of Field- Level Timber Sales Management by Maintaining More Detailed Data. GAO-07-764. Washington, D.C.: June 27, 2007. Managerial Cost Accounting Practices: Department of Agriculture and the Department of Housing and Urban Development. GAO-06-1002R. Washington, D.C.: September 21, 2006. Wildland Fire Rehabilitation and Restoration: Forest Service and BLM Could Benefit from Improved Information on Status of Needed Work. GAO-06-670. Washington, D.C.: June 30, 2006. Forest Service: Better Data Are Needed to Identify and Prioritize Reforestation and Timber Stand Improvement Needs. GAO-05-374. Washington, D.C.: April 15, 2005. Financial Management: Annual Costs of Forest Service's Timber Sales Program Are Not Determinable. GAO-01-1101R. Washington, D.C.: September 21, 2001. Government Performance: Lessons Learned for the Next Administration on Using Performance Information to Improve Results. GAO-08-1026T. Washington, D.C.: July 24, 2008. Governmentwide Purchase Cards: Actions Needed to Strengthen Internal Controls to Reduce Fraudulent, Improper, and Abusive Purchases. GAO-08-333. Washington, D.C.: March 14, 2008. Recreation Fees: Agencies Can Better Implement the Federal Lands Recreation Enhancement Act and Account for Fee Revenues. GAO-06-1016. Washington, D.C.: September 22, 2006. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. Department of Agriculture: Status of Efforts to Address Major Financial Management Challenges. GAO-03-871T. Washington, D.C.: June 10, 2003. Forest Service Purchase Cards: Internal Control Weaknesses Resulted in Instances of Improper, Wasteful, and Questionable Purchases. GAO-03-786. Washington, D.C.: August 11, 2003. Forest Service: Little Progress on Performance Accountability Likely Unless Management Addresses Key Challenges. GAO-03-503. Washington, D.C.: May 1, 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1999. Older Workers: Enhanced Communication among Federal Agencies Could Improve Strategies for Hiring and Retaining Experienced Workers. GAO-09-206. Washington, D.C.: February 24, 2009. Proposed Easement Amendment Agreement between the Department of Agriculture and Plum Creek Timber Co. B-317292. Washington, D.C.: October 10, 2008. Long-Term Fiscal Outlook: Long-Term Federal Fiscal Challenge Driven Primarily by Health Care. GAO-08-912T. Washington, D.C.: June 17, 2008. Climate Change: Agencies Should Develop Guidance for Addressing the Effects on Federal Land and Water Resources. GAO-07-863. Washington, D.C.: August 7, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Forest Service, within the Department of Agriculture, manages over 190 million acres of forest and grassland. The agency is responsible for managing its lands for various purposes--including recreation, grazing, timber harvesting, and others--while ensuring that such activities do not impair the lands' long-term productivity. Carrying out these often competing responsibilities has been made more difficult by the increasing cost of wildland fires and the budgetary constraints necessitated by our nation's long-term fiscal outlook. This testimony highlights some of the major management challenges the Forest Service faces in carrying out its land management responsibilities. It is based on numerous reports GAO has issued on a wide variety of the agency's activities. While the Forest Service has made improvements in many areas GAO has reported on in recent years, certain management challenges persist--with the agency struggling to manage a worsening wildland fire problem and spiraling fire costs, collect data on its activities and their costs, and demonstrate financial and performance accountability to Congress and the public. Several emerging issues facing the agency underscore the urgency of addressing these challenges. The Forest Service continues to lack strategies for using its wildland fire management funds effectively. In numerous reports over the past decade, GAO has highlighted the challenges the Forest Service faces in protecting the nation against the threat of wildland fires. While the agency has taken important steps to improve its wildland fire management, other key steps remain. Specifically, the agency needs to (1) develop a cohesive strategy laying out various potential long-term approaches for addressing wildland fire, the estimated costs associated with each approach, and the trade-offs involved; (2) establish clear goals and a strategy to help contain increasing wildland fire costs; (3) continue improving its processes for allocating funds and selecting projects to reduce potentially hazardous vegetation; and (4) take steps to improve its use of a new interagency budgeting and planning tool. Program management suffers from lack of data on activities and costs. GAO's work over the years points to a persistent shortcoming in the Forest Service's management of its activities: the lack of adequate data on program activities and costs. This shortcoming spans multiple land management programs, including programs for selling timber and rehabilitating and reforesting lands that have been burned, as well as administrative functions such as the competitive sourcing program, which aims to increase competition between federal entities and private sector organizations. Inadequate data have hindered field managers in carrying out their duties and prevented the agency from understanding how much its activities are costing. Financial and performance accountability have been inadequate. The Forest Service has struggled to implement adequate internal controls over its funds, generate accurate financial information, and provide clear measures of what it accomplishes with the appropriations it receives every year. GAO's concerns about these issues date back to the 1990s but have yet to be fully addressed. Several emerging issues underscore the need for the Forest Service to improve its management. The evolving effects of climate change, increasing development in and near wildlands, the aging of the federal workforce, and our nation's long-term fiscal condition likely will have profound implications for the agency and magnify the urgency of addressing these challenges.
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With respect to its workload and workforce, EPA has struggled for years to identify its human resource needs and to deploy its staff throughout the agency in a manner that would do the most good. In 2010, we reported that rather than establishing a process for budgeting and allocating human resources that fully considered the agency's workload, EPA requested funding and staffing through incremental adjustments based largely on historical precedent. We noted that the agency had not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. Moreover, EPA's human capital management systems had not kept pace with changing legislative requirements and priorities, changes in environmental conditions in different regions of the country, and the much more active role that states now play in carrying out the day-to-day activities of federal environmental programs. We recommended, among other things, that EPA link its workforce plan to its strategic plan and establish mechanisms to monitor and evaluate its workforce planning efforts. EPA generally agreed with these recommendations. Our recent work has also identified additional challenges related to workload and workforce management. For example, in July 2011, we reported that EPA had made considerable progress in meeting goals to contain and control contamination at high-risk hazardous waste sites. We also reported, however, that EPA had not rigorously analyzed its remaining workload or the resources it needed to meet its cleanup goals. We recommended that EPA assess its remaining cleanup workload, determine whether the program has adequate resources, and take steps to reallocate its resources or revise its goals. An assessment could also help EPA develop budget estimates and requests that align with program needs. EPA agreed with the recommendation. Also in July 2011, we identified challenges EPA faces in managing its laboratories and its related workforce. EPA operates a laboratory enterprise consisting of 37 laboratories housed in 170 buildings and facilities located in 30 cities across the nation. We reported that EPA had not fully addressed findings and recommendations of independent evaluations of its science activities dating back to 1992 and that its laboratory activities were largely uncoordinated. We also found that, consistent with our 2010 report on workforce planning, EPA did not use a comprehensive planning process for managing its laboratories' workforce. Specifically, we reported that EPA did not have basic information on its laboratory workload and workforce, including demographic data on the number of federal and contract employees working in its laboratories. Without such information, we reported, EPA could not successfully undertake succession planning and management to help the organization adapt to meet emerging and future needs. Because of the challenges identified in this report, we made recommendations to address workforce and workload planning decisions. EPA generally agreed with our findings and recommendations. In September 2010, we reported on EPA's library network and found that EPA had not completed a plan identifying an overall strategy for its libraries, implementation goals, or a timeline. EPA had developed a draft strategic plan, but it did not describe how funding decisions were made. We reported that setting out details for such decisions, to ensure that they are informed and transparent, was especially important because of the decentralized nature of the library network. We recommended, among other things, that EPA complete its strategic plan for the library network, including implementation goals and timelines. As part of this effort, we recommended that EPA outline details for how funding decisions were to be made to ensure they are informed and transparent. EPA concurred with our recommendations. Finally, our July 2011 report on EPA laboratories also identified challenges related to EPA's management of its real property. Federal real property management is an area we have identified as part of our high- risk series because of long-standing problems with over reliance on leasing, excess and underused property, and protecting federal facilities. The need to better manage federal real property was underscored in a June 2010 presidential memorandum that directed agencies to accelerate efforts to identify and eliminate excess properties to help achieve a total of $3 billion in cost savings by 2012. In July 2010 EPA reported to the Office of Management and Budget (OMB) that it did not anticipate the disposal of any of its owned laboratories and major assets in the near future because these assets were fully used and considered critical for the mission of the customer and agency as a whole. However, we found that EPA did not have accurate and reliable information called for by OMB on (1) the need for facilities, (2) property use, (3) facility condition, and (4) facility operating efficiency, to inform such a determination. We made several recommendations for EPA to improve its physical infrastructure and real property planning, including improving the completeness and reliability of operating-cost and other data needed to manage its real property and report to external parties. EPA concurred with the recommendations. EPA relies on other federal and state agencies to help implement its programs. Given the federal deficit and the government's long-term fiscal challenges, it is important that EPA improve coordination with its federal and state partners to reduce administrative burdens, redundant activities, and inefficient uses of federal resources. We have identified key practices for enhancing and sustaining collaboration among federal agencies, such as establishing the roles and responsibilities of collaborating agencies; leveraging their resources; and establishing a process for monitoring, evaluating, and reporting to the public on the results of collaborative efforts. In a September 2011 report on Chesapeake Bay restoration efforts, for example, we found that federal and state agencies were not working toward the same strategic goals. We also surveyed federal officials who said that some form of collaboration was necessary to achieve the goals of a strategy for protecting and restoring the Chesapeake Bay watershed. This collaboration could be between federal agencies, federal and state agencies, or federal agencies and other entities. We recommended, among other things, that EPA work with federal and state stakeholders to develop common goals and clarify plans for assessing progress. EPA generally agreed with the recommendations. In an August 2011 report on pharmaceuticals in drinking water, we found that an interagency work group of eight federal agencies (including EPA) tasked with developing a better understanding of the risks from pharmaceuticals in drinking water and identifying areas for future federal collaboration had disbanded in 2009 without producing a final report. We also reported that EPA coordinated informally with the Food and Drug Administration and the United States Geological Survey to collect data that could support regulatory decisions, but it did not have a formal mechanism for sustaining this collaboration in the future. We recommended that EPA establish a work group or formal mechanism to coordinate research on pharmaceuticals in drinking water. EPA agreed with the recommendation. In a 2009 report on rural water infrastructure, we reported that, from fiscal years 2000 through 2008, EPA and six federal agencies obligated $1.4 billion for drinking water and wastewater projects to assist communities in the U.S.-Mexico border region. We found that the agencies' efforts to fund these projects were ineffective because the agencies, except the Indian Health Service, had not comprehensively assessed the region's needs and did not have coordinated policies and processes for selecting and building projects. As a result, we suggested that Congress consider establishing an interagency task force to develop a plan for coordinating funding to address the region's most pressing needs. Related to our findings on interagency coordination issues, our past and present work seeks to assist Congress and federal agencies in identifying actions needed to reduce duplication, overlap, and fragmentation; achieve cost savings; and enhance revenues. In March 2011, we issued our first annual report to Congress in response to a new statutory requirement that GAO identify federal programs, agencies, offices, and initiatives--either within departments or government-wide--which have duplicative goals or activities. The report identified 34 areas where agencies, offices, or initiatives had similar or overlapping objectives or provided similar services to the same populations or where government missions were fragmented across multiple agencies or programs. The report also identified 47 additional areas--beyond those directly related to duplication, overlap, or fragmentation--offering other opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue to the Treasury. With respect to EPA, the report included our findings on rural water infrastructure, as well as the agency's role in duplicative efforts to support domestic ethanol production. Related to the statutory requirement that GAO identify and report on federal programs, agencies, offices, and initiatives with duplicative goals or activities, we are monitoring developments in the areas already identified and will address any additional significant instances of duplication as well as opportunities for cost savings in future annual reports. We are developing a methodology to ensure that we conduct a systematic review across the federal government and report on the most significant instances of duplication, overlap, or fragmentation through the issuance of annual reports in 2012 and 2013, as well as the report we issued in March 2011. Our 2012 and 2013 reports will include the results of present and planned work related to EPA. In addition to our published work, we periodically assist appropriations and authorizing committees by reviewing agency budget justification documents. To this end, we review agencies' budget requests, conduct selected analyses, and evaluate the support for and adequacy of agencies' justifications for these requests. We often review the justification for programs of congressional interest, new programs and initiatives, and existing programs and practices. We typically provide the results of our analysis in data sheets or briefings to appropriating and authorizing committees. Over the years, our periodic review of EPA's budget justification documents has led to two recurring observations. First, EPA has not consistently provided detailed justification for its activities when requesting new or expanded funding. In some cases, we have noted that such requests have not included (1) clear justification for the amount of funding requested or a detailed description of the type and scope of activities the funding would support, or (2) information on the management controls, such as a schedule for spending the requested funds, EPA would use to ensure the efficient and effective use of requested funding. Second, our reviews have often focused on the agency's efforts to make use of unliquidated balances, or those funds that have been appropriated and properly obligated but not expended. In particular, this situation results from circumstances where no-year budget authority was obligated to a contract, grant, or interagency agreement that has expired with some level of funding remaining unexpended. Over the years, we have encouraged EPA to recover these unliquidated amounts through a process known as "deobligation." When EPA deobligates funds from expired contracts, grants, or interagency agreements, it can "recertify" and re-use these funds, subject to certain restrictions, assuming the amounts have not expired and remain available for new obligations. Use of recertified funds can offset some need for new funding. Over the years, we have observed that EPA has made progress in its efforts to recover unliquidated funds from expired contracts, grants, and interagency agreements. For example, in 2010, EPA deobligated and recertified about $163 million, primarily in its Superfund, State and Tribal Assistance Grants, and Leaking Underground Storage Tanks accounts. While we have observed progress in recovering these funds, we have also observed that EPA's budget justification documents do not describe the amount of deobligated and recertified funding available for new obligations. We have also observed that such information could be useful to Congress because the availability of recertified amounts could partially offset the need for new funding. Chairman Stearns, Ranking Member DeGette, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact David Trimble 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. Contributors to this testimony include Michael Hix (Assistant Director), Ross Campbell, Ellen W. Chu, Tim Guinane, Kristin Hughes, Karen Keegan, Felicia Lopez, Jamie Meuwissen, and Cheryl Peterson. 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 Environmental Protection Agency (EPA) faces a number of management and budgetary challenges, which are particularly important as Congress seeks to decrease the cost of government while improving its performance. EPA operates in a highly complex and controversial regulatory arena, and its policies and programs affect virtually all segments of the economy, society, and government. From fiscal years 2000 through 2010, the agency's budget rose in nominal terms from $7.8 billion to $10.4 billion, but has remained relatively flat over this period in real terms. This testimony highlights some of the major management challenges and budgetary issues facing a range of EPA programs and activities today. This testimony focuses on (1) management of EPA's workload, workforce, and real property; (2) coordination with other agencies to more effectively leverage limited resources; and (3) observations on the agency's budget justifications. This testimony is based on prior GAO products and analysis.. Recent GAO work has identified challenges with EPA's efforts to manage its workload, workforce, and real property and made recommendations to address these challenges. In 2010, GAO reported that EPA had not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. GAO recommended, among other things, that EPA link its workforce to its strategic plan and establish mechanisms to monitor and evaluate their workforce planning efforts. A 2011 review of EPA's efforts to control contamination at hazardous waste sites found that the program was making progress toward its goals but that EPA had not performed a rigorous analysis of its remaining workload to help inform budget estimates and requests in line with program needs. Regarding real property management--an area that GAO has identified as part of its high-risk series--GAO reported that EPA operated a laboratory enterprise consisting of 37 laboratories housed in 170 buildings and facilities in 30 cities. GAO found that EPA did not have accurate and reliable information on its laboratories to respond to a presidential memorandum directing agencies to accelerate efforts to identify and eliminate excess properties. The report recommended that EPA address management challenges, real property planning decisions, and workforce planning. GAO has reported on opportunities for EPA to better coordinate with other federal and state agencies to help implement its programs. Given the federal deficit and the government's long-term fiscal challenges, it is important that EPA improve its coordination with these agencies to make efficient use of federal resources. In a September 2011 report on the Chesapeake Bay, GAO found that federal and state agencies were not working toward the same strategic goals and recommended that EPA establish a working group or formal mechanism to develop common goals and clarify plans for assessing progress. In a 2009 report on rural water infrastructure, GAO reported that EPA and six other federal agencies had funded water and wastewater projects in the U.S.-Mexico border region. GAO suggested that Congress consider establishing an interagency task force to develop a plan for coordinating this funding. These findings were included in GAO's March 2011 report to Congress in response to a statutory requirement for GAO to identify federal programs with duplicative goals or activities. Periodic GAO reviews of EPA's budget justifications have led to two recurring observations. First, with respect to proposals for new or expanded funding that GAO has examined, EPA has not consistently provided clear justification for the amount of funding requested or information on the management controls that the agency would use to ensure the efficient and effective use of requested funding. Second, GAO's reviews have found that EPA's budget justification documents do not provide information on funds from appropriations in prior years that were not expended and are available for new obligations. Such information could be useful to Congress because these funds could partially offset the need for new funding. The work cited in this testimony made a number of recommendations intended to address management and related budget challenges, including improving the agency's workforce and workload planning, as well as its coordination with other federal agencies. EPA generally agreed with these recommendations.
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DOD and the military services classify TWVs by weight or payload capacity into three categories--light, medium, and heavy--although the definitions of each class vary among the services. Each class generally includes multiple variants or models built on a common chassis. For example, the Army's FMTV consists of 2.5- and 5-ton capacity trucks, each with the same chassis and includes cargo, tractor, van, wrecker, and dump truck variants. Table 1 lists the TWVs acquired by the military services over five fiscal years, fiscal years 2007 through 2011. Requirements for TWVs have evolved over the last decade, in part, due to the operational threats encountered in Afghanistan and Iraq. TWVs were traditionally viewed as utility vehicles that required little armor because the vehicles operated behind the front lines. However, the tactics used against forces in these countries dictated that vehicles needed more protection. For example, the HMMWV was conceived and designed to support operations in relatively benign environments behind the front line, but it proved to be highly vulnerable to attacks from improvised explosive devices, rocket-propelled grenades, and small arms fire when it was required to operate in urban environments. As a result, DOD identified an urgent operational need for armored tactical vehicles to increase crew protection and mobility of soldiers. Although the initial solution--the Up- Armored HMMWV--provided greater protection, the enemy responded by increasing the size, explosive force, and type of improvised explosive devices, which were capable of penetrating even the most heavily armored vehicles. Consequently, the Mine Resistant Ambush Protected (MRAP) vehicle was approved in 2007 as a rapid acquisition capability. DOD recognized that no single manufacturer could provide all of the vehicles needed to meet requirements quickly enough, so it awarded contracts to multiple manufacturers. The AECA authorizes the President to control the export of arms, such as TWVs. The authority to promulgate regulations on these items has been delegated to the Secretary of State. State administers arms transfer controls through the International Traffic in Arms Regulations and designates, with the concurrence of DOD, the articles and services deemed to be arms. These arms constitute the United States Munitions List (USML). DOD's TWVs are generally designated as Category VII (Tanks and Military Vehicles) items on the USML. Arms, including TWVs, can be sold and exported to foreign governments through the FMS program or DCS. Under the FMS program, the U.S. government procures items on behalf of eligible foreign governments using the same acquisition process used for its own military needs. While State has overall regulatory responsibility for the FMS program and approves such sales of arms to eligible foreign governments, DOD's Defense Security Cooperation Agency administers the program. Alternatively, the DCS process allows foreign governments to directly negotiate with and purchase arms from U.S. manufacturers. For TWVs controlled on the USML, manufacturers must generally apply for an export license to State's Directorate of Defense Trade Controls, which authorizes the export of arms to foreign governments. State officials assess all arms export requests through the FMS program and DCS license applications against 12 criteria specified in the Conventional Arms Transfer Policy, as summarized in table 2. DOD officials assess the technical risks of the sensitive or classified electronic equipment associated with the sale of TWVs to foreign governments, including the type of armor, sensors or weapons attached to the vehicle, and any signature information. Aside from these technologies, State and DOD officials said the departments generally consider the technology associated with TWVs comparable to commercially available trucks and do not have any additional policies pertaining to the sale of TWVs to foreign governments. In accordance with the AECA, recipient countries of arms, including TWVs, must generally agree to a set of U.S. arms transfer conditions, regardless if sold through the FMS program or DCS. The conditions include agreeing to use the items only for intended purposes without modification, not to transfer possession to anyone not an agent of the recipient country without prior written consent of the U.S. government, and to maintain the security of any defense article with substantially the same degree of protection afforded to it by the U.S. government. To ensure compliance with these conditions, recipient countries must permit observation and review by U.S. government representatives on the use and possession of U.S. TWVs and other arms. While the majority of TWVs that DOD purchases are regulated on the USML, a small number that lack armor, weapons, or equipment that would allow armor or weapons to be mounted are considered to be dual- use items--having both commercial and military applications. These items are controlled under the Export Administration Act of 1979, which established Commerce's authority to control these items through its Export Administration Regulations and Commerce Control List. On the Commerce Control List, DOD's TWVs are generally designated as Category 9 (Propulsion Systems, Space Vehicles, and Related Equipment) items. For DCS of such items, U.S. manufacturers must comply with the Export Administration Regulations to determine if an export license from the Commerce's Bureau of Industry and Security is required. The U.S. TWV industrial base includes seven vehicle manufacturers, over 90 major subsystem suppliers, and potentially thousands of parts and component suppliers. Four of the seven manufacturers provided approximately 92 percent of all TWVs purchased by DOD in fiscal years 2007 through 2011. Figure 1 identifies the manufacturers, the vehicles they produced, and the percent of all vehicles purchased by DOD from each manufacturer in fiscal years 2007 through 2011. Although these manufacturers produced 11 different families of TWVs, which included over 50 vehicle variants, they generally relied on common suppliers for major subsystem components. For example, the manufacturers relied on six or fewer suppliers to provide components, such as engines or tires. In contrast, the manufacturers relied on more than 25 armor suppliers, in part, because there was a shortage of vehicle armor during initial MRAP production. DOD reported that the requirements for armor, in response to the conflicts in Iraq and Afghanistan, provided an opportunity for several suppliers to begin producing armor, which eventually resolved the armor shortage. In addition to these suppliers, manufacturers we met with reported there were potentially thousands of other companies that produced parts for these vehicles. See figure 2 for more information on the number of suppliers that produced major subsystems on DOD's TWVs. DOD purchased over 158,000 TWVs in fiscal years 2007 through 2011 but plans to buy significantly less from now through fiscal year 2017. DOD demands for TWVs increased dramatically in response to the operational demands and threats experienced by U.S. forces during Operation Enduring Freedom and Operation Iraqi Freedom. For example, between fiscal years 1998 through 2001, before these two wars began, Army budget documents indicate plans to purchase approximately 5,000 HMMWVs. After the start of Operation Enduring Freedom, Army budget documents in 2003 reflected an increased requirement for HMMWVs and, at the time, it planned to purchase approximately 23,000 though fiscal year 2009. However, after Operation Iraqi Freedom began, the need for HMMWVs increased further and the Army reported that it ultimately purchased approximately 64,000 between 2003 through 2009. As U.S. forces began to draw down from the conflicts in Iraq and Afghanistan, DOD's operational requirements for TWVs declined. For example, while DOD bought over 100,000 TWVs in fiscal years 2007 and 2008, DOD plans to purchase less than 1,000 TWVs in fiscal years 2015 and 2016. In all, DOD plans to purchase approximately 8,000 TWVs in fiscal years 2012 through 2017, as shown in figure 3. Future defense budgets will likely constrain new vehicle purchases and the size of a fleet the military services will be able to sustain. Army officials told us that it would cost approximately $2.5 billion per year to sustain its current fleet of approximately 260,000 TWVs and meet any new TWV requirements. Officials stated, however, that the Army can no longer afford and does not need such a sized fleet, in part, due to budget cuts and potential force structure changes. The Army is re-evaluating how many TWVs it needs and can afford, which will be outlined in a revised TWV strategy. In developing this revised strategy, Army officials recognize that the Army has a relatively young fleet of TWVs, averaging 9 years of age, many of which will be part of its fleet through 2040. While this revised strategy has not been completed, the Army has already made changes to reduce its TWV costs. For example, in February 2012 the Army reduced the number of FMTVs it planned to purchase by approximately 7,400 vehicles. At that time, the Army also terminated a HMMWV modernization effort, known as the Modernized Expanded Capability Vehicle, which was intended to improve vehicle performance and crew protection on over 5,700 HMMWVs. Officials stated that this effort was terminated, in part, because of DOD-wide funding constraints. Army officials estimate that these actions will result in a total savings of approximately $2.7 billion in fiscal years 2013 through 2017. Furthermore, Army officials stated that the Army plans to reduce the size of its TWV fleet to match force structure requirements. They also stated that, as of July 2012, the Army plans to reduce its total fleet by over 42,000 vehicles. Officials added that more vehicles could be divested depending on any future force structure changes and budget constraints. Despite budget constraints, the industrial base will have some opportunities over the next several years to produce a new TWV for DOD. The Joint Light Tactical Vehicle (JLTV) is a new DOD program, designed to fill the gap between the HMMWV and MRAP by providing near-MRAP level protection while maintaining all-terrain mobility. As we previously reported, the Army and Marine Corps are pursuing a revised developmental approach for JLTV and awarded technology development contracts to three industry teams. The program completed the technology development phase in January 2012. Last month, the Army awarded three contracts for the JLTV's engineering and manufacturing development phase. While production contracts will not be awarded for some time, DOD reports that it plans to purchase approximately 55,000 JLTVs over a 25-year period with full rate production beginning in fiscal year 2018. With production of other TWVs for DOD largely coming to an end in fiscal year 2014, DOD considers the JLTV program to be critical in maintaining an industrial base to supply TWVs to the military. In addition to new production, the Army and Marine Corps also plan to invest in sustainment efforts that could be completed by the U.S. TWV industrial base. These efforts include restoring or enhancing the combat capability of vehicles that were destroyed or damaged due to combat operations. For example, Marine Corps officials reported that it plans to recapitalize approximately 8,000 HMMWVs beginning in fiscal year 2013. In addition, the Army is in the process of resetting the portion of its FMTV fleet that was deployed through at least fiscal year 2017 as well as recapitalizing some of its heavy TWVs. Despite the significant decrease in DOD TWV purchases, the four manufacturers we met with generally reported that these sales remain an important part of their revenue stream. However, there is a wide range in the degree to which the manufacturers were reliant on DOD in a given year. For example, as shown in table 3, one manufacturer reported that for 2007 its revenue from sales to DOD accounted for 4 percent of its total revenue while another manufacturer reported such revenue was as high as 88 percent, with the other two manufacturers falling within that range. Among the four manufacturers, the extent of reliance on revenue from DOD sales varied, in part, because of vehicles sold in the commercial truck and automotive sectors. Aside from producing TWVs, manufacturers produced or assembled commercial vehicles, such as wreckers, fire trucks, school buses, and handicap-accessible taxis, as well as vehicle components, such as engines, transmissions, and suspensions. According to the four manufacturers, their suppliers of TWV major subsystem components generally produced items in the commercial automotive and truck industries. For example, according to manufacturers, suppliers generally produced parts, such as engines, transmissions, axles, and tires for their commercial vehicles in addition to supplying parts for the TWVs they produce. However, vehicle armor, a major TWV component, is primarily a defense-unique item and those suppliers were not typically used in the manufacturers' commercial vehicles. DOD currently has several studies under way to better understand the U.S. TWV industrial base, its capabilities, and how declining DOD sales may affect it. In 2011, DOD's Office of Manufacturing and Industrial Base Policy began a multifaceted review of the U.S. TWV industrial base that includes surveying suppliers, conducting site visits, and paneling experts. The Army's TACOM Life Cycle Management Command also has ongoing studies, including a review to assess the health of the industrial base and others intended to identify its supplier base and any risks associated with sustaining DOD's TWV fleet. Some of the goals of these different studies are to better understand how different vehicle supply chains affect others, identify single point failures in the supply chain, and provide DOD leadership with improved information so they may better tailor future acquisition policies. U.S. manufacturers sold relatively few TWVs for use by foreign governments in fiscal years 2007 through 2011, when compared to the 158,000 vehicles sold to DOD over that same period. However, most of the manufacturers we met with stated that while sales of TWVs to foreign governments have not equaled those sold to DOD, such sales are becoming an increasingly important source of revenue as DOD purchases fewer vehicles. According to data provided by DOD and the four manufacturers, foreign governments purchased approximately 28,000 TWVs, either through the FMS program or through DCS, in fiscal years 2007 through 2011. In addition to these sales to foreign governments, manufacturers reported they exported approximately 5,000 other TWVs that were different vehicles than those DOD purchased during that time period. Nearly all TWVs sold to foreign governments were sold through the FMS program rather than through DCS. DOD reports that about 27,000 TWVs were sold through the FMS program, while the four manufacturers we met with reported that about 700 vehicles were sold through DCS in fiscal years 2007 through 2011.See figure 4 for a comparison of TWVs sold to DOD and to foreign governments through the FMS program and DCS in fiscal years 2007 through 2011. Approximately 95 percent of TWVs purchased through the FMS program from fiscal year 2007 through 2011 were paid for using U.S. government funding through different security and military assistance programs. The U.S. Congress authorizes and appropriates funds for assistance programs that support activities, such as security, economic, and governance assistance in foreign countries. Examples of such assistance programs include the Afghanistan Security Forces Fund and Iraq Security Assistance Fund, which were sources of funding for TWVs purchased for Afghanistan and Iraq through the FMS program. While Afghanistan and Iraq were the largest recipients of U.S. manufactured TWVs through such assistance programs, DOD officials informed us that as the war efforts conclude there, U.S. funding for TWVs for these two countries' security forces has declined and is not planned to continue. In addition, a smaller number of TWVs were sold through the FMS program to countries using their own funds. Figure 5 identifies the countries that purchased the most U.S. manufactured TWVs with U.S. or their own funds through the FMS program. U.S. manufacturers of TWVs and foreign government officials we met with identified a number of interrelated factors that they perceive as affecting whether a foreign government decides to purchase U.S. manufactured TWVs. These included potential future competition from transfers of excess (used) U.S. military TWVs, competition from foreign manufacturers, and differing foreign requirements for TWVs. In addition, these U.S. manufacturers and foreign government officials expressed mixed views on the effect the U.S. arms transfer control regimes may have on foreign governments' decisions to buy U.S. vehicles. These officials said that processing delays and end-use restrictions can influence foreign governments' decisions to buy U.S. TWVs. Despite these issues, foreign government officials said the U.S. arms transfer control regimes would not adversely affect their decisions to purchase a U.S.-manufactured TWV that best meets their governments' requirements. The U.S. manufacturers we met with regard the Army's intent to reduce its TWV fleet size as a risk to their future sales of TWVs to foreign governments. Army officials said it is still assessing its TWV requirements and potential plans to divest over 42,000 vehicles, but they acknowledge that a number of these TWVs could be transferred through the FMS program. The four U.S. manufacturers consider these used vehicles to be a risk to their future sales of U.S. TWVs to foreign governments because foreign governments could be less likely to purchase new vehicles from U.S. manufacturers if the U.S. Army transfers these used vehicles through foreign assistance programs. U.S. manufacturers told us they would like more involvement in DOD's decisions on its plans for these divested vehicles so they may provide input on potential effects on the industrial base. Commerce's Bureau of Industry and Security reviews proposed FMS of divested items to identify effects on the relevant industry. During this review, Commerce provides industry with the opportunity to identify any impacts of the potential FMS on marketing or ongoing sales to the recipient country. When approving these transfers, State and Defense Security Cooperation Agency officials said the U.S. government must also weigh national security and foreign policy concerns, which could outweigh industrial base concerns with transfers of used DOD TWVs to foreign countries. While concerned about the potential for competition from the FMS of these retired vehicles, U.S. manufacturers also view these planned divestitures as a potential to provide repair or upgrade business that could help sustain their production capabilities during a period of low DOD demand. Some manufacturers we met with stated that they would like to purchase DOD's used TWVs, before they are made available to foreign governments, so they may repair or upgrade them and then sell them to foreign governments. DOD is currently reviewing its policies to determine which vehicles, if any, could be sold back to manufacturers. Another manufacturer, while not interested in purchasing the vehicles, expressed interest in providing repair or upgrade services on the used TWVs before they are sold to foreign governments. Defense Security Cooperation Agency officials stated that excess defense articles, such as the used TWVs, are generally made available to foreign governments in "as is" condition and recipient countries are responsible for the cost of any repairs or upgrades they may want to make. They added that in such instances, it could be possible for U.S. manufacturers to perform such services, but it would be at the direction of the purchasing country, not the U.S. government. Foreign government and manufacturer officials that we interviewed identified a number of TWV manufacturers that compete with U.S. manufacturers for international sales. Examples of foreign manufacturers are shown in table 4. Officials from two countries that had not purchased U.S. manufactured TWVs explained that their countries have a well established automotive industrial base capable of producing TWVs that meet their governments' needs. While all of the foreign officials we interviewed reported that their countries had no policies that favor their domestic manufacturers, governments that have not purchased U.S. TWVs generally purchased vehicles from domestic manufacturers. For example, foreign officials from one country said that all of their government's TWVs are assembled within its borders. While all of the competitors to U.S. TWV manufacturers are not headquartered in the purchasing countries, foreign officials reported that many of these companies have established dealer and supplier networks within their countries. Foreign officials reported that these domestic dealer and supplier networks make vehicle sustainment less expensive and more manageable, in part, because it is easier and quicker to obtain replacement parts or have vehicles repaired. In contrast, foreign officials said that U.S. TWV manufacturers do not generally have the same dealer and supplier networks within their countries. They added that this can make maintenance of the U.S. vehicles more expensive, in part, due to the added cost of shipping. In addition to the number of TWV manufacturer competitors, foreign officials also reported that there is limited foreign demand for TWVs. Foreign officials reported that their governments purchase relatively few TWVs compared to the U.S. government, in part, because their fleet size requirements are much smaller. Foreign officials we interviewed reported TWV fleets that ranged in size from 2 to 9 percent the size of the U.S. Army's fleet. For example, foreign officials from one country stated that their military was in the process of upgrading its entire fleet of approximately 7,500 vehicles, which is less than 3 percent of the size of the U.S. Army's TWV fleet. Foreign government officials also explained that U.S. manufacturers can generally produce TWVs to meet their governments' requirements, but the vehicles U.S. TWV manufacturers are producing for DOD do not necessarily align with these requirements. Foreign government officials identified the following areas where their governments' requirements differ from those of DOD: DOD's TWVs are generally larger than what their government can support. For example, officials from one foreign government reported that its military considered purchasing U.S. manufactured MRAP vehicles but did not have the cargo planes required to transport a vehicle the size and weight of DOD's MRAP vehicles. Instead, according to the official, this country purchased a mine and ambush protected vehicle developed by one of its domestic manufacturers that is smaller and lighter than the DOD's MRAP vehicles and better aligned with its transportation capabilities. Their governments do not always require the same level of capabilities afforded by DOD's TWVs and, in some cases, requirements may be met by commercially available vehicles. For example, foreign government officials identified a number of vehicles in their governments' tactical fleets that are based on commercial products from automobile companies such as Jeep and Land Rover. Their governments have different automotive or design standards for military vehicles that do not always align with those produced for DOD by U.S. manufacturers. For example, officials from one country said that their military is required to purchase right-side drive vehicles, which are not always supported by U.S. manufacturers. While their military can obtain a waiver to purchase a left-side drive vehicle, this presents training challenges as the majority of the vehicles in its fleet are right-side drive vehicles. Foreign officials said that while U.S. manufacturers are capable of meeting these requirements, foreign competitors may be more familiar with these requirements. Manufacturers that we interviewed said they produce or are developing TWVs to better meet foreign customers' requirements. For example, one U.S. manufacturer said it was developing a right-side drive variant of one of its vehicles and another manufacturer said that it has a line of TWVs for its international customers that better meets those requirements. U.S. manufacturers and foreign officials expressed mixed views on the effect the U.S. arms transfer control regimes may have on the sale of U.S.-manufactured TWVs to foreign customers. Officials we met with reported that, generally, the U.S. arms transfer control regimes do not inhibit foreign governments from purchasing U.S. manufactured TWVs. Accordingly, we found that once the FMS and DCS process was initiated, no eligible foreign sales or licenses for U.S. TWVs were denied. For example, State officials reported that no countries eligible to participate in the FMS program were denied requests to purchase TWVs in fiscal years 2007 and 2011. Similarly, State DCS license data indicated that no licenses for vehicle purchases were denied from fiscal years 2008 through 2011. While sales of TWVs to foreign governments are generally approved by the U.S. government once initiated, U.S. manufacturers and foreign officials said that foreign governments may prefer to purchase vehicle manufactured outside the United States, in part, due to the amount of time to process sales and licenses requests and end-use restrictions associated with the U.S. arms transfer control regimes. Specifically, manufacturers said the congressional notification process can result in lengthy delays during the FMS and DCS approval process. The AECA requires notification to Congress between 15 and 45 days in advance of its intent to approve certain DCS licenses or FMS agreements. Preceding the submission of this required statutory notification to the U.S. Congress, State provides Congress with an informal review period that does not have a fixed time period for action. One manufacturer stated that this informal review period, in one case, lasted over a year and, after which, the prospective customer decided to not continue with the purchase. Another manufacturer said that the informal congressional notification process is unpredictable because there is no set time limit for review, making it difficult for the manufacturer to meet delivery commitments to foreign customers. State officials acknowledged that the informal congressional notification period can delay the DCS and FMS process because there is no designated time limit for review. According to State officials, the department established a new tiered review process in early 2012 to address this issue by establishing a time bounded informal review period that is based on the recipient country's relationship with the U.S. government. The formal notification period remains unchanged. Foreign officials said when TWVs that meet their governments' requirements are available from manufacturers outside the United States, AECA restrictions on third party transfers and end-use administrative requirements associated with U.S. manufactured vehicles could affect their governments purchasing decisions. Foreign officials explained that there are a number of TWV manufacturers outside the United States that can meet their requirements and vehicles sold by those manufacturers do not necessarily come with the same end-use restrictions as U.S. vehicles. For example, the AECA restricts the transfer of arms, including U.S. manufactured, TWVs to a third party without consent of the U.S. government. Some foreign officials said their governments prefer to use private companies, when possible, to make repairs and maintain its TWV fleet because it can reduce costs compared to government repair work. These foreign officials said that U.S. third party transfer restrictions require that their governments obtain permission from the U.S. government before transferring a U.S. TWV to a private company for repairs, which creates an administrative burden. Additionally, foreign governments are required to maintain information on U.S. TWVs' end-use and possession that must be available to U.S. officials when requested to ensure compliance with U.S. end-use regulations. Foreign officials from one country said the maintenance of this information is an administrative burden and will be more difficult to manage as their government tries to reduce its workforce in a limited budget environment. Foreign officials said that TWVs purchased from manufacturers outside of the Untied States are not generally encumbered with these same restrictions and administrative burdens, making maintenance of these vehicles easier and cheaper, in some cases. State officials acknowledged these concerns from foreign governments but said these restrictions play an important role in protecting U.S. national security interests. Foreign officials reported, however, that the U.S. arms transfer control regimes would not adversely affect their decision to purchase a U.S. vehicle that best meets their governments' requirements in terms of capabilities and cost. Foreign officials said that U.S. manufacturers make vehicles that are reliable and highly capable. When their governments have requirements that align with those associated with U.S. manufactured vehicles, foreign officials said that the U.S. arms transfer control regimes would not be a factor in their governments' decisions to purchase the vehicles. Foreign officials that we interviewed also said their governments are experienced buyers of U.S. arms and are able to successfully navigate the FMS and DCS processes and U.S. end-use restrictions to obtain the military equipment they require. The volume of TWVs DOD purchased to meet operational requirements in Iraq and Afghanistan was unique due to specific threats. Many of these vehicles are no longer needed and DOD's need for new TWVs is expected to decline in coming years. Further, given the current budgetary environment, DOD cannot afford to support the size of its current fleet or buy as many vehicles as it once did. Though U.S. manufacturers increased their production to meet those past needs, they will be challenged in responding to the sharp decline in DOD's TWV requirements in future years. As DOD continues its studies of the U.S. TWV industrial base, it may be better positioned to address these challenges and how DOD can mitigate any risks to sustaining its TWV fleet. It is unlikely that sales to foreign governments will ever offset declines in sales to DOD, but foreign sales may be more important to the industrial base now more than ever. U.S. manufacturers, however, are presented with a number of factors that affect their ability to sell TWVs to foreign governments. While no foreign officials indicated that their governments would not buy U.S. TWVs, there has been relatively limited demand for the vehicles U.S. manufacturers have produced for DOD. Further, there are many foreign manufacturers that can supply vehicles that meet foreign governments' requirements. Each of the U.S. manufacturers we met with was either selling or developing alternative vehicles that better meet foreign governments' requirements, but the extent to which those efforts will stimulate additional sales has yet to be seen. Further, U.S. manufacturers raised concerns that their competitors could eventually include the U.S. military as it makes plans to divest itself of used TWVs that it could make available to foreign governments at reduced costs or for free. Additionally, while U.S. manufacturers perceived the U.S. arms transfer control regimes to be more burdensome than those of other countries, the regimes are not a determining factor when foreign governments seek to purchase TWVs. We provided a draft of this report to DOD, State, and Commerce, as well as the four manufacturers and five foreign governments with whom we met, for their review and comment. DOD and State provide technical comments and two of the manufacturers provided clarifications, which we incorporated into the report as appropriate. Commerce, two manufacturers, and the five foreign governments informed us that they had no comments. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army and the Navy; the Secretary of State; Secretary of Commerce; and the four manufacturers and five foreign governments with whom we met. In addition, the report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix I. In addition to the contact name above, the following staff members made key contributions to this report: Johana R. Ayers, Assistant Director; Patrick Dudley; Dayna Foster; Beth Reed Fritts; Justin Jaynes; Julia Kennon; Roxanna Sun; Robert Swierczek; Bradley Terry; Brian Tittle; and Alyssa Weir.
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DOD's need for TWVs dramatically increased in response to operational demands and threats experienced in Afghanistan and Iraq. TWVs primarily transport cargo and personnel in the field and include the High Mobility Multi-purpose Wheeled and Mine Resistant Ambush Protected vehicles. The U.S. TWV industrial base, which includes manufacturers and suppliers of major subsystems, increased production to meet DOD's wartime requirements. That base now faces uncertainties as DOD's budget declines and operational requirements for these vehicles decrease. In addition to sales to DOD, U.S. manufacturers sell vehicles to foreign governments. The Senate Armed Services Committee Report on a bill for the National Defense Authorization Act for Fiscal Year 2012 directed GAO to (1) describe the composition of the U.S. TWV industrial base, (2) determine how many U.S. manufactured TWVs were purchased by foreign governments from fiscal years 2007 through 2011, and (3) identify factors perceived as affecting foreign governments' decisions to purchase these vehicles. GAO analyzed data from DOD on U.S. and foreign government TWV purchases, as well as sales data from the four primary U.S. TWV manufacturers. GAO also collected data from five foreign governments, including those that did and did not purchase U.S. TWVs. The U.S. tactical wheeled vehicle (TWV) industrial base includes seven manufacturers that utilize common suppliers of major subsystems, such as engines and armor. Four of these manufacturers reported that their reliance on sales to the Department of Defense (DOD) varies, in part, as they also produce commercial vehicles or parts. Collectively, the seven manufacturers supplied DOD with over 158,000 TWVs to meet wartime needs from fiscal years 2007 through 2011. DOD, however, plans to return to pre-war purchasing levels, buying about 8,000 TWVs over the next several years, in part, due to fewer requirements. Almost 28,000 U.S.-manufactured TWVs were purchased for use by foreign governments from fiscal years 2007 through 2011. Approximately 92 percent of these vehicles were paid for using U.S. security assistance funds provided to foreign governments. Iraq and Afghanistan were the largest recipients of such assistance, but officials stated that DOD does not plan to continue funding TWV purchases for these countries. While sales to foreign governments are unlikely to offset reductions in DOD purchases, manufacturers reported that foreign sales are becoming an increasingly important part of their revenue stream. Sales of U.S.-manufactured TWVs to foreign governments may be affected by multiple interrelated factors, including the availability of used DOD vehicles for sale, foreign competition, differing vehicle requirements, and concerns associated with U.S. arms transfer control regimes. U.S. manufacturers said sales of used Army TWVs to foreign governments could affect their ability to sell new vehicles. U.S. manufacturers and foreign governments also identified a number of non-U.S. manufacturers that produce TWVs that meet foreign governments' requirements, such as right-side drive vehicles. While U.S. manufacturers can produce vehicles that meet these requirements, vehicles they produced for DOD generally have not. Finally, manufacturers and foreign officials had mixed views on how the U.S. arms transfer control regimes may affect foreign governments' decisions to purchase U.S. vehicles. U.S. manufacturers and foreign officials expressed concerns with processing times and U.S. end-use restrictions, but foreign officials also said that such concerns have not been a determining factor when purchasing TWVs that meet their requirements. GAO is not making recommendations in this report. DOD, the Department of State, and two manufacturers provided technical or clarifying comments on a report draft that were incorporated as appropriate.
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Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other federal agencies must estimate the net lifetime costs--known as credit subsidy costs--of their loan insurance or guarantee programs and include the costs to the government in their annual budgets. Credit subsidy costs represent the net present value of expected lifetime cash flows, excluding administrative costs. When estimated cash inflows exceed expected cash outflows, a program is said to have a negative credit subsidy rate and generates offsetting receipts that reduce the federal budget deficit. When the opposite is true, the program is said to have a positive credit subsidy rate--and therefore requires appropriations. Generally, agencies must produce annual updates of their subsidy estimates--reestimates-- on the basis of information about actual performance and estimated changes in future loan performance. FCRA recognized the difficulty of making credit subsidy estimates that mirrored actual loan performance and provides permanent and indefinite budget authority for reestimates that reflect increased program costs. Upward reestimates increase the federal budget deficit unless accompanied by reductions in other government spending or an increase in receipts. The Omnibus Budget Reconciliation Act of 1990 required the HUD Secretary to take steps to ensure that the Fund attained a capital ratio of at least 2 percent by November 2000 and maintained at least a 2 percent ratio at all times thereafter. actuarial review of the economic net worth and soundness of the Fund. The annual actuarial review is now a requirement in the Housing and Economic Recovery Act of 2008, which also requires that the HUD Secretary annually report to Congress on the results of the review. Pub. L. No. 101-508. risk, which arises as borrowers become unable to make payments on insured mortgages. Agencies also face counterparty risk. That is, an agency may suffer losses due to weaknesses or uncertainties in the work of its counterparties, which include lenders and appraisers for FHA and issuers for Ginnie Mae. And all agencies face operational risks, the risk of loss resulting from inadequate or failed internal processes, deficiencies in staff numbers, training, and skills, or external events. The Fund's capital ratio dropped sharply in 2008 and fell below the statutory minimum in 2009, when economic and market developments created conditions that simultaneously reduced the Fund's economic value (the numerator of the ratio) and increased the insurance-in-force (the denominator of the ratio). According to annual actuarial reviews of the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 2008 and 0.5 percent in 2009 (see fig. 1). For 2010 and 2011, the ratios were 0.5 and 0.24 percent, respectively. In its November 2011 report to Congress, HUD cited several reasons for the declines from 2010 to 2011. These included the following: Home prices were expected to continue falling. Forecasts for the 2010 actuarial study predicted house price declines of about 2.8 percent before bottoming out in the middle of 2011. Forecasts for the 2011 actuarial study predicted declines of 5.6 percent for FHA's single- family portfolio in 2011. Higher-than-expected declines in house values contributed to both higher defaults and claims and higher loss- on-claim than anticipated in 2010. More loans, particularly from the housing bubble years of 2006-2008 were in serious delinquency, and a significant percentage had been there for more than 1 year. Claims become the most likely outcome for extended delinquency loans, many of which are in foreclosure. For the first time, the actuarial calculations built in a factor recognizing the elevated redefault potential from the increased number of active loans with a previous serious delinquency (3 months or more). The independent actuaries also made a decision to treat foreclosure actions likely affected by so called robosigning problems as expected claims in 2012. In reviewing the components of the capital ratio, the combination of a relatively stable economic value (numerator of the ratio) and a declining insurance-in-force (denominator) over much of the decade increased the capital ratio. However, since 2008, the economic value has fallen as the insurance-in-force has risen, dramatically lowering the capital ratio (see fig. 2). At the same time, the Fund's condition has worsened from a budgetary perspective. Historically, FHA has estimated that its loan insurance program was a negative subsidy program (that is, estimated cash inflows exceeded expected cash outflows). On the basis of these estimates, FHA accumulated substantial balances in a budgetary account known as the capital reserve account, which holds reserves in excess of those needed for estimated credit subsidy costs and helps cover unanticipated increases in those costs such as higher-than-expected claims. Reserves needed to cover estimated subsidy costs are held in the Fund's financing account. However, in recent years, the capital reserve account has covered large upward reestimates of FHA's credit subsidy costs through transfers to the financing account. As a result, balances in the capital reserve account fell dramatically--from $22 billion at the end of 2007 to an estimated $4.4 billion by the end of 2010 (see fig. 3). depleted, FHA would need to draw on permanent and indefinite budget authority to cover additional increases in estimated credit subsidy costs. FHA's latest annual report to Congress raises the possibility that, if house prices were to decline in 2012, the expected future losses on the current, outstanding portfolio could exceed current capital resources. These would be offset by the expected net receipts from the new 2012 cohort of loans. But, according to HUD, if house prices were to decline in 2012 by an amount rivaling that of 2011, these new loans would not be expected to generate sufficient net receipts to offset any potential decline in value of the current outstanding portfolio, potentially necessitating assistance from the Department of the Treasury (Treasury). Under one stress scenario in which house prices decline by 13.7 percent in 2011, rather than the 5.6 percent assumed in the baseline scenario, and house prices decline another 1.3 percent in 2012, HUD estimates that it may require $13 billion in assistance from Treasury to ensure the financing account has sufficient loss reserves. By the end of 2011, the balance in the capital reserve account rose slightly to $4.7 billion. As we reported in September 2010, FHA and its actuarial review contractor enhanced their methods for assessing the Fund's financial condition but still were addressing other methodological issues that could affect the reliability of estimates of the capital ratio. Annual actuarial reviews of the Fund use statistical models to estimate the probability that loans will prepay or result in insurance claims on the basis of certain loan and borrower characteristics (such as loan-to-value ratios and borrower credit scores) and key economic variables (such as house prices and interest rates). FHA and its contractor have enhanced these models in recent years, by incorporating additional variables related to loan performance and developed an additional model to predict loss rates on insurance claims. Also, consistent with recommendations we made in a prior report, in 2003, the actuarial reviews began to analyze the impact of more pessimistic economic scenarios--for example, nationwide declines in home prices--than they did previously. However, the current methodology is significantly limited by its reliance on a single economic forecast to produce the estimate of the capital ratio that is used to determine if the Fund is meeting the 2 percent capital reserve requirement. This approach does not fully account for the variability in future house prices and interest rates that the Fund may face. As a result, baseline estimates of the capital ratio may tend to underestimate insurance claims and mortgage prepayments and therefore may overestimate the Fund's economic value. In a November 2003 report, the Congressional Budget Office concluded that FHA could project the Fund's cash flows more accurately by using an approach (stochastic simulation) that involves running simulations of hundreds of different economic paths to produce a distribution of capital ratio estimates. Given the uncertainty that always surrounds estimates of future economic activity, the report we issued in 2010 recommended that HUD require the actuarial review contractor to use stochastic simulation of future economic conditions, including house prices and interest rates, to estimate the Fund's capital ratio and include the results of this analysis in FHA's annual report to Congress on the financial status of the Fund. However, the most recent annual report does not include an estimate of the Fund's capital ratio using this technique. In response to our 2010 report, FHA officials told us that they were planning to require the actuarial review contractor to use a stochastic simulation model for future actuarial reviews. But, these officials said that the model would be used to examine the implications of extreme economic scenarios on the Fund, and decisions about using the model to estimate the Fund's capital ratio had not been made. FHA faces risks resulting from its operations. FHA's loan volume grew significantly from 2006 to 2010. In 2006, FHA insured almost half a million loans, totaling $70 billion in mortgage insurance. By 2010, it had more than tripled to 1.7 million loans insured or about $319 billion in mortgage insurance. During the same time period, FHA's single-family staff increased 8 percent, from 932 employees in 2006 to 1,011 employees in 2010, while increases in key workload areas often surpassed 100 percent as follows: Staff in the homeownership centers' Processing and Underwriting Division grew at a slower rate (22 percent) than key workload items, particularly volume-driven loan reviews (which increased by more than 100 percent). Increases in contractor staff and workload related to management of foreclosed or real estate-owned properties were substantial, but noncontractor staff levels increased at more modest levels. Loss mitigation actions more than doubled from 2006 to 2010, while loss mitigation staff levels remained relatively constant. Although FHA has taken steps to assess credit and operational risks facing its single-family insurance programs, its current risk-assessment strategy is not comprehensive because it is not integrated across the agency and lacks annual assessments and mechanisms to anticipate changing conditions. To address credit risk and help improve the financial condition of the Fund (which is supported by borrower premiums), FHA raised premiums and made or proposed policy or underwriting changes. For example, in April 2011, FHA increased its annual insurance premiums from 0.85 percent to 1.10 percent for borrowers with 30-year loans with initial loan-to-value ratios of 95 percent or less and from 0.90 percent to 1.15 percent for borrowers with 30-year loans with initial loan-to-value ratios greater than 95 percent. Additionally, FHA increased down- payment requirements for borrowers with lower credit scores. FHA also has proposed reducing allowable seller contributions at closing, thereby helping to ensure that buyers put more of their own funds into the home purchase. Further, FHA has been revising its mortgage scorecard algorithm to recognize the effect of various risk elements not currently discerned by the scorecard and determine what cases warrant manual underwriting. According to FHA, these revisions are in the early stages, and no completion date has been set. To address operational risks and improve its risk-assessment strategy, in 2010, FHA established the Office of Risk Management and Regulatory Affairs and created the position of Deputy Assistant Secretary for Risk Management and Regulatory Affairs, which reports directly to the Assistant Secretary for Housing-FHA Commissioner. To provide assistance to the Office of Risk Management (one of the offices within the Office of Risk Management and Regulatory Affairs) in developing a risk- management strategy and organizational structure and establishing risk- management policies and processes, FHA hired a consultant to produce a comprehensive report and recommend best practices for its operation.According to FHA officials, FHA plans to adopt the consultant's recommendation to establish an enterprise risk committee to address overall risk to the organization and a second tier of committees to address program and operational risks. In addition, in 2009 the Office of Single Family Housing implemented an internal quality control initiative at headquarters and the four homeownership centers. For the areas identified as high-risk, headquarters and the homeownership center divisions developed plans to document control objectives and established a monitoring strategy in which each homeownership center submits quarterly reports to headquarters on the effectiveness of the controls, including the status of any mitigation efforts. However, FHA's risk-assessment strategy raises several issues. First, FHA's current risk-assessment strategy is not comprehensive because it is not integrated throughout the organization. While the consultant recommended that FHA integrate risk assessment and reporting throughout the organization, currently the Office of Single Family Housing's quality control activities and the Office of Risk Management's activities remain separate efforts. FHA officials noted that until the Office of Risk Management sets up a governance process, the integration suggested by the consultant would not be possible. In the meantime, FHA officials stated that every effort was being made to help ensure that the Office of Risk Management's activities complemented program office activities. Second, contrary to HUD guidance, the Office Single Family Housing has not conducted an annual, systematic review of risks to its program and administrative functions since 2009. According to an official in this office, although management intended to conduct an annual assessment, the dates slipped because of changes in senior leadership in the Office Single Family Housing, and few staff were available to perform assessments (because of attrition and increased workload). Finally, the Office of Single Family Housing's current risk-assessment efforts do not include procedures for anticipating potential risks presented by changing conditions. The consultant's report proposes a reporting process and templates for identifying emerging risks and provides specific examples. Office of Risk Management officials told us that, once they are operational, the risk committees eventually would determine the exact design and content of these reports and templates. Moreover, implementation and integration of the new risk-assessment strategy and its planned tools has been slow because of delays in defining the Office of Risk Management's authority, difficulty filling new staff positions in the Office of Risk Management, and changes in FHA leadership. All these factors limit FHA's effectiveness in identifying, planning for, and addressing risk. More specifically, without an integrated risk-assessment strategy, certain risks may not be fully addressed at the operational level in a way that minimizes risk to the insurance programs; without annual reassessments of its risks, the Office of Single Family Housing lacks assurance that its quality control efforts address all its risks; and without ongoing mechanisms in place to anticipate and address new or emerging risks, FHA lacks a systematic approach to help the agency identify, analyze, and formulate timely plans to respond most effectively to changed conditions and risks. Therefore, we recommended that FHA (1) integrate the internal quality control initiative of the Office of Single Family Housing into the operational risk processes of the Office of Risk Management, (2) conduct an annual risk assessment, and (3) establish ongoing mechanisms--such as use of the report templates from the 2010 consultant's report--to anticipate and address risks that might be caused by changing conditions. FHA agreed with the recommendations and, as of January 2012, indicated that it either was working toward achieving the recommendations or had plans to do so in the very near future. For example, FHA said it would leverage or integrate existing risk management efforts as soon as the Office of Risk Management's final governance structure and risk management strategies were in place. The agency also stated that the Office of Risk Management would conduct an annual risk assessment as a component of its overall risk management strategy. It stressed that ongoing mechanisms to anticipate and address risks related to changing conditions would be part of the office's strategy. With growth in loan volume, the number of lenders and appraisers (or counterparties) participating in FHA's single-family programs also has grown. The total number of FHA-approved lenders increased 24 percent, from 10,370 in 2006 to 12,844 in 2010. The number of FHA-approved appraisers increased approximately 67 percent from 33,553 in 2006 to 56,192 in 2010. FHA has made recent changes to address risks posed by its lenders and appraisers. For example, on May 20, 2010, FHA stopped approving new loan correspondents. And as of January 1, 2011, existing loan correspondents could no longer participate in FHA programs. Former loan correspondents now can participate only as third-party originators through sponsorship by FHA-approved lenders. As a result, as of September 2011, the number of FHA-approved lenders had declined to about 3,700. Furthermore, the agency has increased the net worth requirement for approved lenders. On May 20, 2011, FHA increased the requirement for existing lenders to $1 million, except for lenders classified as small under the Small Business Administration's size standards (their requirement increased to $500,000). As of May 20, 2013, FHA will require a net worth of $1 million for all lenders, plus 1 percent of the total loan volume in excess of $25 million, to a maximum required net worth of $2.5 million. To help ensure that lenders and appraisers follow its policies and procedures, FHA also has enhanced the criteria used to select loans for reviews. Specifically, since May 3, 2010, the agency has considered high- risk loan or borrower characteristics, such as certain types of refinanced loans and loans to borrowers with low credit scores. Additionally, FHA increased the number of risk factors used to target lenders for review. FHA also has revised its approach for overseeing appraisers. FHA has addressed staffing and training needs and succession planning to some extent, but it lacks plans that strategically address future workforce needs, including replacing retiring staff. Although workforce planning practices used by leading organizations include defining critical skills and skill gaps, FHA's current approach does not have mechanisms for doing so. FHA previously had a multiyear workforce plan that identified the critical competencies; analyzed skills and competencies, including gaps; and proposed comprehensive strategies to address these gaps, but it has not created another such plan. Instead, FHA has relied on occasional Resource Estimation and Allocation Process studies and annual managerial assessments of staffing and training needs. FHA also currently does not have a succession plan, although a plan for 2006-2009 identified mission-critical positions, analyzed existing staff competencies, assessed the number of retirement-eligible employees, and determined the probability of near-term retirements. Succession planning is particularly important because, as of July 2011, almost 50 percent of the Office of Single Family Housing staff at headquarters were eligible to retire in the next 3 years. The percentage of staff eligible to retire at the homeownership centers was even higher--63 percent. While FHA has taken some steps to address succession planning, these steps have been limited. FHA implemented two initiatives focused on succession planning. The first, begun in 2010, was intended to help ensure that, at any given time, at least two additional supervisors, managers, or executives could perform the work of each supervisor, manager, or executive. However, this does not apply to staff positions beyond management. The second initiative also began in 2010. Its goal is to train and develop staff. Neither initiative assesses the number of retirement-eligible employees in critical positions as required by HUD guidance. According to FHA officials, as resources have dwindled, they have considered all their positions to be critical. Department of Housing and Urban Development, Succession Management Plan, Fiscal Year 2006-2009, (Washington, D.C.: September 2006). recommended that FHA develop workforce and succession plans for the Office of Single Family Housing. FHA agreed, stating that it would develop a formal workforce plan and had efforts under way to develop a succession plan. For example, FHA indicated that it would conduct a comprehensive workforce analysis by the end of January 2012 to determine mission-critical positions, analyze skill gaps, and assess retirement eligibilities and probabilities. Ginnie Mae has undertaken efforts to improve risk management, but as many of these efforts remain in planning or under development, they merit continued commitment and follow through from senior management. Ginnie Mae faces operational risk related to limited staffing and reliance on contractors in the context of increased market share and volume. And, while Ginnie Mae's revenues exceeded its costs, and it has accumulated a capital reserve of about $14.6 billion, its modeling of estimated cost and revenues could be improved by incorporating certain practices, such as using the best available data, that we believe represent sound internal controls for models. Ginnie Mae has taken steps to better manage operational and counterparty risks and has several initiatives planned or under way. GAO and others have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as risks that Ginnie Mae may face. Ginnie Mae's counterparty risk would stem from the failure of issuers of Ginnie Mae-guaranteed MBS to provide investors with monthly principal and interest payments. Although Ginnie Mae's market share and volume of MBS has increased in recent years, its (noncontractor) staff levels have been relatively constant during this time. In recent years, its actual staff levels have been below its authorized staff levels. Ginnie Mae's internal control reviews for 2009 and 2010 identified a control deficiency due to employee vacancies, including multiple vacancies in certain positions relevant to internal controls. The 2011 internal control review had no findings related to employee vacancies. As part of a broad effort to address and mitigate its operational risks related to staffing levels, Ginnie Mae has incorporated some principles consistent with our internal control and management tool. Consistent with this guidance, Ginnie Mae has identified skill gaps in staff resources, developed a plan to hire additional staff, and made changes to its organizational structure. The President's budget for 2012 requested $30 million for administrative expenses at Ginnie Mae, which included supporting 137 full-time equivalent positions (FTE). Ginnie Mae officials told us that, if this request was not approved, the agency would be forced to use its limited resources across its many risk-management efforts and would leave it with little capacity to conduct preventative or forward-looking analyses. The enacted 2012 budget provides $19.5 million for these administrative expenses and up to an additional $3 million, depending on the volume of Ginnie Mae's guarantees. Between 2005 and 2010, as Ginnie Mae's volume and issuer activity increased, and staff levels remained largely the same, the agency increasingly relied on contractors. Contract obligations in 2010 were more than 14 times the contract obligations in 2005. According to Ginnie Mae officials, they have contracted out many functions because the agency has flexibility to use agency revenues to procure contractors. That is, statutorily Ginnie Mae has flexibility to spend funds for contracting expenses because these expenses can be funded from agency revenues without annual appropriations. Ginnie Mae depends on contractors to provide a variety of services, including those related to guaranteeing MBS, such as collecting data from issuers and processing monthly principal and interest payments to investors. In addition, Ginnie Mae relies on several contractors to take over the servicing responsibilities on pooled loans when issuers default. Ginnie Mae has used its own staff as well as third-party assessments of contracts, to oversee its contractors but plans to provide additional staff resources to supplement the third- party assessments. However, officials said that implementation of this plan has been put on hold due to changes in the Ginnie Mae budget. Additionally, Ginnie Mae has conducted risk assessments of its contracts and potential operational risks, and it plans to review the proposed recommendations and determine how to implement them. Ginnie Mae has been working on an ongoing initiative to improve its information technology systems. According to officials, Ginnie Mae has been working on the first phase of its business process improvement initiative for the last few years based on a plan developed in conjunction with the Office of Management and Budget. The main goal of the initiative is to modernize the agency's technology by consolidating processes and eliminating redundant systems. Some of the weaknesses included outdated data systems, a reliance on paper-based processes, and a lack of integrated data systems. According to Ginnie Mae, the first phase of the initiative resulted in the creation of nine new information technology system initiatives such as a system that allows Ginnie Mae to receive enhanced reporting and provide status information to issuers. Ginnie Mae has been drafting a strategy document for its ongoing initiative to look for additional improvement opportunities in its information technology systems. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement and has revised its approval and monitoring procedures. For example, in 2010, Ginnie Mae increased the minimum net worth requirement for issuers of Ginnie Mae-guaranteed MBS to $2.5 million. But, planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, have not been fully implemented. These initiatives include a plan to develop a database for tracking the resolution and timing of findings from reviews of issuers. It will be important for Ginnie Mae to complete its initiatives related to operational and counterparty risk as soon as practicable. Our November 2011 report includes an appendix that contains a listing of Ginnie Mae's planned and proposed initiatives and their expected completion dates. In developing inputs and procedures for the model used to forecast costs and revenues, Ginnie Mae did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing practices in FASAB guidance that we believe represent sound internal controls for models, Ginnie Mae's model may not be using critical data that could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae's ability to accurately report to Congress the extent to which its programs represent a financial exposure to the government. We recommended in our November 2011 report on Ginnie Mae that the HUD Secretary direct Ginnie Mae to take steps to ensure its model more closely follows certain practices identified in FASAB guidance for estimating subsidy costs of credit programs. More specifically, Ginnie Mae should (1) assess and document that it is using the best available data in its model and most appropriate modeling approach; (2) conduct and document sensitivity analyses to determine which cash flow assumptions have the greatest impact on the model; (3) document how management assumptions are determined, such as those for issuer defaults and mortgage buyout rates; and (4) assess the extent to which management assumptions, such as those for issuer defaults and mortgage buyout rates, can be replaced with quantitative estimates. Ginnie Mae has indicated that it plans to implement all of our recommendations but has not provided a specific timeline. In addition, Ginnie Mae agreed with our observation about the importance of completing ongoing and planned initiatives for enhancing its risk- management processes, as soon as practicable, to improve operations. Mr. Chairman, Ranking Member Olver, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact me at 202- 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Paige Smith, Assistant Director; Andrew Pauline, Assistant Director; Steve Westley, Assistant Director; Dan Alspaugh; Nadine Garrick Raidbard; John McGrail; Marc Molino; Jose R. Pena; Beth Reed Fritts; Paul Revesz; 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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In recent years, two components of HUD--FHA and Ginnie Mae--have played a major role in the single-family mortgage market. FHA insures lenders against losses from mortgage defaults. Ginnie Mae guarantees the timely payment of principal and interest for securities backed by federally insured or guaranteed mortgages. Due partly to the contraction of other mortgage market segments, FHA's and Ginnie Mae's business volumes have risen sharply. This growth highlights the need for these entities to properly manage financial risks while meeting the housing needs of borrowers. This testimony discusses (1) changes in the financial condition of FHA's insurance fund, the budgetary implications of these changes, and how FHA evaluates the fund's financial condition; (2) steps FHA has taken to assess and manage risks; and (3) steps Ginnie Mae has taken to manage risks and estimate costs and revenues. This testimony draws from GAO reports on FHA's oversight capacity (GAO-12-15), the financial condition of FHA's insurance fund (GAO-10-827R), and Ginnie Mae's risk management (GAO-12-49). GAO also reviewed updated information on the fund's condition as of September 30, 2011. For the third consecutive year, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) reported that the capital ratio for the Mutual Mortgage Insurance Fund--the ratio of the fund's economic value to insurance obligations--has not met the 2 percent statutory minimum. FHA cites declines in the fund's economic value due to higher-than-expected defaults, claims, and losses. At the same time, the other component of the ratio, insurance obligations, grew rapidly. The fund's condition also worsened from a budgetary perspective, with balances in the fund's capital reserve account reaching new lows. If the account were depleted, FHA would require more funds to help cover costs on insurance issued to date. FHA has indicated that it will narrowly avoid this scenario in fiscal year 2012. FHA enhanced methods for assessing the fund's financial condition but has not fully addressed GAO's 2010 recommendation for improving the reliability of its estimates. It relies on a single economic forecast, which does not fully account for variability in future house prices and interest rates. The approach GAO recommended would simulate numerous economic paths for house prices and interest rates would improve the reliability of its capital ratio estimates. FHA has taken or plans steps to better assess and manage risk. It created a risk office in 2010 and hired a consultant to recommend best practices. FHA plans to establish committees to evaluate risks at enterprise-wide and programmatic levels. It began a quality control initiative for single-family housing, in which program and field offices assess and report on risks, and enhanced lender and appraiser reviews. While FHA's consultant recommended integrating risk assessments, the quality control and risk office activities currently remain separate efforts. Also, since 2009, the Office of Single Family Housing has not updated assessments annually in accordance with HUD guidance. Without integrated and updated risk assessments that identify emerging risks, FHA lacks assurance it has identified all its risks. GAO recommended integrating quality control and risk office activities and updating assessments annually. GAO and others have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as risks that the Government National Mortgage Association (Ginnie Mae) may face. Ginnie Mae has several planned initiatives to enhance its risk-management processes related to gaps in resources, contracts, and issuers, but these plans have not been fully implemented. It will be important for Ginnie Mae to complete these initiatives as soon as practicable to enhance its operations. Also, in developing inputs and procedures for the model used to forecast costs and revenues, the agency did not consider certain practices identified in guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing certain practices, which GAO believes represent sound internal controls for models, Ginnie Mae's model may not use critical data that could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. GAO recommended that Ginnie Mae adopt these practices. GAO previously recommended that FHA and Ginnie Mae take additional steps to improve their risk management. FHA and Ginnie Mae agreed with these recommendations and said they had efforts under way to implement them.
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Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other federal agencies must estimate the net lifetime costs--known as credit subsidy costs--of their loan insurance or guarantee programs and include the costs to the government in their annual budgets. Credit subsidy costs represent the net present value of expected lifetime cash flows, excluding administrative costs. When estimated cash inflows exceed expected cash outflows, a program is said to have a negative credit subsidy rate and generates offsetting receipts that reduce the federal budget deficit. When the opposite is true, the program is said to have a positive credit subsidy rate--and therefore requires appropriations. Generally, agencies must produce annual updates of their subsidy estimates--reestimates-- on the basis of information about actual performance and estimated changes in future loan performance. FCRA recognized the difficulty of making credit subsidy estimates that mirrored actual loan performance and provides permanent and indefinite budget authority for reestimates that reflect increased program costs. Upward reestimates increase the federal budget deficit unless accompanied by reductions in other government spending or an increase in receipts. The Omnibus Budget Reconciliation Act of 1990 required the Secretary of the Department of Housing and Urban Development (HUD) to take steps to ensure that the Fund attained a capital ratio of at least 2 percent by November 2000 and maintained at least a 2 percent ratio at all times thereafter. It also required an annual independent actuarial review of the economic net worth and soundness of the Fund. The annual actuarial review is now a requirement in the Housing and Economic Recovery Act of 2008, which also requires that the Secretary of HUD annually report to Congress on the results of the review. Federal agencies face a number of risks. In the case of agencies with loan guarantee or insurance programs, they can face credit risks that include borrower default risk, which arises as borrowers become unable to make payments on insured mortgages. Agencies with these programs also face counterparty risk. That is, an agency may suffer losses due to weaknesses or uncertainties in the work of its counterparties--in this example, lenders and appraisers. And all agencies face operational risks, the risk of loss resulting from inadequate or failed internal processes or people (in terms of staff numbers, training, and skills), or external events. For this statement, we focus on operational risks related to FHA's staffing and contractor capacity to process increasing workloads. The Fund's capital ratio dropped sharply in 2008 and fell below the statutory minimum in 2009, when economic and market developments created conditions that simultaneously reduced the Fund's economic value (the numerator of the ratio) and increased the insurance-in-force (the denominator of the ratio).the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 2008 and 0.5 percent in 2009 (see fig. 1). For 2010 and 2011, the ratios were 0.5 and 0.24 percent, respectively. As we reported in September 2010, FHA and its actuarial review contractor enhanced their methods for assessing the Fund's financial condition but still were addressing other methodological issues that could affect the reliability of estimates of the capital ratio. Annual actuarial reviews of the Fund use statistical models to estimate the probability that loans will prepay or result in insurance claims on the basis of certain loan and borrower characteristics (such as loan-to-value ratios and borrower credit scores) and key economic variables (such as house prices and interest rates). FHA and its contractor have enhanced these models in recent years, by incorporating additional variables related to loan performance and developed an additional model to predict loss rates on insurance claims. Also, consistent with recommendations we made in a prior report, in 2003 the actuarial reviews began to analyze the impact of more pessimistic economic scenarios--for example, nationwide declines in home prices--than they did previously. However, the current methodology is significantly limited by its reliance on a single economic forecast to produce the estimate of the capital ratio that is used to determine if the Fund is meeting the 2 percent capital reserve requirement. This approach does not fully account for the variability in future house prices and interest rates that the Fund may face. As a result, baseline estimates of the capital ratio may tend to underestimate insurance claims and mortgage prepayments and therefore may tend to overestimate the Fund's economic value. In a November 2003 report, the Congressional Budget Office concluded that FHA could project the Fund's cash flows more accurately by using an approach (stochastic modeling) that involves running simulations of hundreds of different economic paths to produce a distribution of capital ratio estimates. Given the uncertainty that always surrounds estimates of future economic activity, the report we issued last year recommended that HUD require the actuarial review contractor to use stochastic simulation of future economic conditions, including house prices and interest rates, to estimate the Fund's capital ratio and include the results of this analysis in FHA's annual report to Congress on the financial status of the Fund. However, the most recent annual report does not include an estimate of the Fund's capital ratio using this technique. In response to our 2010 report, FHA officials told us that they were planning to require the actuarial review contractor to use a stochastic simulation model for the 2011 actuarial review. But, these officials said that the model would be used to examine the implications of extreme economic scenarios on the Fund and decisions about using the model to estimate the Fund's capital ratio had not been made. FHA faces risks resulting from its operations. FHA's loan volume grew significantly from 2006 to 2010. In 2006, FHA insured almost half a million loans, totaling $70 billion in mortgage insurance. By 2010, it insured 1.7 million loans, or about $319 billion in mortgage insurance. During the same time period, FHA's single-family staff increased 8 percent, from 932 employees in 2006 to 1,011 employees in 2010, while increases in key workload areas often surpassed 100 percent: Staff in the homeownership centers' Processing and Underwriting Division grew at a slower rate (22 percent) than key workload items, particularly volume-driven loan reviews (which increased by more than 100 percent). Increases in contractor staff and workload related to management of foreclosed or real estate-owned properties were substantial, but noncontractor staff levels increased at more modest levels. Loss mitigation actions more than doubled from 2006 to 2010, while loss mitigation staff levels remained relatively constant. Although FHA has taken steps to assess credit and operational risks facing its single-family insurance programs, its current risk-assessment strategy is not comprehensive because it is not integrated across the agency and lacks annual assessments and mechanisms to anticipate changing conditions. To address credit risk and help improve the financial condition of the Fund (which is supported by borrower premiums), FHA raised premiums and made or proposed policy or underwriting changes. For example, in April 2011 FHA increased its annual insurance premiums from 0.85 percent to 1.10 percent for borrowers with 30-year loans with initial loan-to-value ratios of 95 percent or less and from 0.90 percent to 1.15 percent for borrowers with 30-year loans with initial loan-to-value ratios greater than 95 percent. Additionally, FHA increased down- payment requirements for borrowers with lower credit scores. FHA also has proposed reducing allowable seller contributions at closing, thereby helping to ensure that buyers put more of their own funds into the home purchase. In addition, FHA is in the process of revising its mortgage scorecard algorithm, to recognize the effect of various risk elements not currently discerned by the scorecard and determine what cases warrant manual underwriting. According to FHA, these revisions are in the early stages, and no completion date has been set. To address operational risks and improve its risk-assessment strategy, in 2010 FHA received congressional approval to establish the Office of Risk Management and Regulatory Affairs and create the position of Deputy Assistant Secretary for Risk Management and Regulatory Affairs, which reports directly to the Assistant Secretary for Housing-FHA Commissioner. To provide assistance to the Office of Risk Management (one of the offices within the Office of Risk Management and Regulatory Affairs) in developing a risk-management strategy and organizational structure and establishing risk-management policies and processes, FHA hired a consultant to produce a comprehensive report and recommend best practices for its operation. adopt the consultant's recommendation to establish an enterprise risk committee to address overall risk to the organization and a second tier of committees to address program and operational risks. In addition, in 2009 the Office of Single Family Housing implemented an internal quality control initiative at headquarters and the four homeownership centers. For the areas identified as high-risk, headquarters and the homeownership center divisions developed plans to document control objectives and established a monitoring strategy in which each homeownership center submits quarterly reports to headquarters on the effectiveness of the controls, including the status of any mitigation efforts. McKinsey & Company, Building the ORM Organization, Close-out Materials, a report prepared at the request of the Department of Housing and Urban Development, December 2010. the consultant would not be possible. In the meantime, they stated that every effort was being made to help ensure that the Office of Risk Management's activities complemented program office activities. Second, contrary to HUD guidance, Single Family Housing has not conducted an annual, systematic review of risks to its program and administrative functions. According to an official in the Office of Single Family Housing, although management intended to conduct an annual assessment, the dates slipped because of changes in senior leadership in Single Family Housing and few staff were available to perform assessments (because of attrition and increased workload). Finally, Single Family Housing's current risk-assessment efforts do not include procedures for anticipating potential risks presented by changing conditions. The consultant's report proposes a reporting process and templates for identifying emerging risks and provides specific examples. Office of Risk Management officials told us that once they are operational the risk committees eventually would determine the exact design and content of the reports and templates. Moreover, implementation and integration of the new risk-assessment strategy and planned tools has been slow because of delays in defining the Office of Risk Management's authority, difficulty filling new staff positions in the Office of Risk Management, and changes in FHA leadership. All these factors limit FHA's effectiveness in identifying, planning for, and addressing risk. More specifically, without an integrated risk-assessment strategy, certain risks may not be fully addressed at the operational level in a way that minimizes risk to the insurance programs; without annual reassessments of its risks, Single Family Housing lacks assurance that its quality control efforts address all its risks; and without ongoing mechanisms in place to anticipate and address new or emerging risks, FHA lacks a systematic approach to help the agency identify, analyze, and formulate timely plans to respond most effectively to changed conditions and risks. Therefore, we recommended that FHA (1) integrate the internal quality control initiative of the Office of Single Family Housing into the operational risk processes of the Office of Risk Management, (2) conduct an annual risk assessment, and (3) establish ongoing mechanisms--such as use of the report templates from the 2010 consultant's report--to anticipate and address risks that might be caused by changing conditions. FHA agreed with the recommendations and stated that it either was working toward achieving the recommendations or had plans to do so in the very near future. For example, FHA said it would leverage or integrate existing risk management efforts as soon as the Office of Risk Management's final governance structure and risk management strategies were in place. The agency also stated that the Office of Risk Management would conduct an annual risk assessment as a component of its overall risk management strategy. It stressed that ongoing mechanisms to anticipate and address risks related to changing conditions would be part of the office's strategy. With growth in loan volume, the number of lenders and appraisers (or counterparties) participating in FHA's single-family programs also has grown. The total number of FHA-approved lenders increased 24 percent, from 10,370 in 2006 to 12,844 in 2010. The number of FHA-approved appraisers increased approximately 67 percent from 33,553 in 2006 to 56,192 in 2010. However, FHA has made recent changes to address risks posed by its lenders and appraisers. For example, on May 20, 2010, FHA stopped approving new loan correspondents. As of January 1, 2011, existing loan correspondents could no longer participate in FHA programs. Former loan correspondents now can participate only as third-party originators through sponsorship by FHA-approved lenders. As a result, as of September 2011, FHA had almost 3,700 approved lenders. Furthermore, the agency has increased the net worth requirement for approved lenders. On May 20, 2011, FHA increased the requirement for existing lenders to $1 million, except for lenders classified as small under the Small Business Administration's size standards (their requirement increased to $500,000). As of May 20, 2013, FHA will require a net worth of $1 million for all lenders, plus 1 percent of the total loan volume in excess of $25 million, to a maximum required net worth of $2.5 million. To help ensure that lenders and appraisers follow its policies and procedures, FHA also has enhanced the criteria used to select loans for technical reviews. Specifically, since May 3, 2010, the agency has considered high-risk loan or borrower characteristics, such as certain types of refinanced loans and loans to borrowers with low credit scores. Additionally, FHA increased the number of risk factors used to target lenders for review. FHA also has revised its approach for overseeing appraisers. FHA has addressed staffing and training needs and succession planning to some extent, but it lacks plans that strategically address future workforce needs, including replacing retiring staff. Although workforce planning practices used by leading organizations include defining critical skills and skill gaps, FHA's current approach does not have mechanisms for doing so. FHA previously had a multiyear workforce plan that identified the critical competencies; analyzed skills and competencies, including gaps; and proposed comprehensive strategies to address these gaps, but has not created another such plan. Instead, FHA has relied on occasional Resource Estimation and Allocation Process studies and annual managerial assessments of staffing and training needs. FHA also currently does not have a succession plan, although a HUD plan for 2006-2009 identified mission-critical positions, analyzed existing staff competencies, assessed the number of retirement-eligible employees, and determined the probability of near-term retirements. Succession planning is particularly important because almost 50 percent of Single Family Housing headquarters staff are eligible to retire in the next 3 years. The percentage of staff eligible to retire at the homeownership centers is even higher--63 percent. While FHA has taken some steps to address succession planning, they have been limited. FHA implemented two initiatives focused on succession planning. The first, begun in 2010, was intended to help ensure that, at any given time, at least two additional supervisors, managers, or executives could perform the work of each supervisor, manager, or executive. However, this does not apply to staff positions beyond management. The second initiative also began in 2010. Its goal is to train and develop staff. Neither initiative assesses the number of retirement-eligible employees in critical positions as required by HUD guidance. According to FHA officials, as resources have dwindled, they have considered all their positions to be critical. According to FHA officials, plans to update their workforce and succession plans were suspended. In 2007-2009, FHA had a workforce planning process designed to identify critical skill gaps and a strategy for addressing these gaps. According to the officials, HUD told FHA to stop this initiative in 2009 because HUD was going to implement a workforce planning process for the entire department. However, the effort never came to fruition because of funding shortages. Without a more comprehensive workforce planning process that includes succession planning, FHA's ability to systematically identify the workforce needed for the future and plan for upcoming retirements is limited. Therefore, we recommended that FHA develop workforce and succession plans for the Office of Single Family Housing. FHA agreed, stating that it would develop a formal workforce plan and had efforts underway to develop a succession plan. We released a report today about Ginnie Mae, which has experienced a substantial increase in the volume of its business since 2007 as the volume of federally insured or guaranteed mortgages increased. Ginnie Mae is a wholly owned government corporation in HUD, which guarantees the timely payment of principal and interest on mortgage- backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans, such as FHA loans. As of 2010, Ginnie Mae guaranteed more than $1 trillion in outstanding MBS composed primarily of FHA-insured mortgages. The growth in outstanding Ginnie Mae- guaranteed MBS resulted in an increased financial exposure for the federal government. Nonetheless, Ginnie Mae's revenues exceeded its costs, and it has accumulated a capital reserve of about $14.6 billion. Ginnie Mae has taken steps to better manage operational and counterparty risks and has several initiatives planned or underway. The operational risks the agency may face include limited staff, substantial reliance on contractors, and the need for modernized information systems. Ginnie Mae plans to increase its staff levels, complete a reorganization, and implement recommendations related to contracting. For Ginnie Mae, counterparty risk is the risk that issuers of Ginnie Mae MBS fail to provide investors with monthly principal and interest payments. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement and has revised its approval and monitoring procedures. For example, in 2010 Ginnie Mae increased the minimum net worth requirement for issuers of Ginnie Mae-guaranteed MBS to $2.5 million. But, planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, have not been fully implemented. It will be important for Ginnie Mae to complete its initiatives related to operational and counterparty risk as soon as practicable. In developing inputs and procedures for the model used to forecast costs and revenues, Ginnie Mae did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing practices in FASAB guidance that GAO believes represent sound internal controls for models, Ginnie Mae's model may not use critical data that could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae's ability to accurately report to Congress the extent to which its programs represent a financial exposure to the government. We recommended that the Secretary of Housing and Urban Development direct Ginnie Mae to take steps to ensure its model more closely follows certain practices identified in Federal Accounting Standards Advisory Board guidance for estimating subsidy costs of credit programs. More specifically, Ginnie Mae should (1) assess and document that it is using the best available data in its model and most appropriate modeling approach, (2) conduct and document sensitivity analyses to determine which cash flow assumptions have the greatest impact on the model, (3) document how management assumptions are determined, such as those for issuer defaults and mortgage buyout rates, and (4) assess the extent to which management assumptions, such as those for issuer defaults and mortgage buyout rates, can be replaced with quantitative estimates. The President of Ginnie Mae wrote that Ginnie Mae is working towards implementing our recommendation for conducting sensitivity analyses relating to issuer risk and behavior, but neither agreed nor disagreed with our other specific recommendations. In addition, Ginnie Mae agreed with our observation about the importance of completing ongoing and planned initiatives for enhancing its risk-management processes, as soon as practicable, to improve operations. Mr. Chairman, Ranking Member Frank, and Members of the Committee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact Mathew J. Scire, Director, at 202-512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Paige Smith (Assistant Director), Andy Pauline (Assistant Director), Steve Westley (Assistant Director), Dan Alspaugh, Nadine Garrick Raidbard, John McGrail, Marc Molino, Jose R. Pena, Beth Reed Fritts, Paul G. Revesz, and Barbara Roesmann. 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The Federal Housing Administration (FHA) has helped millions purchase homes by insuring private lenders against losses from defaults on single-family mortgages. In recent years, FHA has experienced a dramatic increase in its market role due, in part, to the contraction of other mortgage market segments. The increased reliance on FHA mortgage insurance highlights the need for FHA to ensure that it has the proper controls in place to minimize financial risks while meeting the housing needs of borrowers. This statement discusses (1) changes in the financial condition of FHA's fund used to insure mortgages--the Mutual Mortgage Insurance Fund (Fund)--and the budgetary implications of these changes; (2) how FHA evaluates the financial condition of the Fund; and (3) steps FHA has taken to assess and manage risks. This statement is drawn from a recent report on FHA's oversight capacity (GAO-12-15) as well as a report issued in September 2010 on the financial condition of the Fund (GAO-10-827R). GAO also obtained updated information on the status of the Fund from the recently issued actuarial report on the Fund. For the third consecutive year, FHA reported that the Fund's capital ratio (the ratio of economic value to insurance-in-force) has not met the 2 percent statutory minimum (see below). FHA cites declines in the Fund's economic value due to higher-than-expected defaults, claims, and losses. At the same time, the other component of the ratio, FHA's insurance-in-force, has grown rapidly. The Fund's condition also worsened from a budgetary perspective, with balances in the Fund's capital reserve account reaching new lows. If the account were depleted, FHA would require more funds to help cover costs on insurance issued to date. FHA enhanced methods for assessing the Fund's financial condition but has not yet addressed GAO's 2010 recommendation for improving the reliability of its estimates. It relies on a single economic forecast, which does not fully account for variability in future house prices and interest rates. An approach that would simulate hundreds of economic paths for house prices and interest rates would improve the reliability of its capital ratio estimates. FHA has taken or plans a number of steps to better assess and manage risk. It created a risk office in 2010 and hired a consultant to recommend best practices. FHA plans to charter committees to evaluate risks at enterprise-wide and programmatic levels. It began a quality control initiative in the Office of Single Family Housing, in which program and field offices assess and report on risks. FHA also enhanced lender and appraiser reviews. While FHA's consultant recommended integrating risk assessments, the quality control and risk office activities currently remain separate efforts. Also, the Office of Single Family Housing has not annually updated assessments since 2009 as required. Without integrated and updated risk assessments that identify emerging risks, FHA lacks assurance it has identified all its risks. GAO previously made recommendations on modeling the Fund's financial condition, risk assessments, and human capital. FHA agreed with these recommendations and told GAO they have efforts underway to implement them.
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CBP is the lead federal agency in charge of securing the nation's borders. When CBP was created, it represented a merger of components from three agencies--the U.S. Customs Service, the U.S. Immigration and Naturalization Service (INS), and the Animal and Plant Health Inspection Service. Under the Immigration and Nationality Act, its implementing regulations, and CBP policies and procedures, CBP officers are required to establish, at a minimum, the nationality of individuals and whether they are eligible to enter the country at ports of entry. All international travelers attempting to enter the country through ports of entry undergo primary inspection, which is a preliminary screening procedure to identify those legitimate international travelers who can readily be identified as admissible. Regarding land ports of entry, the United States shares over 5,000 miles of border with Canada to the north (including the state of Alaska), and 1,900 miles of border with Mexico to the south. Individuals attempting to legally enter the United States by land present themselves to a CBP officer at one of the 170 ports of entry located along these borders. During the period of our investigations, U.S. citizens could gain entry to the United States by establishing their citizenship to the satisfaction of U.S. officials at a land port of entry. While this frequently involved a citizen presenting their birth certificate, photo identification (e.g., a driver's license), or baptismal records, the law did not require U.S. citizens to present any of these documents as proof of citizenship. Until recently, U.S. citizens could enter the country at land ports of entry based only on oral statements. However, as of January 31, 2008, U.S. citizens age 19 and older are required, under the Western Hemisphere Travel Initiative, to present both proof of identity and citizenship when attempting to enter the United States by land. Documents that would fulfill this requirement could include a passport, a military ID with travel orders, or an enhanced driver's license. In the absence of a single document that establishes both proof of identity and citizenship, U.S. citizens require multiple documents, such as a driver's license and a birth certificate, to enter the United States. Requirements for entering the United States by sea are similar to those for entering by land. Regarding air ports of entry, starting on January 23, 2007, U.S. citizens were required, under the Western Hemisphere Travel Initiative, to present a passport or secure travel document when entering the United States. Prior to the implementation of this initiative, U.S. citizens entering the country by air from such locations as the Bahamas, Mexico, and Jamaica could establish their citizenship by oral assertions and documents such as drivers' licenses and birth certificates. It is illegal to enter the United States at any location other than a port of entry. The U.S. Border Patrol, a component of CBP, patrols and monitors areas between ports of entry. However, given limited resources and the wide expanse of the border, the U.S. Border Patrol is limited in its ability to monitor the border either through use of technology or with a consistent manned presence. Commensurate with its perception of the threat, CBP has distributed human resources differently on the northern border than it has on the southern border. According to CBP, as of May 2007, it had 972 U.S. Border Patrol agents assigned to the northern border and 11,986 agents assigned to the southern border. The number of agents actually providing border protection at any given time is far smaller than these figures suggest. As mentioned above, in the September 2007 hearing on border security before your Committee, a CBP official stated that roughly 250 U.S. Border Patrol agents were patrolling the U.S.-Canada border at any given time--about a quarter of all agents reportedly assigned to patrol the northern border during that period. We found two types of security vulnerabilities in our covert testing at ports of entry. First, we found that, in the majority of cases, the government inspectors who reviewed our undercover investigators' counterfeit documentation did not know that they were bogus and allowed them to enter the country. Second, we found that government officials did not always ask for identification. Although it was not a requirement for government officials to ask for identification at the time we performed our tests, we concluded that this was a major vulnerability that could allow terrorists or other criminals to easily enter the country. In table 1 below, each individual instance of an investigator crossing the border is noted separately, although, in some cases, investigators crossed the border in groups of two or more. We consider our attempts to enter the country through sea and air ports of entry as different from our land crossings. For one thing, we did not perform the same amount of testing that we performed at land ports of entry. For another, the standard for admittance via air ports of entry continues to be stricter than via land and sea routes. In table 2 below, each individual instance of an investigator entering the United States via air or sea is noted separately. Selected details related to these covert tests are discussed below. For our 2003 testimony, investigators successfully entered the United States using counterfeit drivers' licenses and other bogus documentation through a land port of entry in Washington. They also entered Florida via air from Jamaica using the same counterfeit documentation. Similar follow-up work was performed throughout 2003 and 2004, resulting in successful entry at locations in Washington, New York, California, Texas, and Virginia using counterfeit identification. In 2006, investigators successfully entered the United States using counterfeit drivers' licenses and other bogus documentation through seven land ports of entry on the northern and southern borders, adding the states of Michigan, Idaho, and Arizona to the list of states they had entered. In the majority of cases, investigators entered the country by land using rental cars. When requested, they displayed counterfeit Virginia and West Virginia drivers' licenses and birth certificates to the government officials at ports of entry. They also used bogus U.S. passports and, in one case, a fake employee identification card in the name of a major U.S. airline. Government officials typically inspected the documentation while inquiring whether our undercover investigators were U.S. citizens. On some occasions, the officials asked whether our investigators had purchased anything in Canada or Mexico. In several instances, CBP officials asked our investigators to leave their vehicles and inspected the vehicles; they appeared to be searching for evidence of smuggling. In only one case on the northern border, one of our undercover investigators was denied entry because a CBP officer became suspicious of the expired U.S. passport with substituted photo offered as proof of citizenship. For our 2003 testimony, we found that INS inspectors did not request identification at a sea port of entry in Washington and a land port of entry in California. Our investigators' oral assertions that they were U.S. citizens satisfied the INS inspectors and they were allowed to enter the country. Later, while conducting our 2006 covert tests, we found that CBP officers did not request identification during several foot crossings from Mexico. For example, on February 23, 2006, two investigators crossed the border from Mexico into Texas on foot. When the first investigator arrived at the port of entry, he was waved through without being asked to show identification. At this point, the investigator asked the CBP officer whether he wished to see any identification. The officer replied, "OK, that would be good." The investigator began to remove his counterfeit Virginia driver's license from his wallet when the officer said "That's fine, you can go." The CBP officer never looked at the license. However, the CBP officer did request identification from the investigator who was walking behind the first investigator. In another test on March 15, 2006, two investigators entered Arizona from Mexico by foot. They had received a phone call in advance from another investigator who had crossed the border earlier using genuine identification. He said that the CBP officers on duty had swiped his driver's license through a scanning machine. Because the counterfeit drivers' licenses the other two investigators were carrying had fake magnetic strips, the investigators realized they could be questioned by CBP officers if their identification cards did not scan properly. When the two investigators arrived at the port of entry, they engaged one of the officers in conversation to distract him from scanning their drivers' licenses. After a few moments, the CBP officer asked the investigators if they were both U.S. citizens. They said, "yes." He then asked the investigators if they had purchased anything in Mexico, and they responded, "no." The CBP officer then said, "Have a nice day" and allowed them to enter the United States. He did not ask for any identification. We first reported on potential security vulnerabilities at unmanned and unmonitored border areas in our 2003 testimony. While conducting testing at U.S.-Canada ports of entry, we found that one of our investigators was able to walk into the United States from Canada at a park straddling the border. The investigator was not stopped or questioned by law enforcement personnel from either Canada or the United States. In our September 2007 testimony, we reported on similar vulnerabilities at unmanned and unmonitored locations on the northern and southern borders. The unmanned and unmonitored border areas we visited were defined as locations where CBP does not maintain a manned presence 24 hours per day or where there was no apparent monitoring equipment in place. Safety considerations prevented our investigators from performing the same assessment work on the U.S.-Mexico border as performed on the northern border. We found three main vulnerabilities during this limited security assessment. First, we found state roads close to the border that appeared to be unmanned and unmonitored, allowing us to simulate the cross- border movement of radioactive materials or other contraband from Canada into the United States. Second, we also located several ports of entry that had posted daytime hours and which, although monitored, were unmanned overnight. Investigators observed that surveillance equipment was in operation but that the only observable preventive measure to stop a cross-border violator from entering the United States was a barrier across the road that could be driven around. Finally, investigators identified potential security vulnerabilities on federally managed lands adjacent to the U.S.-Mexico border. These areas did not appear to be monitored or have a noticeable law enforcement presence during the time our investigators visited the sites. See table 3 for a summary of the vulnerabilities we found and the activity of investigators at each location. Selected details related to these covert tests are discussed below. According to CBP, the ease and speed with which a cross-border violator can travel to the border, cross the border, and leave the location of the crossing are critical factors in determining whether an area of the border is vulnerable. We identified state roads close to the border that appeared to be unmanned and unmonitored, allowing us to simulate the cross- border movement of radioactive materials or other contraband from Canada into the United States. For example, on October 31, 2006, our investigators positioned themselves on opposite sides of the U.S.-Canada border in an unmanned location. Our investigators selected this location because roads on either side of the border would allow them to quickly and easily exchange simulated contraband. After receiving a signal by cell phone, the investigator in Canada left his vehicle and walked approximately 25 feet to the border carrying a red duffel bag. While investigators on the U.S. side took photographs and made a digital video recording, the individual with the duffel bag proceeded the remaining 50 feet, transferred the duffel bag to the investigators on the U.S. side, and returned to his vehicle on the Canadian side. The set up and exchange lasted approximately 10 minutes, during which time the investigators were in view of residents both on the Canadian and U.S. sides of the border. According to CBP records of this incident, an alert citizen notified the U.S. Border Patrol about the suspicious activities of our investigators. The U.S. Border Patrol subsequently attempted to search for a vehicle matching the description of the rental vehicle our investigators used. However, the U.S. Border Patrol was not able to locate the investigators with the duffel bag, even though they had parked nearby to observe traffic passing through the port of entry. See figure 1 for a photograph of our investigator crossing the northern border at another unmanned, unmonitored location on the northern border with simulated contraband. In contrast to our observations on the northern border, our investigators observed a large law enforcement and Army National Guard presence near a state road on the southern border, including unmanned aerial vehicles. On October 17, 2006, two of our investigators left a main U.S. route about a quarter mile from a U.S.-Mexico port of entry. Traveling on a dirt road that parallels the border, our investigators used a GPS system to get as close to the border as possible. Our investigators passed U.S. Border Patrol agents and U.S. Army National Guard units. In addition, our investigators spotted unmanned aerial vehicles and a helicopter flying parallel to the border. At the point where the dirt road ran closest to the U.S.-Mexico border, our investigators spotted additional U.S. Border Patrol vehicles parked in a covered position. About three-fourths of a mile from these vehicles, our investigators pulled off the road. One investigator exited the vehicle and proceeded on foot through several gulches and gullies toward the Mexican border. His intent was to find out whether he would be questioned by law enforcement agents about his activities. He returned to the vehicle after 15 minutes, at which time our investigators returned to the main road. Our investigators did not observe any public traffic on this road for the 1 hour that they were in the area, but none of the law enforcement units attempted to stop our investigators and find out what they were doing. According to CBP, because our investigators did not approach from the direction of Mexico, there would be no expectation for law enforcement units to question these activities. We also identified several ports of entry with posted daytime hours in one state on the northern border. During the daytime these ports of entry are staffed by CBP officers. During the night, CBP told us that it relies on surveillance systems to monitor, respond to, and attempt to interdict illegal border crossing activity. For example, on November 14, 2006, at about 11:00 p.m., our investigators arrived on the U.S. side of one port of entry that had closed for the night. Investigators observed that surveillance equipment was in operation but that the only visible preventive measure to stop an individual from entering the United States was a barrier across the road that could be driven around. CBP provided us with records that confirmed our observations about the barrier at this port of entry, indicating that on one occasion a cross-border violator drove around this type of barrier to illegally enter the United States. Although the violator was later caught by state law enforcement officers and arrested by the U.S. Border Patrol, we were concerned that these ports of entry were unmanned overnight. Investigators identified potential security vulnerabilities on federally managed land adjacent to the U.S.-Mexico border. These areas did not appear to be monitored or have a manned CBP presence during the time our investigators visited the sites. For example, on January 9, 2007, our investigators entered federally managed land adjacent to the U.S.-Mexico border. The investigators had identified a road running parallel to the border in this area. Our investigators were informed by an employee of a visitor center that because the U.S. government was building a fence, the road was closed to the public. However, our investigators proceeded to the road and found that it was not physically closed. While driving west along this road, our investigators did not observe any surveillance cameras or law enforcement vehicles. A 4-foot-high fence (appropriate to prevent the movement of a vehicle rather than a person) stood at the location of the border. Our investigators pulled over to the side of the road at one location. To determine whether he would activate any intrusion alarm systems, one investigator stepped over the fence, entered Mexico, and returned to the United States. The investigators remained in the location for approximately 15 minutes but there was no observed law enforcement response to their activities. In another example, on January 23, 2007, our investigators arrived on federally managed lands adjacent to the U.S.-Mexico border. In this area, the Rio Grande River forms the southern border between the United States and Mexico. After driving off-road in a 4x4 vehicle to the banks of the Rio Grande, our investigators observed, in two locations, evidence that frequent border crossings took place. In one location, the investigators observed well-worn footpaths and tire tracks on the Mexican side of the river. At another location, a boat ramp on the U.S. side of the Rio Grande was mirrored by a boat ramp on the Mexican side. Access to the boat ramp on the Mexican side of the border had well-worn footpaths and vehicle tracks. An individual who worked in this area told our investigators that at several times during the year, the water is so low that the river can easily be crossed on foot. Our investigators were in this area for 1 hour and 30 minutes and observed no surveillance equipment, intrusion alarm systems, or law enforcement presence. Our investigators were not challenged regarding their activities. After performing our limited security assessment of these locations, investigators learned that a memorandum of understanding exists between DHS (of which CBP is a component), the Department of the Interior, and the Department of Agriculture regarding the protection of federal lands adjacent to U.S. borders. Although CBP is ultimately responsible for protecting these areas, officials told us that certain legal, environmental, and cultural considerations limit options for enforcement--for example, environmental restrictions and tribal sovereignty rights. We held corrective action briefings with CBP in 2006 and 2007 to discuss the results of our prior work. CBP generally agreed with our August 2006 findings and acknowledged that its officers are not able to identify all forms of counterfeit identification presented at land border crossings. In addition, in response to our August 2006 work, CBP officials stated that they supported the Western Hemisphere Travel Initiative and were working to implement it. This initiative has several parts, the most recent of which went into effect on January 31, 2008. In response to our September 2007 report, CBP indicated that resource restrictions prevent U.S. Border Patrol agents from investigating all instances of suspicious activity. CBP stated that the northern border presents more of a challenge than the southern border for several reasons, including the wide expanse of the border and the existence of many antiquated ports of entry. In response to this report, DHS provided a written update on numerous border protection efforts it has taken to enhance border security since 2003. To directly address vulnerabilities related to bogus documentation, DHS stated that measures have been implemented to enhance CBP officers' ability to detect fraudulent documents, such as providing updated fraudulent document training modules to the CBP Academy for inclusion in its curriculum, implementing mandatory refresher training in detecting fraudulent documents, and providing the 11 ports of entry that have the highest rate of fraudulent document interceptions with advanced equipment to assist with the examination and detection of fraudulent documents. DHS also pointed out that, effective January 31, 2008, it has ended verbal declarations of citizenship at border crossings and now requires documents for U.S. citizens. If implemented effectively, this would address some of the vulnerabilities we identified in our 2003 and 2006 testimonies. According to DHS, although the full implementation of its Western Hemisphere Travel Initiative has been delayed, the implementation will also address vulnerabilities cited in our testimonies. In addition, DHS indicated that it has taken a number of actions related to the security of the northern border. In particular, DHS states that, as of April 2008, there were 1,128 agents assigned to the Northern Border--a 16 percent increase from the 972 agents identified in our 2007 report. Furthermore, DHS plans to double personnel staffing levels over the next 2 years to over 2,000 agents by the end of fiscal year 2010. DHS also indicates that CBP has established a field testing division to perform covert tests that appear similar to our own tests, with a particular focus on detecting and preventing illicit radioactive material from entering the United States. We addressed DHS technical and sensitivity comments as appropriate. We did not attempt to verify the information provided by DHS, but have included its full response in appendix I. As agreed with your offices, unless you publicly announce the contents of this report earlier, we will plan no further distribution until 30 days from the report date. At that time, we will provide copies of this report to the Secretary of Homeland Security and interested congressional committees and members. 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://gao.gov. Please contact me at (202) 512-6722 or [email protected] if you or your staffs have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report included John Cooney, Assistant Director; Andy O'Connell, Assistant Director; Barbara Lewis, Andrew McIntosh, Sandra Moore, and Barry Shillito.
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From January 2003 to September 2007, GAO testified before the Committee on three occasions to describe security vulnerabilities that terrorists could exploit to enter the country. GAO's first two testimonies focused on covert testing at ports of entry--the air, sea, and land locations where international travelers can legally enter the United States. In its third testimony, GAO focused on limited security assessments of unmanned and unmonitored border areas between land ports of entry. GAO was asked to summarize the results of covert testing and assessment work for these three testimonies. This report discusses the results of testing at land, sea, and air ports of entry; however, the majority of GAO's work was focused on land ports of entry. The unmanned and unmonitored border areas GAO assessed were defined as locations where the government does not maintain a manned presence 24 hours per day or where there was no apparent monitoring equipment in place. GAO assessed a nonrepresentative selection of these locations and did not attempt to evaluate all potential U.S. border security vulnerabilities. Further, GAO's work was limited in scope and cannot be projected to represent systemic weaknesses. In response to this report, DHS provided a written update on numerous border protection efforts it has taken to enhance border security since 2003. GAO did not attempt to verify the information provided by DHS, but has included the response in this report. GAO investigators identified numerous border security vulnerabilities, both at ports of entry and at unmanned and unmonitored land border locations between the ports of entry. In testing ports of entry, undercover investigators carried counterfeit drivers' licenses, birth certificates, employee identification cards, and other documents, presented themselves at ports of entry and sought admittance to the United States dozens of times. They arrived in rental cars, on foot, by boat, and by airplane. They attempted to enter in four states on the northern border (Washington, New York, Michigan, and Idaho), three states on the southern border (California, Arizona, and Texas), and two other states requiring international air travel (Florida and Virginia). In nearly every case, government inspectors accepted oral assertions and counterfeit identification provided by GAO investigators as proof of U.S. citizenship and allowed them to enter the country. In total, undercover investigators made 42 crossings with a 93 percent success rate. On several occasions, while entering by foot from Mexico and by boat from Canada, investigators were not even asked to show identification. For example, at one border crossing in Texas in 2006, an undercover investigator attempted to show a Customs and Border Protection (CBP) officer his counterfeit driver's license, but the officer said, "That's fine, you can go" without looking at it. As a result of these tests, GAO concluded that terrorists could use counterfeit identification to pass through most of the tested ports of entry with little chance of being detected. In its most recent work, GAO shifted its focus from ports of entry and primarily performed limited security assessments of unmanned and unmonitored areas between ports of entry. The names of the states GAO visited for this limited security assessment have been withheld at the request of CBP. In four states along the U.S.-Canada border, GAO found state roads that were very close to the border that CBP did not appear to monitor. In three states, the proximity of the road to the border allowed investigators to cross undetected, successfully simulating the cross-border movement of radioactive materials or other contraband into the United States from Canada. For example, in one apparently unmanned, unmonitored area on the northern border, the U.S. Border Patrol was alerted to GAO's activities through the tip of an alert citizen. However, the responding U.S. Border Patrol agents were not able to locate the investigators and their simulated contraband. Also on the northern border, GAO investigators located several ports of entry in one state on the northern border that had posted daytime hours and were unmanned overnight. Investigators observed that surveillance equipment was in operation, but that the only preventive measure to stop an individual from crossing the border into the United States was a barrier across the road that could be driven around. GAO also identified potential security vulnerabilities on federally managed lands adjacent to the U.S.-Mexico border. GAO concluded that CBP faces significant challenges on the northern border, and that a determined cross-border violator would likely be able to bring radioactive materials or other contraband undetected into the United States by crossing the U.S.-Canada border at any of the assessed locations.
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Both State and DOD recognize the need to improve stability and reconstruction capabilities of the United States, and the importance of coordinating military activities with those of other U.S. government agencies and international partners. Following the problems with reconstruction efforts in Iraq in the Fall of 2003, State noted that the U.S. government had no standing civilian capacity to plan, implement, or manage stabilization and reconstruction operations and had relied on ad hoc processes for planning and executing these efforts. State recommended that a new office be established to provide a centralized and permanent structure for planning and coordinating the civilian response to stabilization and reconstruction operations. In August 2004, the Secretary of State announced the creation of the Office of the Coordinator for Reconstruction and Stabilization (S/CRS) to coordinate U.S. efforts to prepare, plan, and resource responses to complex emergencies, failing and failed states, and post conflict environments. Such efforts could involve establishing security, building basic public services, and economic development. The Consolidated Appropriations Act of 2005 granted statutory authorization for S/CRS within the Office of the Secretary of State. In November 2005, DOD issued DOD Directive 3000.05, Military Support for Stability, Security, Transition, and Reconstruction (SSTR) Operations, which established the Department's policy for stability operations. In its directive, DOD recognizes that stability operations is a core U.S. military mission, but that many stability operations are best performed by indigenous, foreign, or U.S. civilian professionals and that DOD's participation may be in a supporting role. However, it also states that U.S. military forces shall be prepared to perform all tasks necessary to establish or maintain order when civilians cannot do so. In December 2005, President Bush issued NSPD-44 to promote the security of the United States through improved coordination, planning, and implementation of stabilization and reconstruction assistance. NSPD-44 assigned the Secretary of State the responsibility to coordinate and lead U.S. government efforts to plan for, prepare and conduct stabilization and reconstruction operations in countries and regions at risk of, in, or in transition from conflict or civil strife. The Secretary, in turn, delegated implementation of the directive to S/CRS. NSPD-44 identifies roles, responsibilities, and coordination requirements of U.S. government agencies that would likely participate in stabilization and reconstruction operations. It also requires that State lead the development of civilian response capability, including the capacity to ensure that the United States can respond quickly and effectively to overseas crises. Finally, NSPD-44 established the NSC Policy Coordination Committee for Reconstruction and Stabilization Operations to manage the development, implementation, and coordination of stabilization and reconstruction national security policies. S/CRS has led an interagency effort to develop a framework for planning and coordinating stabilization and reconstruction operations. The NSC has adopted two of three elements of the framework--the Interagency Management System (IMS) and procedures for initiating the framework's use. One element--a guide for planning stabilization and reconstruction operations--has not been completed. As of October 2007, the framework has not been fully applied to any operation. In addition, NSPD-44, the Foreign Affairs Manual, and the framework provide unclear and inconsistent guidance on roles and responsibilities for S/CRS and other State bureaus and offices; the lack of a common definition for stability and reconstruction operations may pose an obstacle to interagency collaboration; and some partners have shown limited support for the framework and S/CRS. S/CRS is leading an NSC interagency group of 16 agencies to create a framework for developing specific stabilization and reconstruction plans under NSPD-44. The framework is intended to guide the development of U.S. planning for stabilization and reconstruction operations by facilitating coordination across federal agencies and aligning interagency efforts at the strategic, operational, and tactical levels. Key elements of the framework include an IMS, a guide for planning specific stabilization and reconstruction operations, and procedures for initiating governmentwide planning. The IMS, the first element of the framework, was created to manage high- priority and highly complex crises and operations. In March 2007, the NSC approved the IMS, which would guide coordination between Washington, D.C. policymakers, Chiefs of Mission, and civilian and military planners. If used, IMS would include three new interagency groups for responding to specific crises: a Country Reconstruction and Stabilization Group, an Integration Planning Cell, and an Advance Civilian Team. The Country Reconstruction and Stabilization Group would be responsible for developing U.S. government policies that integrate civilian and military plans and for mobilizing civilian responses to stabilization and reconstruction operations. The Integration Planning Cell would integrate U.S. civilian agencies' plans with military operations. The Advance Civilian Team would be deployed to U.S. embassies to set up, coordinate, and conduct field operations and provide expertise on implementing civilian operations to the Chief of Mission and military field commanders. These teams would be supported by Field Advance Civilian Teams to assist reconstruction efforts at the local level. The second element of the framework, which the NSC approved in March 2007, establishes procedures for initiating the use of the framework for planning a U.S. response to an actual crisis or in longer-term scenario- based planning. Factors that may trigger the use of the framework include the potential for military action, actual or imminent state failure, the potential for regional instability, displacement of large numbers of people, and grave human rights violations. The use of the framework for planning crisis responses may be initiated by the NSC or by a direct request from the Secretary of State or the Secretary of Defense. The NSC, Chiefs of Mission, and Regional Assistant Secretaries of State may request the framework's initiation for longer-term scenario planning for crises that may occur within 2 to 3 years. The third element, the planning guide, has not been approved by the NSC because State is rewriting the draft planning guide to address interagency concerns. Although NSC approval of the draft planning guide is not required, S/CRS officials stated that NSC approval would lend authority to the framework and strengthen its standing among interagency partners. The draft planning guide divides planning for stabilization and reconstruction operations into three levels: policy formulation, strategy development, and implementation planning. The guide states that the goals and objectives at each level should be achievable, be linked to planned activities, and include well-defined measures for determining progress. As of October 2007, the administration had not fully applied the framework to any stabilization and reconstruction operation. While IMS was approved by the NSC, the administration has not yet applied it to a current or potential crisis. The administration also applied earlier versions of one component of the framework--the planning guide--for efforts in Haiti, Sudan, and Kosovo. According to State officials, the administration has been using NSPD-1 processes to manage and plan U.S. operations in Iraq and Afghanistan in the absence of an approved framework. In completing the framework, State must resolve three key problems. First, NSPD-44, the Foreign Affairs Manual, and the framework provide unclear and inconsistent guidance on the roles and responsibilities of S/CRS and State's bureaus and offices, resulting in confusion and disputes about who should lead policy development and control resources for stabilization and reconstruction operations. The Foreign Affairs Manual does not define S/CRS's roles and responsibilities, but it does define responsibilities for State's regional bureaus and Chiefs of Mission. Each regional bureau is responsible for providing direction, coordination, and supervision of U.S. activities in countries within the region, while each Chief of Mission has authority over all U.S. government staff and activities in the country. However, according to S/CRS's initial interpretation of NSPD-44, it was responsible for leading, planning, and coordinating stabilization and reconstruction operations. Staff from one of State's regional bureaus said that S/CRS had enlarged its role in a way that conflicted with the Regional Assistant Secretary's responsibility for leading an operation and coordinating with interagency partners. More recently, according to S/CRS officials, S/CRS has taken a more facilitative role in implementing NSPD-44. Second, the lack of a common definition for stability and reconstruction operations may pose an obstacle to effective interagency collaboration under the framework. The framework does not define what constitutes stabilization or reconstruction operations, including what specific missions and activities would be involved. In addition, the framework does not explain how these operations differ from other types of military and civilian operations, such as counterinsurgency, counterterrorism, and development assistance. As a result, it is not clear when, where, or how the administration would apply the framework. In our October 2005 report, we found that collaborative efforts require agency staff to define and articulate a common outcome or purpose. Prior GAO work shows that the lack of a clear definition can pose an obstacle to improved planning and coordination of stabilization and reconstruction operations. Third, some interagency partners and State staff expressed concern over the framework's importance and utility. For example, some interagency partners and staffs from various State offices said that senior officials did not communicate strong support for S/CRS or the expectation that State and interagency partners should use the framework. S/CRS has not been given key roles for operations that emerged after its creation, such as the ongoing efforts in Lebanon and Somalia, which several officials and experts stated are the types of operations S/CRS was created to address. In addition, USAID staff noted that some aspects of the planning framework were unrealistic, ineffective, and redundant because interagency teams had already devised planning processes for ongoing operations in accordance with NSPD-1. Further, some interagency partners believe the planning process, as outlined in the draft planning guide, is too cumbersome and time consuming for the results it produces. Although officials who participated in planning for Haiti stated that the process provided more systematic planning, some involved in the operations for Haiti and Sudan said that the framework was too focused on process. Staff also said that in some cases, the planning process did not improve outcomes or increase resources, particularly since S/CRS has few resources to offer. As a result, officials from some offices and agencies have expressed reluctance to work with S/CRS on future stabilization and reconstruction plans. DOD has taken several positive steps toward developing a new approach to stability operations but has encountered challenges in several areas. As discussed in our May 2007 report, since November 2005, the department issued a new policy, expanded its military planning guidance, and developed a joint operating concept to help guide DOD planning for stability operations. However, because DOD has not yet fully identified and prioritized stability operations capabilities as required by DOD's new policy, the services are pursuing initiatives that may not provide the comprehensive set of capabilities that combatant commanders need to accomplish stability operations in the future. Also, DOD has made limited progress in developing measures of effectiveness as required by DOD Directive 3000.05, which may hinder the department's ability to determine if its efforts to improve stability operations capabilities are achieving the desired results. Similarly, the combatant commanders are establishing working groups and other outreach efforts to include non-DOD organizations in the development of a wide range of military plans that combatant commanders routinely develop, but these efforts have had a limited effect because of inadequate guidance, practices that inhibit sharing of planning information, and differences in the planning capabilities and capacities of all organizations involved. Finally, although DOD collects lessons learned from past operations, DOD does not have a process to ensure that lessons learned are considered when plans are reviewed. As a result, DOD heightens its risk of either repeating past mistakes or being unable to build on its experiences from past operations as it plans for future operations. Among the many improvement efforts under way, DOD has taken three key steps that frame its approach to stability operations. First, in November 2005, DOD published DOD Directive 3000.05, which formalized a stability operations policy that elevated stability operations to a core mission, gave such operations priority comparable to combat operations, and stated that stability operations will be explicitly addressed and integrated across all DOD activities, including doctrine, training, education, exercises, and planning. The directive also states that many stability operations are best performed by indigenous, foreign, or U.S. civilian personnel, but that U.S. military forces shall be prepared to perform all tasks necessary to maintain order when civilians cannot do so. The directive assigned approximately 115 specific responsibilities to 18 DOD organizations. For example, the Under Secretary of Defense for Policy is responsible for, among other things, identifying DOD-wide stability operations capabilities, and recommending priorities to the Secretary of Defense, and submitting a semiannual stability operations report to the Secretary of Defense. A second step taken by DOD to improve stability operations was to broaden its military planning guidance beyond DOD's traditional emphasis on combat operations for joint operations to include noncombat activities to stabilize countries or regions and prevent hostilities and postcombat activities that emphasize stabilization, reconstruction, and transition governance to civil authorities. Figure 1 illustrates the change in DOD planning guidance. As shown in figure 1, military planners in DOD's combatant commands will now be required to plan for six phases of an operation, which include new phases focused on (1) shaping efforts to stabilize regions so that conflicts do not develop and (2) enabling civil authorities. These are also the phases of an operation that will require significant unity of effort and close coordination between DOD and other federal agencies. A third step taken by DOD that frames the approach to stability operations was the publication, by Joint Forces Command, of the Military Support to Stabilization, Security, Transition, and Reconstruction Operations Joint Operating Concept. This publication will serve as a basis for how the military will support stabilization, security, transition, and reconstruction operations in foreign countries in the next 15 to 20 years. The military services also have taken complementary actions to improve stability operations capabilities. For example, the Marine Corps has established a program to improve cultural awareness training, increased civil affairs planning in its operational headquarters, and established a Security Cooperation Training Center. Navy officials highlighted service efforts to (1) align its strategic plan and operations concept to support stability operations, (2) establish the Navy Expeditionary Combat Command, and (3) dedicate Foreign Area Officers to specific countries as their key efforts to improve stability operations capabilities. We have identified four specific challenges that if not addressed, may hinder DOD's ability to develop the full range of capabilities needed for stability operations, or to facilitate interagency participation in the routine planning activities at the combatant commands. DOD has not identified and prioritized the full range of capabilities needed for stability operations. At the time of our review, DOD had made limited progress in fully identifying and prioritizing capabilities needed for stability operations, which was required by DOD Directive 3000.05. In the absence of DOD-wide guidance, a variety of approaches were being used by the combatant commands to identify stability operations capabilities and requirements. We identified two factors that limited DOD's progress in carrying out the capability gap assessment process. First, at the time of our review, DOD had not issued its 2007 planning guidance to the combatant commanders that reflect the new 6-phase approach to planning previously discussed in this testimony. This planning guidance forms the basis on which combatant commanders develop operational plans and identify needed capabilities. Second, there was significant confusion over how to define stability operations. For example, Air Force officials stated in their May 22, 2006, Stability Operations Self-Assessment that the absence of a common lexicon for stability operations functions, tasks, and actions results in unnecessary confusion and uncertainty when addressing stability operations. This lack of a clear and consistent definition of stability operations has caused confusion across DOD about how to identify stability operations activities and the end state for which commanders need to plan. Because of the fragmented efforts being taken by combatant commands to identify requirements, and the different approaches taken by the services to develop capabilities, the potential exists that the department may not be identifying and prioritizing the most critical capabilities needed by the combatant commanders, and the Under Secretary of Defense for Policy has not been able to recommend capability priorities to the Secretary of Defense. The department recognizes the importance of successfully completing these capability assessments, and in the August 2006 report on stability operations to the Secretary of Defense, the Under Secretary stated that the department has not yet defined the magnitude of DOD's stability operations capability deficiencies, and that clarifying the scope of these capability gaps continues to be a priority within the department. DOD has made limited progress in developing measures of effectiveness. DOD Directive 3000.05 required numerous organizations within DOD to develop measures of effectiveness that could be used to evaluate progress in meeting their respective goals outlined in the directive. Our past work on DOD transformation reported the advantages of using management tools, such as performance measures, to gauge performance in helping organizations successfully manage major transformation efforts. Performance measures are an important results-oriented management tool that can enable managers to determine the extent to which desired outcomes are being achieved. Performance measures should include a baseline and target; be objective, measurable, and quantifiable; and include specific time frames. Results-oriented measures further ensure that it is not the task itself being evaluated, but progress in achieving the intended outcome. Despite this emphasis on developing performance measures, however, as of March 2007, we found that DOD achieved limited progress in developing measures of effectiveness because of significant confusion over how this task should be accomplished and minimal guidance provided by the Office of Policy. For example, each of the services described to us alternative approaches it was taking to develop measures of effectiveness, and three services initially placed this task on hold pending guidance from DOD. Officials in the combatant commands we visited were either waiting for additional guidance or stated that that there were no actions taken to develop measures of effectiveness. Without clear departmentwide guidance on how to develop measures of effectiveness and milestones for completing them, confusion may continue to exist within the department, and progress on this important management tool may be significantly hindered. DOD has not fully established mechanisms that would help it achieve consistent interagency participation in the military planning process. The combatant commanders routinely develop a wide range of military plans for potential contingencies for which DOD may need to seek input from other agencies or organizations. Within the combatant commands where contingency plans are developed, the department is either beginning to establish working groups or is reaching out to U.S. embassies on an ad hoc basis to obtain interagency perspectives. But this approach to coordinate with embassies on an ad-hoc basis can be cumbersome, does not facilitate interagency participation in the actual planning process, and does not include all organizations that may be able to contribute to the operation being planned. Three factors hinder interagency participation in DOD's routine planning activities at the combatant commands. First, DOD has not provided specific guidance to the commands on how to integrate planning with non- DOD organizations. Second, DOD does not have a process in place to facilitate the sharing of planning information with non-DOD agencies because department policy is to not share DOD contingency plans with agencies or offices outside of DOD unless directed by the Secretary of Defense. Third, DOD and non-DOD organizations, such as State and USAID, lack an understanding of each other's planning processes and capabilities and have different planning cultures and capacities. DOD collects lessons learned from past operations, but planners are not consistently using this information as they develop future contingency plans. Lessons learned from current and past operations are being captured and incorporated into various databases, but our analysis shows that DOD planners are not using this information on a consistent basis as plans are revised or developed. Three factors contribute to this inconsistent use of lessons learned in planning: (1) DOD's guidance for incorporating lessons learned into plans is outdated and does not specifically require planners to include lessons learned in the planning process, (2) accessing and searching lessons-learned databases is cumbersome, and (3) the planning review process does not evaluate the extent to which lessons learned are incorporated into specific plans. As a result, DOD is not fully utilizing the results of the lessons-learned systems and may repeat past mistakes. In our May 2007 report, we recommended that DOD provide comprehensive guidance to enhance their efforts to (1) identify and address capability gaps, (2) develop measures of effectiveness, and (3) facilitate interagency participation in the development of military plans. We also recommended that the Secretary of Defense in coordination with the Secretary of State develop a process to share planning information with interagency representatives early in the development of military contingency plans, and more fully incorporate stability operations- related lessons learned into the planning process. DOD partially agreed with our recommendations but did not state what specific steps, if any, it plans to take to implement them. Therefore, we included a matter for congressional consideration suggesting that Congress consider requiring the Secretary of Defense to develop an action plan and report annually on the specific steps being taken to address our recommendations and the current status of its efforts. Since 2005, State has been developing three civilian corps to deploy rapidly to international crises. State has established two internal units made up of State employees--the Active Response Corps (ARC) and the Standby Response Corps (SRC). In May 2007, State began an effort to establish the Civilian Reserve Corps (CRC), which would be made up of nonfederal civilians who would become full-time term federal employees. State and other agencies face difficulties in establishing positions and recruiting personnel for the ARC and training SRC volunteers; securing resources for international operations not viewed as part of the agencies' domestic missions; and addressing the possibility that deployed volunteers could result in staff shortages for the home unit. For the CRC, State needs further congressional authorization to establish the Corps and provide compensation packages. Further, State is moving the civilian reserve concept forward without a common interagency definition of stabilization and reconstruction operations. To meet NSPD-44 requirements for establishing a strong civilian response capability, State and other U.S. agencies are developing three corps of civilians to support stabilization and reconstruction operations. Table 1 summarizes the three civilian corps. In 2006, State established the ARC within S/CRS, whose members would deploy during the initial stage of a U.S. stabilization and reconstruction operation. These first responders would deploy to unstable environments to assess countries' or regions' needs and help plan, coordinate, and monitor a U.S. government response. Since 2006, S/CRS has deployed ARC staff to Sudan, Eastern Chad, Lebanon, Kosovo, Liberia, Iraq, and Haiti. When not deployed, ARC members engage in training and other planning exercises and work with other S/CRS offices and State bureaus on related issues to gain relevant expertise. Members of the SRC would deploy during the second stage of a stabilization and reconstruction operation and would supplement ARC staff or provide specialized skills needed for the stabilization and reconstruction operation. When not deployed, SRC employees serve in other capacities throughout State. Through October 2007, S/CRS has deployed SRC members to Sudan in support of the Darfur Peace Agreement and to Chad to support Darfur refugees who had migrated into the country. S/CRS has worked to establish Active and Standby Response Corps in other U.S. agencies that could be drawn upon during the initial stage of a stabilization and reconstruction operation. Currently, only USAID and the Department of the Treasury have established units to respond rapidly to stability and reconstruction missions and have identified staff available for immediate deployment to a crisis. In July 2007, the NSC approved S/CRS plans to establish a governmentwide SRC with 500 volunteers by fiscal year 2008 and 2,000 volunteers by fiscal year 2009. In 2007, State received authority to make available funds to establish a CRC. This corps' staff would be deployed to support stabilization and reconstruction operations for periods of time longer than the Active and Standby Response Corps. The CRC would be comprised of U.S. civilians from the private sector, state and local governments, and nongovernmental organizations who have skills not readily available within the U.S. government. These reservists would remain in their nonfederal jobs until called upon for service and, when deployed, would be classified as full-time term federal employees. They would have the authority to speak for the U.S. government and manage U.S. government contracts and employees. These personnel would receive training upon joining CRC and would be required to complete annual training. In addition, they would receive training specific and relevant to an operation immediately before deployment. Based on our work to date, State and other agencies face the following challenges in establishing and expanding their Active and Standby Response Corps. S/CRS has had difficulty establishing positions and recruiting personnel for ARC and training SRC volunteers. S/CRS plans to increase the number of authorized staff positions for ARC from 15 temporary positions to 33 permanent positions, which State included in its 2008 budget request. However, according to S/CRS staff, it is unlikely that State will receive authority to establish all 33 positions. Further, S/CRS has had trouble recruiting ARC personnel, and as shown in Table 1, S/CRS has only been able to recruit 11 of the 15 approved ARC positions. State also does not presently have the capacity to train the 1,500 new SRC volunteers that S/CRS plans to recruit in 2009. S/CRS is studying ways to correct the situation. Many agencies that operate overseas have limited numbers of staff available for rapid responses to overseas crises because their missions are domestic in nature. Officials from the Departments of Commerce, Homeland Security, and Justice said that their agencies or their appropriators do not view international programs as central to their missions. As a result, it is difficult for these agencies to secure funding for deployments to active stabilization and reconstruction operations, whether as part of a cadre of on-call first and second responders or for longer-term assistance programs. State and other agencies said that deploying volunteers can result in staff shortages in their home units; thus, they must weigh the value of deploying volunteers against the needs of these units. For example, according to State's Office of the Inspector General, S/CRS has had difficulty getting State's other units to release the SRC volunteers it wants to deploy in support of stabilization and reconstruction operations. Other agencies also reported a reluctance to deploy staff overseas or to establish on-call units because doing so would leave fewer workers available to complete the offices' work requirements. State also faces several challenges in establishing the CRC. In 2007, Congress granted State the authority to make available up to $50 million of Diplomatic and Consular Programs funds in the fiscal year 2007 supplemental to support and maintain the CRC. However, the legislation specified that no money may be obligated without specific authorization for the CRC's establishment in a subsequent act of Congress. Legislation that would authorize the CRC is pending in both the Senate and the House of Representatives, but as of October 2007, neither chamber had taken action on the bills. In addition, State needs congressional authority to provide key elements of a planned compensation package for CRC personnel. Proposed legislation would allow State to provide the same compensation and benefits to deployed CRC personnel as it does to members of the Foreign Service, including health, life, and death benefits; mission-specific awards and incentive pay; and overtime pay and compensatory time. However, the proposed legislation does not address whether deployed CRC personnel would have competitive hiring status for other positions within State or whether the time deployed would count toward government retirement benefits. In addition, deployed CRC personnel would not have reemployment rights similar to those for military reservists. Currently, military reservists who are voluntarily or involuntarily called into service have the right to return to their previous places of employment upon completion of their military service requirements. Further, S/CRS is moving the CRC concept forward without a common interagency definition of stabilization and reconstruction operations. According to S/CRS staff and pending legislation that would authorize CRC, reservists would deploy to nonhumanitarian stabilization and reconstruction missions. However, S/CRS has not defined what these missions would be and how they would differ from other foreign assistance operations. A common interagency definition of what constitutes a stabilization and reconstruction operation is needed to determine the corps' structure, the missions it would support, and the skills and training its volunteers would need. State and DOD have begun to take steps to enhance and better coordinate stability and reconstruction activities, but several significant challenges may hinder their ability to successfully integrate planning for potential future operations and strengthen military and civilian capabilities to conduct them. Specifically, without an interagency planning framework and clearly defined roles and responsibilities, achieving unity of effort in stabilization and reconstruction operations, as envisioned by NSPD-44, may continue to be difficult to achieve. Also, unless DOD develops a better approach for including other agencies in the development of combatant commander military contingency plans, DOD's plans may continue to reflect a DOD-centric view of how potential conflicts may unfold. Moreover, better guidance on how DOD should identify and prioritize capability gaps, measure progress, and incorporate lessons learned into future planning is needed to ensure that DOD is using its available resources to address the highest priority gaps in its stability operations capabilities. Finally, unless State develops and implements a sound plan to bolster civilian capabilities to support stability and reconstruction operations and establish a capable civilian reserve corps, DOD may continue to be heavily relied upon to provide needed stability and reconstruction capabilities, rather than leveraging expertise that resides more appropriately in civilian agencies. Mr. Chairman and Members of the Subcommittee, this concludes our prepared remarks. We would be happy to answer any questions you may have. For questions regarding this testimony, please call Janet A. St. Laurent at (202) 512-4402 or [email protected] or Joseph A. Christoff at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other key contributors to this statement were Robert L. Repasky, Assistant Director; Judith McCloskey, Assistant Director; Sam Bernet; Tim Burke; Leigh Caraher; Grace Coleman; Lynn Cothern; Marissa Jones; Sona Kalapura; Kate Lenane; and Amber Simco. 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 United States has become increasingly involved in stabilization and reconstruction operations as evidenced in the Balkans, Haiti, Somalia, Iraq, and Afghanistan. In December 2005, the President issued National Security Presidential Directive 44, establishing governmentwide policy for coordinating, planning, and implementing U.S. stabilization and reconstruction assistance to affected foreign entities. This testimony addresses stabilization and reconstruction issues related to (1) State Department (State) efforts to improve interagency planning and coordination, (2) Department of Defense (DOD) efforts to enhance its capabilities and planning, and (3) State efforts to develop civilian capabilities. GAO's statement is based on its May 2007 report on DOD stability operations and preliminary observations related to State's interagency planning framework and civilian response capabilities. State and DOD have begun to take steps to better coordinate stabilization and reconstruction activities, but several significant challenges may hinder their ability to integrate planning for potential operations and strengthen military and civilian capabilities to conduct them. State's Office of the Coordinator for Reconstruction and Stabilization is developing a framework for U.S. agencies to use when planning stabilization and reconstruction operations, but the framework has yet to be fully applied to any operation. The National Security Council has not approved the entire framework, guidance related to the framework is unclear, and some interagency partners have not accepted it. For example, some interagency partners stated that the framework's planning process is cumbersome and too time consuming for the results it produces. While steps have been taken to address concerns and strengthen the framework's effectiveness, differences in planning capacities and procedures among U.S. government agencies may pose obstacles to effective coordination. DOD has taken several positive steps to improve its ability to conduct stability operations but faces challenges in developing capabilities and measures of effectiveness, integrating the contributions of non-DOD agencies into military contingency plans, and incorporating lessons learned from past operations into future plans. These challenges, if not addressed, may hinder DOD's ability to fully coordinate and integrate stabilization and reconstruction activities with other agencies or to develop the full range of capabilities those operations may require. Among its many efforts, DOD has developed a new policy, planning construct and joint operating concept with a greater focus on stability operations, and each service is pursuing efforts to improve capabilities. However, inadequate guidance, practices that inhibit sharing of planning information with non-DOD organizations, and differences in the planning capabilities and capacities of DOD and non-DOD organizations hinder the effectiveness of these improvement efforts. Since 2005, State has been developing three civilian corps to deploy rapidly to international crises, but significant challenges must be addressed before they will be fully capable. State and other agencies face challenges in establishing two of these units--the Active Response Corps and Standby Response Corps--because of staffing and resource constraints and concerns that stabilization and reconstruction operations are not core missions for each parent organization. Congress has not yet enacted legislation necessary for State to obligate funds for the third unit, the Civilian Reserve Corps, staffed solely with non-federal volunteers. Further, State has not fully defined the types of missions these personnel would be deployed to support.
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Before discussing FAA's efforts to implement a number of security initiatives, it is important to discuss some of the vulnerabilities that exist within the nation's aviation security system. In our previous reports and testimonies, we highlighted a number of these vulnerabilities. Since the 1988 bombing of Pan Am Flight 103, security reviews by FAA, audits conducted by GAO and the Department of Transportation's Inspector General, and the work of a presidential commission have shown that the system continues to be flawed. In fact, nearly every major aspect of the system--ranging from screening passengers, checked and carry-on baggage, mail, and cargo to controlling the access to secured areas within an airport environment--has weaknesses that could be exploited. For example, for those bags that are screened, we reported in March 1996 that conventional X-ray screening systems had performance limitations and offer little protection against a moderately sophisticated explosive device. According to the intelligence community, the threat of terrorism against the United States has increased. The World Trade Center bombing and the emergence in the United States of more dangerous international terrorist groups revealed that the threat of attacks in the United States is more serious and more extensive than previously believed. On the basis of information provided by the intelligence community, FAA makes judgments about the threat to aviation and decides which procedures would best address the threat. Among these procedures are methods to identify passengers who pose potential risks and who are then subjected to additional security measures. Such procedures can, at FAA's discretion, be instituted for a limited period or made permanent by incorporating them into the agency's security procedures. Our 1994 reports criticized FAA for its lack of progress in addressing identified vulnerabilities and in deploying new explosives detection systems and for related weaknesses in its security research program, such as insufficient attention to integrating different technologies. Past experience has demonstrated that concepts that make sense in a laboratory may not work in an airport environment. Because of this, we recommended that FAA pilot test new equipment and procedures to determine if they improve security before implementing them systemwide in the nation's airports. We also recommended that FAA pay greater attention to human factors issues, such as security screeners' performance. Providing effective security is a complex and difficult task because of the size of the U.S. aviation system, the differences among airlines and airports, and the unpredictable nature of terrorism. FAA was attempting to build consensus with the aviation community on how to improve aviation security when, in 1996, TWA Flight 800 crashed. Because the crash was initially suspected to be a terrorist act, national attention focused on the need to address aviation security vulnerabilities. The President created a Commission to review aviation safety and security issues, and the Congress held hearings. The Commission made a total of 31 recommendations for improving aviation security at our nation's airports. In the 1996 Reauthorization Act, the Congress mandated that FAA take several actions to improve aviation security, and the Congress provided $144.2 million in the Omnibus Consolidated Appropriations Act of 1997 to purchase commercially available advanced security equipment for screening checked and carry-on baggage and to conduct related activities. As we reported in April 1998, FAA has made progress in a number of critical areas to improve aviation security as recommended by the Commission and mandated by the Reauthorization Act. However, the agency has experienced delays of up to 12 months in completing the five efforts we reviewed: passenger profiling, explosives detection technologies, passenger-bag matching, vulnerability assessments, and the certification of screening companies and the performance of security screeners. FAA officials said many of the expected completion dates were ambitious, and they have extended them to take into account the complexities and time-consuming activities involved. We found that delays were caused by the new and relatively untested technologies, limited funds, and problems with equipment installation and contractors' performance. In some cases, FAA must develop regulations to establish new requirements. Airports, air carriers, and screening companies then must establish programs to meet those requirements. Based on FAA's current schedule and milestones, this whole process for enhancing the nation's aviation security system will take years to fully implement. I will briefly discuss the status of these five initiatives and the actions that FAA and others need to take before they can be fully implemented. Automated passenger profiling is a computer-based method that permits air carriers to focus on the small percentage of passengers who may pose security risks and whose bags should be screened by explosives detection equipment or matched with the boarding passengers. The system developed to screen passengers is known as the computer-assisted passenger screening (CAPS) system. It is designed to enable air carriers to more quickly separate passengers into two categories--those who do not require additional security attention and those who do. None of the major carriers had an automated system in place by December 31, 1997, as FAA originally planned. However, as of February 1998, three major air carriers had voluntarily implemented the system, and all but one major carrier are expected to have voluntarily implemented it by September 1998. FAA still needs to issue a regulation to require this type of screening. Concerns have been raised about the potential of this system to function in a discriminatory manner. However, the Department of Justice has determined that the screening process used by the system does not discriminate against travelers because it does not record or give any consideration to the race, color, national or ethnic origin, religion, or gender of passengers. Nor does it include as a screening factor any passenger traits, such as a passenger's name or mode of dress, that may be directly associated with discriminatory judgments. To ensure the system is run in a nondiscriminatory manner, the system will be reviewed periodically by FAA and the Department of Justice. Explosives detection technologies are screening devices that have the capability to detect the potential existence of explosives that can be concealed in carry-on or checked baggage. This area is one that recently has seen a substantial increase in funding. FAA is a year behind schedule in deploying this equipment. These delays have been caused, in part, by the inexperience of the contractor hired to install the equipment and the ongoing or planned construction projects that must be completed before the equipment can be installed at certain airports. By December 1997, FAA originally planned to deploy 54 certified explosives detection systems to screen checked bags and 489 trace detection devices to screen passengers' carry-on bags at major airports. However, as of the end of April 1998, FAA had deployed only 21 of the certified explosives detection systems and only about 250 of the trace detection devices. FAA now plans to have all of them installed and operational by December 1998. At that time, still only a limited number of airports and a fraction of the flying public would be covered. During the deployment of this equipment, FAA plans to gather information and evaluate how well the equipment is working in the field. This is important because we previously reported that there were significant differences between how these certified systems performed in the field and in the laboratory. Both the cost of the equipment--two units in one place costing about $2 million are required to meet FAA's certification standard--and the speed at which the equipment can screen bags have been concerns to the aviation industry. FAA is interested in identifying and certifying less expensive and faster equipment and has continued to fund research to develop more equipment that could potentially meet FAA's certification standard. Matching checked bags to the passengers who actually board a flight allows airlines to reduce the risk from concealed explosives because they can remove the bags of people who do not board the aircraft. According to FAA, when passenger-bag matching is fully implemented, the system will match some passengers, who are either randomly selected or who have been identified through the profiling system, with their bags. FAA began examining the feasibility of matching bags with passengers before the Commission's final report was issued and the Reauthorization Act was passed. In June 1997, the agency completed a pilot program at selected airports. Although FAA was required by the Reauthorization Act to report to the Congress on the pilot program within 30 days after its completion, it did not do so. In the fall of 1997, FAA notified the Congress that the report would be delayed because FAA had agreed with the airline industry to combine this report with an economic analysis of the impact of matching passengers and bags systemwide. Some air carriers have already voluntarily begun to match some passengers and bags for their domestic flights. In November 1998, FAA expects to issue a regulation that will require air carriers to implement such a program within 30 days--about 1 year later than the Commission expected. In both the Reauthorization Act and the Commission's final report, FAA was directed to conduct a number of vulnerability assessments in an airport environment to identify weaknesses in security measures that could allow threats to be successfully carried out. In August 1996, recognizing the vital role of vulnerability assessments, we recommended that steps be taken to conduct a comprehensive review of the safety and security of all major airports and air carriers to identify the strengths and weaknesses of their procedures to protect the flying public and to identify vulnerabilities in the system. FAA has three separate efforts under way. First, FAA is developing a standardized model for conducting airport vulnerability assessments, as the Commission recommended. FAA is working with several companies that are using different models for assessing the vulnerabilities at 14 major airports. FAA has established a panel to review the assessment results and to select the best model for assessing a facility's vulnerabilities. The agency plans to make this model available to airlines and airports in March 1999. Although some delays have occurred in starting the assessments, they have not been significant. Second, to address the Reauthorization Act's requirement for FAA and the Federal Bureau of Investigation (FBI) to jointly assess threats and vulnerabilities at high-risk airports, FAA and FBI officials conducted their first assessment in December 1997. In February 1998, FAA officials said they would begin conducting one to two assessments each month. The results of the joint assessments will be used for comparing threats and vulnerabilities at different airports. By having both threat and vulnerability information, FAA and FBI officials should be able to determine which airports and which areas of airports present the highest risks. FAA and FBI have agreed to a schedule for assessing 31 airports considered to be high-risk candidates by the end of calendar year 1999. The Reauthorization Act, however, called for the initial assessments to be completed by October 9, 1999. The schedule FAA and FBI agreed to calls for their reviews at 28 of the 31 airports to be completed by this date. Third, the Reauthorization Act mandates that FAA require airports and air carriers to conduct periodic vulnerability assessments. FAA plans to require that airports and air carriers incorporate periodic assessments into their individual security programs. However, FAA stated that before implementing this change, it intends to make the standardized model that it is developing available to both airports and air carriers for use in conducting these assessments. As mentioned previously, FAA expects the model to be available in March 1999. Implementation of the periodic assessments is to begin around mid-1999. Both the Reauthorization Act and the Commission's report directed FAA to certify the screening companies that air carriers contract with to provide security at airport checkpoints and to improve the training of the personnel doing the screening. Certifying the companies would ensure that these companies and their employees meet established standards and have consistent qualifications. FAA plans to complete the final regulation for certifying screening companies and screener performance in March 2000. According to FAA officials, they need time to develop performance standards based on screener performance data and to incorporate those standards into the final regulation. Improving the training and testing of people hired by these companies to screen passengers' baggage at airport security checkpoints would also improve aviation security. Regardless of advances in technology, the people who operate the equipment are the last and best line of defense against the introduction of any dangerous object into the aviation system. Currently, the people who are hired to screen baggage attend a standardized classroom training program. FAA is deploying a computerized, self-paced training and testing system, called the Screener Proficiency Evaluation and Reporting System (SPEARS). This effort was begun well before the Commission issued its initial report and the Reauthorization Act was enacted. As of February 1998, FAA had deployed computer-based training systems for personnel who use X-ray machines for screening carry-on bags at 17 major airports. Deployment is planned for two additional major airports by May 1998. FAA had also awarded a contract to deploy these systems at another 60 airports, but as of March 1998, the agency had decided to deploy only 15 of the 60 systems because it lacked necessary funding. If funds are available, FAA plans to deploy the other 45 systems by the end of fiscal year 1998 or early fiscal year 1999. Although no system can guarantee full protection against the threat of terrorist activities, security improvements can help to reduce that threat. Further improvements in the nation's aviation security system will need long-term efforts by FAA and the aviation industry. To maintain momentum, it is important for the Congress to provide continual oversight and to address funding issues. Funding for aviation security improvements is an issue that the Congress will be faced with for a number of years. The Commission envisioned a federal investment of approximately $100 million annually to enhance aviation security. The President's 1999 budget requested $100 million to continue the purchase and installation of explosives detection devices, as recommended by the Commission, and an additional $2 million for vulnerability assessments. The amount of funding appropriated to date, as well as FAA's request in fiscal year 1999, represents only a fraction of the funding needed to fully implement security improvements throughout the nation's aviation system. For example, several years ago, FAA estimated that the cost of acquiring and installing the certified systems at the nation's 75 busiest airports could range from $400 million to $2.2 billion, depending on the number and the cost of machines installed. In 1996, we stressed that it is important for the Congress to oversee the implementation of FAA's security measures. We recommended that the Congress require the responsible agencies to establish consistent goals and performance measures. This is consistent with the purpose behind the Government Performance and Results Act, which requires agencies to set goals and measure their performance against those goals so that the Congress can hold the agencies accountable for results. Starting with fiscal year 1998, FAA began including such goals and specific performance measures for its security programs in its annual budget submissions. FAA is also incorporating goals and performance measures into its 1998 Strategic Plan, which should be issued shortly. Using these established goals and performance measures, the Congress can then oversee FAA's progress in improving aviation security. In closing, Mr. Chairman, vulnerabilities in our aviation security system still exist. While FAA has made some progress in addressing these vulnerabilities, it is crucial that the Congress maintain vigilant oversight of the agency's efforts. When we testified before several committees nearly 20 months ago following the crash of TWA Flight 800, a parallel was drawn between actions taken following Pan Am Flight 103 and TWA Flight 800. In both instances, presidential commissions were formed, vulnerabilities were identified, and a period of heightened activity by the government, the aviation industry, and the media ensued. Regrettably, after the commission investigating Pan Am Flight 103 issued its report, activity began to wane and not much progress was made. Although improvements have been made since the crash of TWA Flight 800, we must ensure that momentum will not be lost. Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any Member of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed its recent review of the Federal Aviation Administration's (FAA) implementation of five key initiatives: automated passenger profiling, explosives detection technologies, passenger-bag match, vulnerability assessments, and certification of screening companies and improvement of screeners' performance. GAO noted that: (1) FAA has made some progress in five critical areas as recommended by the White House Commission on Aviation Safety and Security and mandated by Congress; (2) given the current implementation schedule, it will take years for FAA and the aviation industry to fully implement the initiatives; (3) to date, FAA has encountered delays of up to 12 months in implementing these initiatives, in part because they are more complex than originally envisioned and involve new and relatively untested technologies; (4) delays have also been caused by limited funding and problems with equipment installation and contractors' performance; (5) while progress is being made in strengthening aviation security, the completion of the current initiatives will require additional financial resources and a sustained commitment by the federal government and the aviation industry; (6) because momentum and public attention began to subside after the downing of Pan Am Flight 103, sufficient progress did not occur; and (7) to avoid a similar situation, congressional oversight and commitment are important.
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Title IV-B of the Social Security Act authorizes funds to states to provide an array of child welfare services to prevent the occurrence of abuse, neglect, and need to place children in foster care. The Administration for Children and Families within HHS is responsible for the administration and oversight of federal funding to states for child welfare services under Title IV-B. HHS headquarters staff are responsible for developing appropriate policies and procedures for states to follow in obtaining and using federal child welfare funds, while staff in HHS's 10 regional offices are responsible for providing direct oversight of state child welfare systems. No federal eligibility criteria apply to the children and families receiving services funded under Title IV-B. The amount of subpart 1 funds a state receives is based on its population under the age of 21 and the state per capita income, while subpart 2 funding is determined by the percentage of children in a state whose families receive food stamps. Subpart 1 provides grants to states for child welfare services, that are broadly defined. Subpart 1 funds are intended for services that are directed toward the accomplishment of the following purposes: protect and promote the welfare of all children; prevent or remedy problems that may result in the abuse or neglect prevent the unnecessary separation of children from their families by helping families address problems that can lead to out-of-home placements; reunite children with their families; place children in appropriate adoptive homes when reunification is not possible; and ensure adequate care to children away from their homes in cases in which the child cannot be returned home or cannot be placed for adoption. Subpart 2 services are similar to those allowed under subpart 1, although the range of services allowed under subpart 2 is more limited in some cases. For example, time-limited family reunification services can only be provided during a child's first 15 months in foster care, while no such restriction is placed on the use of subpart 1 funds. In addition, states must spend a "significant portion" of their subpart 2 funds on each of four service categories: Family preservation service. Services designed to help families at risk or in crisis, including services to (1) help reunify children with their families when safe and appropriate; (2) place children in permanent homes through adoption, guardianship, or some other permanent living arrangement; (3) help children at risk of foster care placement remain safely with their families; (4) provide follow- up assistance to families when a child has been returned after a foster care placement; (5) provide temporary respite care; and (6) improve parenting skills. Family support services. Community-based services to promote the safety and well-being of children and families designed to increase the strength and stability of families, to increase parental competence, to provide children a safe and supportive family environment, to strengthen parental relationships, and to enhance child development. Examples of such services include parenting skills training and home visiting programs for first time parents of newborns. Time-limited family reunification services. Services provided to a child placed in foster care and to the parents of the child in order to facilitate the safe reunification of the child within 15 months of placement. These services include counseling, substance abuse treatment services, mental health services, and assistance to address domestic violence. Adoption promotion and support services: Services designed to encourage more adoptions of children in foster care when adoption is in the best interest of the child, including services to expedite the adoption process and support adoptive families. Federal child welfare funding has long been criticized for entitling states to reimbursement for foster care placements, while providing little funding for services to prevent such placements. When the Congress enacted the Adoption Assistance and Child Welfare Act of 1980, it created a new funding source for foster care and adoption assistance under Title IV-E of the Social Security Act. Title IV-E provides an open-ended entitlement for foster care maintenance payments to cover a portion of the food, housing, and incidental expenses for all foster children whose parents meet certain federal eligibility criteria. Title IV-E also provides payments to adoptive parents of eligible foster children with special needs. While states could still use Title IV-B funding for foster care and adoption assistance for children ineligible under Title IV-E, the law established a dollar cap on the amount of Title IV-B funds that states could use for three categories of service: foster care maintenance payments, adoption assistance payments, and child care related to a parent's employment or training. The law requires that the total of subpart 1 funds used for these categories cannot exceed a state's total 1979 subpart 1 expenditures for all types of services. The intent of this restriction, according to a congressional document, was to encourage states to devote increases in subpart 1 funding as much as possible to supportive services that could prevent the need for out-of- home placements. However, this restriction applies only to the federal portion of subpart 1 expenditures, as the law provides that states may use any or all of their state matching funds for foster care maintenance payments. For the fourth consecutive year, the President's budget proposes a Child Welfare Program Option. HHS developed the proposal to give states more flexibility in using Title IV-E foster care funds for preventive services such as those under Title IV-B. Under this proposal, states could voluntarily choose to receive a fixed IV-E foster care allocation (based on historic expenditure rates) over a 5-year period, rather than receiving a per child allocation. States could use this allocation for any services provided under Titles IV-B and IV-E, but would also have to fund any foster care maintenance payments and associated administrative costs from this fixed grant or use state funds. No legislation to enact this option has been introduced. While states funded similar services under subparts 1 and 2, most states reported using subpart 1 funds primarily to pay for costs associated with operating child welfare programs, while most states reported using subpart 2 funds for family services as shown in table 1. For example, states used over 44 percent of subpart 1 funds to pay for staff salaries and costs to administer and manage programs. In contrast, states spent over 71 percent of subpart 2 funds for services to support, preserve, and reunify families. The majority of subpart 1 funds were spent on staff salaries, and Washington officials said that in their state, over half of these costs paid for staff providing direct services to children and families. Overall, states reported that nearly half of Title IV-B funds used for staff salaries supported social worker positions in child protective services. Another 20 percent of funds supported positions for other social workers. The remaining costs supported other staff including those providing supervision of caseworkers and legal services. (See fig. 1.) Percentages do not total to 100 due to rounding. The remaining subpart 1 funds were split fairly evenly among administration and management, child protective services, and foster care maintenance payments: Administration and management comprised the second largest category of subpart 1 expenditures, accounting for almost 17 percent of subpart 1 dollars. These services included rent and utilities for office space, travel expenses for agency staff, and staff training. Child protective services represent the third largest category of subpart 1 expenditures. States reported using about 16 percent of their subpart 1 funds to provide a variety of CPS services, such as telephone hotlines for the public to report instances of child abuse and neglect, emergency shelters for children who needed to be removed from their homes, and investigative services. States reported using nearly 11 percent of their subpart 1 funds to make recurring payments for the room and board of foster children who were not otherwise eligible for federal reimbursement. For example, New Jersey officials reported spending over half of the state's subpart 1 funds on foster care maintenance payments. States reported using over 70 percent of their subpart 2 dollars on serving families, with nearly half of these funds used to fund family support and prevention services. These services included mentoring programs to help pregnant adolescents learn to be self-sufficient, financial assistance to low- income families to help with rent and utilities, parenting classes, child care, and support groups provided by community-based resource centers. The remaining subpart 2 funds were split fairly evenly among family preservation, family reunification, and services to support and preserve adoptive families. Family preservation services accounted for nearly 12 percent of subpart 2 dollars. Services provided by Washington state in this category included counseling and parent training services for up to 6 months for families with children who were at risk of being placed in foster care. Adoption support and preservation services accounted for over 11 percent of subpart 2 dollars. With these funds, states provided services such as counseling for children who were going to be adopted, family preservation services to adoptive families, and respite care for adoptive families. Officials in Ohio reported using almost half of its subpart 2 dollars for adoption services, including post adoption services and services to recruit families for children in need of homes. Family reunification services accounted for over 9 percent of subpart 2 funds. These services included supervised visitation centers for parents to visit with their children who were in foster care and coordinators for alcohol and drug treatment services for families whose primary barrier to reunification was substance abuse. New Jersey funded a supervised visitation program that offered parenting education, counseling, transportation, and support groups and was located in a private home, allowing families to visit together in a homelike setting and engage in more natural interactions. States served similar populations under subparts 1 and 2; however, states reported using most subpart 1 funds primarily to serve families whose children had been removed from the home, while most subpart 2 funds were reported to serve families with children at risk of removal due to child abuse or neglect, as shown in table 2. For example, states used 42 percent of subpart 1 funds to serve children in foster care and/or their parents. In contrast, states used 44 percent of subpart 2 funds for children at risk of child abuse and neglect and/or their parents. In our survey, we asked states for more detailed information about the populations served by programs under subparts 1 and 2, such as demographic and socioeconomic characteristics. However, few states were able to provide this data. For selected subpart 1 services, 10 states were able to estimate the extent to which the same children and families also received services under subpart 2: four states reported that generally none or almost none of the recipients also received a service funded by subpart 2, three states reported that generally less than half of the recipients received subpart 2 services, one state reported that all or almost all recipients received subpart two states provided varying estimates for different subpart 1 services. Officials in almost all of HHS's regional offices supported retaining the current balance between allowing states some flexibility in use of funds and targeting some resources toward prevention, regardless of whether federal funding sources are combined under alternative financing options. One regional official noted that the current financing structure of subpart 1 gives states the flexibility to address unexpected circumstances affecting the child welfare system--for example, the need to develop substance abuse treatment programs for parents affected by the cocaine epidemic of the 1980s. Other regional officials noted that the spending requirements under subpart 2 helped ensure that states used some funds on family support services and prevention activities to help preserve families and keep children from entering foster care. States reported in our survey that flexibility was important to meet the needs of their child welfare systems, and thus generally preferred the financing structure of subpart 1 over subpart 2, as shown in figure 2. HHS provided relatively little oversight specific to state spending under subpart 1. HHS does not collect data on subpart 1 expenditures, relying instead on cursory reviews of plans submitted by states that discuss how they intend to use their subpart 1 funds in the coming year. HHS regional officials reported that they review these plans for relatively limited purposes because there are few restrictions on how states can spend subpart 1 dollars. We also found that HHS regional offices had paid little attention to statutory limits in states' planned use of subpart 1 funds. In response to our survey, 10 states reported actual 2002 subpart 1 expenditures that exceeded the spending limits by over $15 million in total. HHS received forms from states each year that showed how they planned to spend subpart 1 funds, but had little information on how states actually spent these funds. Officials from four HHS regional offices said that they generally reviewed the forms to ensure that states were requesting the total amount of subpart 1 funds to which they were entitled, and that they complied with the requirement to match 25 percent of subpart 1 funds with state funds. Most regional offices indicated that their review of the state submitted forms focused more on subpart 2 than subpart 1. For example, they reported reviewing planned subpart 2 spending to ensure that states complied with the requirement to spend at least 20 percent of funds on each of the service categories and spend no more than 10 percent of funds for administrative purposes. Several HHS officials said that they did not monitor subpart 1 funds as closely as other federal child welfare funds due to the relatively small funding amount and the lack of detailed requirements about how these funds could be spent. Oversight of subpart 1 was further limited because spending plans states provided on the annual forms may not reliably show how states actually spent Title IV-B funds. HHS officials explained that states' actual expenditures may vary from planned expenditures as states address unforeseen circumstances. The timing for submitting the annual forms also affected how well states could plan Title IV-B spending. HHS required states to submit their initial spending plans for the upcoming year by June 30, prior to states receiving information on program appropriations for the upcoming year. While we did not conduct a review comparing state submitted planned expenditures to actual expenditures for previous years, we did identify instances that suggested differences in planned and actual expenditures as well as data on actual expenditures that were not always accurate. For example, two states with county-administered child welfare systems said they could not reliably estimate planned spending by service category because the states did not collect expenditure data from county child welfare agencies that administer Title IV-B funds. One regional official explained that the only way to determine how a state actually used its Title IV-B funds was to review its financial accounts. At the time of our review, three regional offices had indicated that they had begun asking states to provide Title IV-B expenditure data. HHS regional offices paid little attention to the statutory limits on the use of subpart 1 funds for foster care maintenance and adoption assistance. Officials in only 1 of HHS's 10 regional offices said that they ensured state plans complied with statutory spending limits for subpart 1. In contrast, 5 regional offices were unaware that any limits on the use of subpart 1 funds existed. Four other regional offices were aware that some limitations existed, but did not ensure state compliance with them. Two regional offices said they did not monitor planned expenditures for subpart 1 because they had no data to calculate the spending limit for each state, and HHS had not provided guidance on how to enforce the limits. Officials in another region said that their office discontinued subpart 1 compliance reviews because they considered the limits to be meaningless because state and federal funds are fungible and state funds spent on child welfare services greatly exceeded subpart 1federal funds. In other words, any attempt to enforce the limits, according to these officials, would only lead to changes in how states accounted for state and federal funds. Some states reported in our survey that they spent 2002 subpart 1 funds in excess of the statutory authority for foster care maintenance and adoption assistance payments. (See fig. 4.) While spending excesses were small in some states, they were large in others, ranging from a low of $27,000 in New Hampshire to nearly $4 million in Michigan. In total, reported actual spending by the 10 states exceeded the statutory limit by over $15 million. Subsequent to our review, ACF issued guidance to states reminding them of the statutory spending limits for Title IV-B subpart 1 funds in November 2003. This guidance included information needed by each state to calculate its spending limit for foster care and adoption assistance payments, and day care related to employment or training. Research on the effectiveness of services provided under subpart 1of Title IV-B was limited, and HHS evaluations of subpart 2 services showed no or little effect on children's outcomes. In our survey, 22 states reported providing services other than maintenance payments, staff salaries, or administration under subpart 1; however, none of these states had evaluated the outcomes of these services. One state official said that few states could afford to divert resources away from direct services to families in order to conduct formal program evaluations, given the tremendous service needs of families involved in the child welfare system. Similarly, our literature review showed that few evaluations had been conducted, and evaluations that had been conducted produced mixed results. For example, one study evaluating a program in Texas to increase family literacy and prevent child abuse by enhancing parent-child interactions cited results showing positive effects on children's measured competence and classroom behavior. However, evaluation of the same program in New York did not consistently show differences in outcomes for children and parents in the program compared to those in a control group. HHS evaluations of subpart 2 services also have shown no or little effect, as reported by the Congressional Research Service. The Congress required HHS to evaluate the effectiveness of programs funded under subpart 2 as part of its initial approval of funding for family preservation and family support services. HHS focused on the use of subpart 2 funds in three large-scale evaluations. One looked at overall implementation issues for the program, the second looked at the effectiveness of two models of family preservation services (both providing relatively intensive casework), and the third looked at the effectiveness of a wide range of family support services. Overall, the findings were similar across all evaluation sites showing subpart 2 services provided no or little effect in reducing out-of-home placement, maltreatment recurrence, or improved family functioning beyond what normal casework services achieved. No similar large scale evaluations of time-limited reunification services or of adoption promotion and support services have been made. Our 2003 report recommended that the Secretary of HHS provide the necessary guidance to ensure that HHS regional offices are providing appropriate oversight of subpart 1, consider the feasibility of collecting data on states' use of these funds to facilitate program oversight and guidance to states, and use the information gained through enhanced oversight of subpart 1 to inform its design of alternative child welfare financing options. ACF agreed with our findings and implemented guidance to states reminding them of the statutory requirements for subpart 1 spending. ACF disagreed with our recommendation to consider collecting data on subpart 1 expenditures. ACF believed that its level of oversight was commensurate with the scope and intent of subpart 1, noting that its oversight efforts are more appropriately focused on reviews of the states' overall child welfare systems. ACF did not comment on our recommendation to use such data to inform the design of an alternative financing option. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-8403. Individuals making key contributions to this testimony include Lacinda Ayers, Diana Pietrowiak, and Michelle St. Pierre. Lessons Learned for Protecting and Educating Children after the Gulf Coast Hurricanes. GAO-06-680R. Washington, D.C.: May 11, 2006. District of Columbia: Federal Funds for Foster Care Improvements Used to Implement New Programs, but Challenges Remain. GAO-05-787. Washington, D.C.: July 22, 2005. Child Welfare: Better Data and Evaluations Could Improve Processes and Programs for Adopting Children with Special Needs. GAO-05-292. Washington, D.C.: June 13, 2005. Indian Child Welfare Act: Existing Information on Implementation Issues Could Be Used to Target Guidance and Assistance to States. GAO-05-290. Washington, D.C.: April 4, 2005. Foster Youth: HHS Actions Could Improve Coordination of Services and Monitoring of States' Independent Living Programs. GAO-05-25. Washington, D.C.: November 18, 2004. D.C. Child And Family Services Agency: More Focus Needed on Human Capital Management Issues for Caseworkers and Foster Parent Recruitment and Retention. GAO-04-1017. Washington, D.C.: September 24, 2004. Child And Family Services Reviews: States and HHS Face Challenges in Assessing and Improving State Performance. GAO-04-781T. Washington, D.C.: May 13, 2004. D.C. Family Court: Operations and Case Management Have Improved, but Critical Issues Remain. GAO-04-685T. Washington, D.C.: April 23, 2004. Child and Family Services Reviews: Better Use of Data and Improved Guidance Could Enhance HHS's Oversight of State Performance. GAO-04-333. Washington, D.C.: April 20, 2004. Child Welfare: Improved Federal Oversight Could Assist States in Overcoming Key Challenges. GAO-04-418T. Washington, D.C.: January 28, 2004. D.C. Family Court: Progress Has Been Made in Implementing Its Transition. GAO-04-234. Washington, D.C.: January 6, 2004. Child Welfare: States Face Challenges in Developing Information Systems and Reporting Reliable Child Welfare Data. GAO-04-267T. Washington, D.C.: November 19, 2003. Child Welfare: Enhanced Federal Oversight of Title IV-B Could Provide States Additional Information to Improve Services. GAO-03-956. Washington, D.C.: September 12, 2003. Child Welfare: Most States Are Developing Statewide Information Systems, but the Reliability of Child Welfare Data Could be Improved. GAO-03-809. Washington, D.C.: July 31, 2003. D.C. Child and Family Services: Key Issues Affecting the Management of Its Foster Care Cases. GAO-03-758T. Washington, D.C.: May 16, 2003. Child Welfare and Juvenile Justice: Federal Agencies Could Play a Stronger Role in Helping States Reduce the Number of Children Placed Solely to Obtain Mental Health Services. GAO-03-397. Washington, D.C.: April 21, 2003. Foster Care: States Focusing on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-03-626T. Washington, D.C.: April 8, 2003. Child Welfare: HHS Could Play a Greater Role in Helping Child Welfare Agencies Recruit and Retain Staff. GAO-03-357. Washington, D.C.: March 31, 2003. Foster Care: Recent Legislation Helps States Focus on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-02-585. Washington, D.C.: June 28, 2002. District of Columbia Child Welfare: Long-Term Challenges to Ensuring Children's Well-Being. GAO-01-191. Washington, D.C.: December 29, 2000. Foster Care: HHS Should Ensure That Juvenile Justice Placements Are Reviewed. GAO/HEHS-00-42. Washington, D.C.: June 9, 2000. Juvenile Courts: Reforms Aim to Better Serve Maltreated Children. GAO/HEHS-99-13. Washington, D.C.: January 11, 2000. Foster Care: States' Early Experiences Implementing the Adoption and Safe Families Act. GAO/HEHS-00-1. Washington, D.C.: December 22, 1999. Foster Care: HHS Could Better Facilitate the Interjurisdictional Adoption Process. GAO/HEHS-00-12. Washington, D.C.: November 19, 1999. Foster Care: Effectiveness of Independent Living Services Unknown. GAO/HEHS-00-13. Washington, D.C.: November 5, 1999. Child Welfare: States' Progress in Implementing Family Preservation and Support Services. GAO/HEHS-97-34. Washington, D.C.: February 18, 1997. Child Welfare: Opportunities to Further Enhance Family Preservation and Support Activities. GAO/HEHS-95-112. Washington, D.C.: June 15, 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. 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For federal fiscal year 2004, state and local child protective services staff determined that an estimated 872,000 children have been victims of abuse or neglect. Title IV-B subparts 1 and 2 authorize a wide array of child welfare services with some restrictions on states' use of funds. This testimony discusses: (1) how states used Title IV-B dollars to serve families under subparts 1 and 2; (2) the extent that federal oversight ensured state compliance with spending requirements under subpart 1; and (3) what the research said about the effectiveness of service states have provided to families using Title IV-B funds. This testimony was primarily based on a 2003 report (GAO-03-956). States used Title IV-B funds to provide a broad range of services to prevent the occurrence of abuse, neglect, and foster care placements in addition to other child welfare services. While there was some overlap, states reported using Title IV-B subpart 1 funds primarily to operate child welfare programs and serve families in the foster care system, while states reported using subpart 2 funds primarily for family services targeted to families at risk of child removal due to abuse or neglect. For example, nearly half of subpart 1 staff costs paid salaries for social worker positions in child protective services. Family services under subpart 2 included those to support, preserve, and reunify families by providing mentoring programs, financial assistance to help with rent and utilities, parenting classes, child care, and support groups. HHS provided relatively little oversight specific to state spending under subpart 1. HHS did not collect data on subpart 1 expenditures and regional officials paid little attention to statutory limits in states' planned use of funds. In response to GAO's survey, 10 states reported actual 2002 subpart 1 expenditures that exceeded the sending limits by over $15 million in total. Research is limited assessing the effectiveness of services provided under Title IV-B. In GAO's survey, 22 states reported providing services other than foster care and adoption assistance payments, staff salaries, or administration under subpart 1; however, none of these states had sufficiently evaluated the outcomes of these services. Similarly, GAO's literature review showed that few evaluations had been conducted, and evaluations that had been conducted showed mixed results. HHS evaluations of subpart 2 services also have shown no or little effect in reducing out-of-home placement, maltreatment recurrence, or improved family functioning beyond what normal casework services achieved.
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OMB Policy Letter 89-1, "Conflict of Interest Policies Applicable to Consultants," issued by the Office of Federal Procurement Policy, establishes federal policy relating to OCI standards for persons who provide consulting services, including advisory and assistance services, to the government. The federal government obligated about $14 billion for consulting and advisory and assistance services in fiscal year 1994. They included activities such as special studies and analyses and professional, administrative, and management support services. The policy letter defines a conflict as a condition or circumstance in which a person is unable or potentially unable to render impartial assistance or advice to the government because of other activities or relationships with other persons or organizations, or where a person has an unfair advantage in competing for a federal contract. The policy letter also provides examples of potential OCI situations. One could include a situation where a contractor is providing advice and assistance to an agency where such advice and assistance could benefit the contractor's other clients. Another situation could include a contractor hired to evaluate a third party's products or services when the contractor is or was substantially involved in the development or marketing of those products or services. To help avoid conflicts of interest, the policy letter states that for contracts over $25,000, contractors must submit to the agency a certificate describing the nature of the services to be rendered and a statement that (1) no actual or potential organizational conflict of interest exists, or (2) any actual or potential conflict has been communicated in writing to the contracting officer. In addition, the policy letter requires agency officials to evaluate the potential for a conflict of interest and to determine whether an actual conflict exists before a contract is awarded. In carrying out this responsibility, information from the contractor's certificate and any other available information may be used. The provisions of the OMB policy letter are implemented by the Federal Acquisition Regulation (FAR). The FAR sets forth governmentwide regulations and requirements, including requirements for avoiding and mitigating organizational conflicts, for all types of procurement by contract. For example, the FAR requires agencies to determine whether an OCI exists before awarding a contract for all types of services, including advisory and assistance services as well as others not covered by the policy letter. The FAR lists certain sources of information that may be used to help identify conflicts. These include sources within the government, such as personnel within the contracting office and other contracting offices, and nongovernment sources, such as publications and credit rating services. We reviewed instructions for identifying organizational conflicts of interest contained in the FAR and in OMB Policy Letter 89-1. We also reviewed agency-specific procurement regulations at the agencies selected for review--DOE, EPA, and Navy. To determine whether agencies were complying with the requirements, we reviewed a sample of advisory and assistance service contracts from a fiscal year 1992 contract universe provided by the Federal Procurement Data Center for DOE, EPA, and Navy. Fiscal year 1992 was the most recent year for which data were available when we began our work. We generated a random list of contracts identified by the Federal Procurement Data Center as being for advisory and assistance services and selected 102 contracts for review from the above agencies (DOE-36, EPA-26, Navy-40). Our sample included DOE contracts administered by the agency's Washington, D.C., headquarters and field locations in Colorado. Navy contracts included contracts from that agency's headquarters as well as field locations in California. EPA contracts included contracts administered at its Washington, D.C., headquarters and at a Pennsylvania field location. Because of travel costs and other considerations, our sample was of a limited size and was not designed to be projectable. We reviewed contract files to determine compliance with contractor certification requirements and to obtain documentation on the nature and extent of agency OCI reviews. The Navy did not consider the contracts selected to be for advisory and assistance services, but to be for routine technical and engineering services which are not subject to contractor certification requirements in the policy letter. Rather than resample Navy contracts to test compliance with the certification requirements, we relied on a DOD IG report, Organizational and Consultant Conflicts of Interest (Report No. 94-174, August 10, 1994). We discussed the report with DOD IG officials and reviewed the supporting working papers. We reviewed the 40 Navy contracts we had selected, however, to test compliance with the OCI evaluation requirements set forth in the FAR. We discussed OCI review procedures with agency officials. To do this, we judgmentally selected 32 contracts from our sample and identified a total of 66 procurement, program, and General Counsel officials who were responsible for them. We interviewed these officials to obtain an understanding of the steps followed as well as the types of external sources of information such as contractor annual reports and marketing brochures used in making OCI determinations. We also discussed OCI training with these 66 officials to, among other things, obtain (1) information on the extent that they had received OCI training and (2) their views on the value of additional training. We reviewed available training material at DOE and EPA to determine the content and nature of training provided. We reviewed an April 1993 survey report prepared by the PCIE on the implementation of OMB Policy Letter 89-1. We also discussed the report with PCIE officials and reviewed PCIE workpapers. We did our work at the agencies' headquarters in the Washington, D.C., area and selected field locations between April 1993 and July 1995 in accordance with generally accepted government auditing standards. We requested oral comments on a draft of this report from the Secretaries of DOD, Navy, and DOE, the Administrator of EPA, and the Director of OMB or their designees. Their comments are discussed on pages 15 to 17.. Agency compliance with the requirement for obtaining contractors' OCI certifications or advisory and assistance service contracts has varied. At two of the three agencies we reviewed--EPA and DOE--we found certificates in contract files in almost all cases in which they were required. For example, 19 of the 26 EPA contracts we selected were subject to the certification requirement because they had been awarded after the issuance of OMB Policy Letter 89-1. We found certificates for 18 of them. Of 36 DOE contracts, 26 were subject to the certification requirement. Certificates had been filed for 25 of them. Officials at both agencies believed that the two missing certifications had been received but had not been included in the contract file. To check Navy's compliance with the certification requirement, we relied on the 1994 DOD IG study. This study was done to determine whether DOD contracting offices had effectively implemented FAR OCI policies and procedures when planning procurements and awarding contracts. The IG study included 46 contracting activities in the Army, Navy, Air Force, the Defense Supply Service - Washington, the Advanced Research Projects Agency, and the Defense Nuclear Agency. The IG reported that, in most cases, DOD contracting officers failed to obtain the OCI certificates required by the FAR. Of 101 contracts reviewed, the IG determined certificates were required for 28 contracts. Certificates were not, however, obtained for 25 of the 28 contracts. Twelve of the 28 contracts requiring certificates were Navy contracts. Certificates were only obtained for two of them. Contracting officers at five contracting activities told the IG that contractors probably ignored the applicable FAR provisions. The IG concluded that certificates were not being submitted because they were not requested or required by contracting offices. The IG recommended that service procurement officials take steps to ensure compliance with the FAR requirements concerning OCI contractor certificates. In July 1994, the Director of Defense Procurement requested defense agencies to remind contracting officers to obtain the certificates. In addition, in September 1994, the Navy reemphasized to Navy contracting offices the importance of obtaining the required contractor certificates. The PCIE had also reviewed agency compliance with the certification requirements. Its April 1993 report stated that of 19 agencies reviewed, contractors' certifications were obtained only at 9 of them. EPA, one of the agencies we reviewed, did not provide information on the number of certificates because it was not available from agency records. EPA conducted its own sample and found that the certificates had been filed. DOE and DOD did not participate in the PCIE study. The PCIE report did not cite a reason for the noncompliance, but indicated that agency officials generally believed contractors' self-certification would do little to deter dishonest contractors. While contractor certifications are important controls required by the FAR and the OMB policy letter, the perceptions of agency contracting officials that contractors' self-certifications have limitations appear to have merit. For example, it is possible that even if a contractor made a good faith effort to identify and report potential conflicts of interest, some might be missed or go unreported because of different interpretations of the policy letter and what constitutes a conflict. Consequently, independent efforts by agencies to obtain additional information to use in identifying and evaluating potential conflicts are, in our view, particularly important supplementary controls. Policy Letter 89-1 and the FAR require that contracting officers, prior to contract award, evaluate and identify the potential for such conflicts that could be prejudicial to the interest of the federal government with regard to persons who provide advisory and assistance services and take steps to avoid or mitigate any conflicts believed to exist. We reviewed 62 advisory and assistance service contracts at DOE and EPA. Our review showed that contracting officials had conducted the required evaluations before awarding the contracts. We also reviewed case files for the 40 Navy contracts we had selected. As discussed on page 5, these contracts were identified by Navy officials as involving routine engineering and technical services rather than advisory and assistance services, and were consequently not subject to Policy Letter 89-1. However, the FAR still requires agencies to evaluate such acquisitions for potential conflicts of interest prior to contract award. Our contract file review found little documentation of such evaluations and contracting officials whom we spoke with said they were not frequently done. However, during our review, corrective action was taken in the form of various directive memorandums to reemphasize the need for contracting officials to comply with the FAR's requirements on conflict of interest evaluations. The DOE and EPA contracts we reviewed included such advisory and assistance services as health and safety assessments, environmental studies and audits, assistance in developing regulations, and analyses of the impact of regulations. The nature of potential conflicts involved contractors performing work that could benefit the contractor or other clients of the contractor, or evaluating products or services in which the contractor had a financial interest. Both DOE and EPA have agency-specific instructions and guidance that supplement Policy Letter 89-1 and the FAR. For example, a DOE order outlines the responsibilities of contracting personnel and describes OCI procedures. DOE procedures include controls such as (1) requiring the technical representative or contract specialist to complete an OCI abstract that focuses on specific questions to be asked for each procurement and (2) requiring contractors to complete an OCI questionnaire. EPA has a procurement policy notice that describes similar procedures. Our review of 36 advisory and assistance service contract files at DOE and 26 contract files at EPA indicated that evaluations aimed at identifying potential conflicts of interest, as called for by the policy letter and the FAR, had been made. The files generally included the types of documentation called for by agency-specific procedures. In addition, the files often included other sources of information for use by contracting officials in making OCI determinations. These included contractor marketing brochures, resumes of contractor personnel, and lists of a contractor's other contracts. Such sources can provide important information to contracting officials in making OCI determinations. The following two examples--both at EPA--illustrate the importance of agencies' reviews to identify and evaluate potential conflicts of interest. Case 1. In this case, EPA awarded a $23 million contract in February 1993 for the study of the economic and environmental impacts of the Clean Air Act's provisions regulating acid rain. In August 1992, before the contract award, program officials who reviewed the contractor's proposal discovered the potential for a conflict and expressed their concern. The contractor had several contracts with electric utilities and a coal company. These industries have been identified as prime contributors to acid rain. The officials believed that such industry ties could possibly impair the contractor's objectivity in evaluating the Clean Air Act's provisions regulating acid rain. Also, two of the contractor's subsidiaries had contracts with third parties that could cause potential conflicts of interest. One subsidiary had contracts of its own with electric utilities. The other subsidiary owned the licensing rights of various technologies that the contractor was to evaluate under the EPA contract. The contractor acknowledged in a September 1992 letter to the pre-award contracting officer that the appearance of a conflict existed. The contractor pointed out that "the electric utility industry is the principal constituent of the acid rain program's regulated community, and the mere fact of providing professional services under contract both to the regulated community and to the community of regulators can create the appearance of potential conflict of interest." After examining the potential conflicts of interest, EPA had the contractor prepare a conflict avoidance plan and awarded the contract. Among other things, the plan prohibited the employees of the contractor who had worked on other projects that could cause a conflict situation from taking part in the EPA work. We did not evaluate the reasonableness of the avoidance plan. Case 2. This case involved the award by EPA of a $50 million contract in March 1994 for the identification of parties responsible for pollution at Superfund sites in one of EPA's regions. Under the Superfund law, parties responsible for contaminated sites may be required to clean them up or to reimburse EPA for the cleanup it performs. As instructed by EPA, the contractor searched EPA's list of potential polluters in the region to identify any party on the list with which the contractor could have a conflict of interest. The contractor reported that it had business relationships with approximately 40 parties on EPA's list of potential polluters, but did not believe they would constitute a conflict of interest. The contractor certified to EPA that it was unaware of any potential conflict of interest. According to the pre-award contract officer, he and the technical evaluation panel reviewed the identified relationships and found no apparent conflict. He pointed out, however, that it was difficult to determine whether the business relationships constituted a conflict because actual work assignments and pollution sites had not been identified. He said that the subject contract was essentially considered a contract vehicle with no specific requirements. After the contract was entered into, work assignments were issued with specific requirements to be performed under the contract at specifically identified pollution sites. Another contracting officer was responsible for the post-award contract. He identified 410 potential polluters for a site in a work assignment he issued. Out of the 410, the contractor had identified approximately 40 with which it had 500 to 1,000 contractual relations. The contracting officer reviewed the contractual relationship with each of the potential polluters and determined that four would be in conflict with the efforts to be performed under the work assignment. The work assignment was issued after the investigative activities to be performed by the contractor, which were considered most susceptible to conflicts of interest, were deleted. The 40 Navy contracts that we selected primarily involved routine engineering and technical services. They did not fall into the category of advisory and assistance services that were subject to the contractor certification requirement. According to section 9.504 (a) of the FAR, however, all contracts are to be reviewed for potential conflicts of interest prior to award. Our review of the contract files showed that with the exception of 10 contractor officials' resumes and 5 lists of other contracts in which the contractors were involved, the 40 contract files we reviewed included no documentation to indicate that any type of pre-award evaluation had been made to disclose the possibility of an OCI or a situation of an unfair advantage and contracting officials told us that evaluations were not frequently done. Some of their comments are summarized below. Officials at the Naval Air Weapons Station, China Lake, California, agreed that pre-award analysis to help detect potential conflicts of interest would be helpful. An official at the Naval Regional Contracting Center, San Diego, California, acknowledged that contract personnel do not generally examine past contracts held by a prospective contractor, or other financial relationships in which the contractor may be involved. The official said that he sporadically examines industry financial reports or corporate credit ratings, but not on a routine basis. An official at the Naval Command and Control and Ocean Surveillance installation, San Diego, California, said there was no screening of historic data about a contractor to detect OCI situations. While the Navy did not routinely conduct OCI evaluations before awarding these contracts, contracting officials pointed out that they concentrate on the possibility of future benefits that may accrue to a contractor and use contract clauses to prevent the possibility of such future conflicts. Our review of the contract files supported this. For example, one contract we reviewed contained a conflict of interest clause in which the contractor agreed not to supply DOD for a period of 2 years after completion of the contract with any major component which the contractor might suggest DOD purchase. We also discussed the apparent lack of pre-award evaluations with DOD and Navy procurement officials. They agreed that the Navy should comply with the FAR requirement to evaluate the potential for conflict of interest situations prior to contract award. They provided us with documentation that showed that corrective action had been taken to reemphasize the need for contracting officials to comply with the FAR's requirements on conflict of interest evaluations. During our work we identified two opportunities to help agencies meet the objective of OMB's policy letter regarding the avoidance of OCI situations. These include ensuring that all appropriate agency officials receive OCI training. Among other things, such training could emphasize the availability and usefulness of possible sources of information--such as annual reports and marketing brochures--that can assist contracting officials in understanding the business relationships of potential contractors and identifying possible OCI situations. In addition, we identified the potential for the FAR to be interpreted to imply that if certificates had been obtained from contractors, agencies should not obtain other information in conducting an evaluation of the potential for conflicts of interest. OMB could provide clarification to avoid such an interpretation. Officials at the three agencies we visited received varying amounts of OCI awareness and detection training. DOE and EPA offered formal in-house OCI training. The Navy did not have an OCI training course. However, some Navy officials received training from other sources. In none of the three agencies had all of the officials received training. We asked 66 procurement officers at the three agencies (DOE-27, EPA-15, and Navy-24) whether they had received 1 day or more of OCI training, less than 1 day of training, or no training. We also asked them how they believed the OCI screening process could be improved. Several of the officials said the process could be improved with more training. The results of our discussions are shown in Table 1. As shown, 44 of 66 contracting officers reported receiving some OCI training. (Sixteen reported receiving more than 1-day of OCI training and 28 reported receiving less than 1-day of OCI training.) However, 22 (one-third) of the officers reported receiving no training. Nineteen of the 66 officers expressed the belief that more training would improve the OCI screening process. We reviewed EPA's and DOE's OCI training materials. EPA's material discussed Policy Letter 89-1 and FAR requirements, procedures to follow if the existence of an OCI were to be identified, and basic steps in making an OCI decision. The training materials also emphasized basic information in making OCI determinations, including whether the work to be performed by the contractor was related to work the contractor was also doing for the industry and how much work was performed for commercial clients over the last 3 years. DOE's training materials covered similar subjects. In addition, DOE's training emphasized the availability of a variety of sources of information such as annual reports that could (1) be used by contracting officials to understand the business relationships of a contractor, (2) assist in verifying the information in the contractor's certificate that no actual or potential conflict of interest exists, and (3) help identify potential conflicts of interest. To identify the extent that agencies used such independent sources of information in examining for potential contracts, we asked 57 contract and program personnel at the 3 agencies (DOE-26, EPA-11, Navy-20) whether they were using selected external sources of information. Table 2 shows the results of our discussions. As shown, DOE contracting officials most frequently cited using the full range of information sources. DOE procurement officials attributed such widespread use to its training courses. Officials at DOE, EPA, Navy, and OMB generally agreed about the importance of ensuring that contracting officials receive sufficient conflict of interest training. EPA officials also pointed out that subsequent to our interviews with procurement officials additional training had been provided. OMB officials said that they believed agency procurement staff needed to be reminded of the importance of conflict of interest training and they thought it would be helpful for OMB to remind agencies to ensure that their staffs are adequately trained in this area. "(a) If information concerning prospective contractors is necessary to identify and evaluate potential organizational conflicts of interest or to develop recommended actions, and no organizational conflicts of interest certificates have been filed contracting officers should first seek the information from within the Government or from other readily available sources. Government sources include the files and the knowledge of personnel within the contracting office, other contracting offices, the cognizant contract administration and audit activities and offices concerned with contract financing. Non-Government sources include publications and commercial services, such as credit rating services, trade and financial journals, and business directories and registers." (Underscoring added) In our opinion, this language could be interpreted to indicate that such external sources of information should not be sought in instances where contractor certificates have been obtained. However, OMB's policy letter provides that in evaluating the potential for conflicts of interest, contracting officers may use any substantive information that is available whether or not the certificates have been provided. Officials at DOE, Navy, and OMB generally agreed that there was a need to clarify the FAR. EPA officials said they were not sure such clarification may be needed. They said that contractors' certifications should, in most cases, be sufficient to protect the government's interests. OCI situations can be detrimental to the interests of the federal government and, as a matter of policy, are to be identified, avoided, and/or mitigated. As shown by a 1993 PCIE study, however, agencies' implementation of OCI requirements for advisory and assistance services has varied. Although two of the three agencies covered in our review appeared to be complying, the third agency--Navy--was reported by the DOD IG as not ensuring that contractor certificates were received prior to contract award. Corrective action, however, was taken during our review that reemphasized the need for contracting officials to obtain such certificates. We also noted that Navy contracting officials were not routinely evaluating contracts prior to award for potential conflicts of interest. However, corrective action was also taken during our review that reemphasized the need for contracting officials to comply with the conflict of interest policies and procedures set forth in the FAR. One-third of the agency contracting officials we spoke with indicated that they had received no OCI training. About 19 (29 percent) believed that additional training could help improve OCI screening. Each of the agencies included in our review agreed on the importance of OCI training and OMB suggested it would be helpful if OMB reminded agencies to ensure that training is provided. The importance of the OCI requirements of the OMB policy letter are reflected by their inclusion into the FAR as federal regulation. Unfortunately, the FAR could be interpreted to suggest that if OCI certifications have been obtained from contractors, agencies should not obtain additional information in conducting an evaluation of the potential for conflicts of interest. In actuality, whether or not OCI certifications have been obtained, contracting officials should be encouraged to obtain any additional information they believe is necessary and appropriate in order for them to identify and evaluate the potential for conflicts of interest. We recommend that the Director, OMB (1) emphasize to heads of agencies the importance of ensuring that contracting officials receive sufficient training to help them to identify and to avoid and mitigate OCI situations and (2) take steps to avoid the possibility that the FAR might be interpreted to imply that if certificates have been obtained from contractors, agencies should not obtain other information in conducting an evaluation of the potential for conflicts of interest. One way of accomplishing both recommendations without going through the formal process of modifying the FAR would be by issuing a new policy letter or supplement to Policy Letter 89-1. DOE, EPA, DOD, Navy, and OMB officials reviewed a draft of this report. Comments were provided on various dates between September 7 through 20, 1995, by the Deputy Assistant Secretary for Procurement and Assistance Management and the Acting Director, Office of Headquarters Procurement Operations, DOE; the Director, Office of Acquisition Management, EPA; the Director, Defense Procurement, DOD; the Special Assistant for Management and Administration, Navy; and the Deputy Administrator and the Deputy Associate Administrator, Office of Federal Procurement Policy, OMB. Each of the agencies agreed with our observations and recommendation to OMB regarding the need to emphasize the importance of ensuring that contracting officials receive sufficient conflict of interest training. DOE, DOD, Navy, and OMB agreed with our recommendation to OMB regarding the need to take steps to avoid the possibility that the FAR could be misinterpreted. EPA officials, however, said they interpreted section 9.506 of the FAR as providing guidance to contracting officials in those instances when contractors' certificates are not required. When a certificate is required by the FAR, the officials believed that the certificate itself will provide the primary source of information on potential conflicts. They said that the contracting officer may choose to seek additional information, as he or she sees fit. We do not disagree with EPA's view that when a certificate is required under the FAR, the contracting officer may choose to seek additional information in order to evaluate the potential for conflicts of interest. Our point, however, is that the current wording in the FAR could be interpreted as indicating that such information should be sought only in instances when contractor certificates have not been obtained. To avoid this possibility, we believe the FAR should be clarified. EPA officials also said they believed that our suggested approach to accomplishing both recommendations to OMB through issuing a new policy letter or supplement to Policy Letter 89-1 could lead to conflicting guidance on the subject since the FAR language would remain the same. We provided this suggestion as a possible alternative to modifying the FAR. If OMB chooses, the FAR could be modified. In its comments, OMB suggested another possible means to implement the recommendations--sending a memorandum to senior agency procurement officials. We believe the manner of implementation should be up to OMB's discretion. OMB officials also suggested that it might be beneficial for us to address our recommendations to the Administrator, Office of Federal Procurement Policy, rather than to the OMB Director. Our usual practice is to address the recommendations to the agency head. The Director, of course, could delegate the responsibility to implement the recommendations to the Administrator. DOD and Navy officials agreed that the Navy should comply with the FAR requirement to evaluate the potential for conflict of interest situations prior to contract award. They pointed out that corrective action had been taken during the course of our review, in the form of various directive memorandums, to reemphasize the need for contracting officials to comply with the FAR's requirements. Because of the action taken, we are not making a recommendation on this issue. As agreed with your office, unless you publicly announce the contents earlier, we plan no further distribution until 30 days from the date of this report. At that time, we will send copies of this report to the Director of the Office of Management and Budget, the Secretaries of Energy, Defense, and Navy, and the Administrator of the Environmental Protection Agency. We will also provide copies to the Chairman, Subcommittee on Post Office and Civil Service, Senate Committee on Governmental Affairs, and other appropriate congressional committees. Copies will be made available to other interested parties upon request. Richard Caradine, William Bosher, and Carolyn Samuels of our General Government Division and Ronald Belak of our Denver Regional Office were major contributors to this report. If you have any questions about this report, please call me on (202) 512-3511. Timothy P. Bowling Associate Director Federal Management and Workforce 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. 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Pursuant to a legislative requirement and a congressional request, GAO reviewed three federal agencies' implementation of the Office of Management and Budget's (OMB) policies on conflicts of interest, focusing on: (1) whether the agencies have complied with existing requirements to identify and evaluate potential organization conflicts of interest (OCI); and (2) ways that agencies could improve their screening for such conflicts. GAO found that: (1) although the Environmental Protection Agency (EPA) and the Department of Energy (DOE) obtained contractors' OCI certifications in almost all of the cases reviewed, the Navy failed to obtain OCI certifications in most cases, mainly because contracting officers did not request or require them; (2) the Navy has since stressed the importance of obtaining OCI certifications; (3) a 1993 Presidential council report showed that only 9 of 19 agencies reviewed obtained OCI certifications; (4) many agency officials did not believe the certifications were an effective deterrent; (5) self-certifications have limitations because differences of opinion or interpretation cause potential OCI underreporting; (6) the OMB requirement that agencies evaluate the potential for OCI is an important supplemental control; (7) DOE and EPA have conducted preaward evaluations for potential OCI; (8) although the Navy has not routinely conducted required preaward OCI evaluations, it has tried to prevent future conflicts of interests; and (9) agencies could improve their screening for OCI by ensuring that all responsible officials receive OCI training to avoid misinterpretation.
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The demands on judges' time are largely a function of both the number and complexity of the cases on their dockets. To measure the case-related workload of district court judges, the Judicial Conference has adopted weighted case filings. The purpose of the district court case weights was to create a measure of the average judge time that a specific number and mix of case filed in a district court would require. Importantly, the weights were designed to be descriptive not prescriptive--that is, the weights were designed to develop a measure of the national average amount of time that judges actually spent on specific cases, not to develop a measure of how much time judges should spend on various types of cases. Moreover, the weights were designed to measure only case-related workload. Judges have noncase-related duties and responsibilities, such as administrative tasks, that are not reflected in the case weights. With few exceptions, such as cases that are remanded to a district court from the court of appeals, each civil and criminal case filed in a district court is assigned a case weight. For example, in the 2004 case weights, drug possession cases are weighted at 0.86 while civil copyright and trademark cases are weighted at 2.12. The total annual weighted filings for a district are determined by summing the case weight associated with all the cases filed in the district during the year. A weighted case filings per authorized judgeship is the total annual weighted filings divided by the total number of authorized judgeships. For example, if a district had total weighted filings of 4,600 and 10 authorized judgeships, its weighted filings per authorized judgeships would be 460. The Judicial Conference uses weighted filings of 430 or more per authorized judgeship as an indication that a district may need additional judgeships. Thus, a district with 460 weighted filings per authorized judgeship could be considered for an additional judgeship. However, the Judicial Conference does not consider a district for additional judgeships, regardless of its weighted case filings, if the district does not request any additional judgeships. In our 2003 report, we found the district court case weights approved in 1993 to be a reasonably accurate measure of the average time demands a specific number and mix of cases filed in a district court could be expected to place on the district judges in that court. The methodology used to develop the weights used a valid sampling procedure, developed weights based on actual case-related time recorded by judges from case filings to disposition, and included a measure (standard errors) of the statistical confidence in the final weight for each weighted case type. Without such a measure, it is not possible to objectively assess the accuracy of the final case weights. At the time of our 2003 report, the Subcommittee on Judicial Statistics of the Judicial Conference's Judicial Resources Committee had approved the research design for revising the 1993 case weights, with a goal of having new weights submitted to the Resources Committee for review in the summer of 2004. The design for the new case weights relied on three sources of data for specific types of cases: (1) data from automated databases identifying the docketed events associated with the cases; (2) data from automated sources on the time associated with courtroom events for cases, such as trials or hearings; and (3) consensus of estimated time data from structured, guided discussion among experienced judges on the time associated with noncourtroom events for cases, such as reading briefs or writing opinions. According to the FJC, the Subcommittee wanted a study that could produce case weights in a relatively short period of time without imposing a substantial record-keeping burden on district judges. The FJC staff provided the Subcommittee with information about various approaches to case weighting, and the Subcommittee chose an event-based method--that is, a method that used data on the number of and types of events, such as trials and other evidentiary hearings, in a case. The design did not involve the type of time study that was used to develop the 1993 case weights. Although the proposed methodology appeared to offer the benefit of reduced judicial burden (no time study data collection), potential cost savings, and reduced calendar time to develop the new weights, we had two areas of concern--the challenge of obtaining reliable, comparable data from two different data systems for the analysis and the limited collection of actual data on the time judges spend on cases. First, the design assumed that judicial time spent on a given case could be accurately estimated by viewing the case as a set of individual tasks or events in the case. Information about event frequencies and, where available, time spent on the events would be extracted from existing administrative data bases and report and used to develop estimates of the judge-time spent on different types of cases. For event data, the research design proposed using data from two data bases (one of which was new and had not been implemented in all district courts) that would have to be integrated to obtain and analyze the event data. The FJC proposed creating a technical advisory group to address this issue. Second, the research design did not require judges to record time spent on individual cases. Actual time data would be limited to that available from existing data bases and reports on the time associated with courtroom events and proceedings for different types of cases. However, a majority of district judges' time is spent on case-related work outside the courtroom. The time required for noncourtroom events would be derived from structured, guided discussion of groups of 8 to 13 experienced district court judges in each of the 12 geographic circuits (about 100 judges in all). The judges would develop estimates of the time required for different events in different types of cases within each circuit using FJC-developed "default values" as the reference point for developing their estimates. These default values would be based in part on the existing case weights and in part on other types of analyses. Following the meetings of the judges in each circuit, a national group of 24 judges (2 from each circuit) would consider the data form the 12 circuit groups and develop the new weights. The accuracy of judges' time estimates is dependent upon the experience and knowledge of the participating judges and the accuracy and reliability of the judges' recall about the average time required for different events in different types of cases--about 150 if all the case types in the 1993 case weights were used. These consensus data could not be used to calculate statistical measures of the accuracy of the resulting case weights. Thus, the planned methodology did not make it possible to objectively, statistically assess how accurate the new case weights are--weights whose accuracy the Judicial Conference relies upon in assessing judgeship needs. We noted that a time study conducted concurrently with the proposed research methodology would be advisable to identify potential shortcoming of the event-based methodology and to assess the relatively accuracy of the case weights produced using that methodology. In the absence of a concurrent time study, there would be no objective statistical way to determine the accuracy of the case weights produced by the proposed event-based methodology--a major difference with the methodology used to develop the 1993 case weights. The principal quantitative measure the Judicial Conference uses to assess the need for additional courts of appeals judgeships is adjusted case filings. The measure is based on data available from standard statistical reports for the courts of appeals. The adjusted filings workload measure is not based on any empirical data regarding the time that different types of cases required of appellate judges. The Judicial Conference's policy is that courts of appeals with adjusted case filings of 500 or more per three-judge panel may be considered for one or more additional judgeships. Courts of appeals generally decide cases using constantly rotating three-judge panels. Thus, if a court had 12 authorized judgeships, those judges could be assigned to four panels of three judges each. In assessing judgeship needs for the courts of appeals, the Conference may also consider factors other than adjusted filings, such as the geography of the circuit or the median time from case filings to disposition. Essentially, the adjusted case filings workload measure counts all case filings equally, with two exceptions. First, cases refilled and approved for reinstatement are excluded from total case filings. Second, pro se cases-- defined by the Administrative Office of the U.S. Courts as cases in which one or both of the parties are not represented by an attorney--are weighted at 0.33, or one-third as much as other cases, which are weighted at 1.0. For example, a court with 600 total pro se case filings in a year would be credited with 198 adjusted pro se case filings (600 x 0.33). Thus, a court of appeals with 1,600 filings (excluding reinstatements)--600 pro se cases and 1,000 non-pro se cases--would be credited with 1,198 adjusted case filings (198 discounted pro se cases plus 1,000 non-pro se cases). If this court had 6 judges (allowing two panels of 3 judges each), it would have 599 adjusted case filings per 3-judge panel, and, thus, under Judicial Conference policy, could be considered for an additional judgeship. The current court of appeals workload measure represents an effort to improve the previous measure. In our 1993 report on judgeship needs assessment, we noted that the restraint of individual courts of appeals, not the workload standards, seemed to have determined the actual number of appellate judgeships the Judicial Conference requested. At the time the current measure was developed and approved, using the new benchmark of 500 adjusted case filings resulted in judgeship numbers that closely approximated the judgeship needs of the majority of the courts of appeals, as the judges of each court perceived them. The current courts of appeals case-related workload measure principally reflects a policy decision using historical data on filings and terminations. It is not based on empirical data regarding the judge time that different types of cases may require. On the basis of the documentation we reviewed for our 2003 report, we determined that there is no empirical basis or assessing the potential accuracy of adjusted case filings as a measure of case-related judge workload. In the past decade the Judicial Conference has considered a number of proposals for developing a revised case-related workload measure for the courts of appeals judges, but has been unable to reach a consensus on any approach. As part of its assistance to the Conference in this effort, the FJC in 2001 compiled a document that reviewed previous proposals to develop some type of case weighting measure for the courts of appeals. Table 1 outlines some of these proposals and their advantages and disadvantages, as identified by the FJC. Generally, methods that rely principally on empirical data on actual case characteristics and judge behavior (e.g., time spent on cases) are more appropriate than those that rely principally on qualitative data because statistical methods can be used to estimate the accuracy of the resulting workload measure. We recognize that a methodology that provides greater empirical assurance of a workload measure's accuracy will require judges to document how they spend their time on cases for at least a period of weeks. However, we believe that the importance and cost of creating new federal judgeships requires the best possible case-related workload data using sound research methods to support the assessment of the need for more judgeships. In our 2003 report we recommended that the Judicial Conference of the United States update the district court case weights using a methodology that supports an objective, statistically reliable means of calculating the accuracy of the resulting weights; and develop a methodology for measuring the case-related workload of courts of appeals judges that supports an objective, statistically reliable means of calculating the accuracy of the resulting workload measures and that addressed the special case characteristics of the Court of Appeals for the D.C. Circuit. Neither of these recommendations has been implemented. With regard to our 2003 recommendation for updating the district court case weights, the FJC agreed that the method used to develop the new case weights would not permit the calculation of standard errors, but that other methods could be used to assess the integrity of the resulting case weight system. In response, we noted that the Delphi technique to be used for developing out-of-court time estimates was most appropriate when more precise analytical techniques were not feasible and the issue could benefit from subjective judgments on a collective basis. More precise techniques were available for developing the new case weights and were to be used for developing new bankruptcy court case weights. The methodology the Judicial Conference decided to begin in June 2002 for the revision of the bankruptcy case weights offered an approach that could be usefully adopted for the revision of the district court case weights. The bankruptcy court methodology used a two-phased approach. First, new case weights would be developed based on the time data recorded by bankruptcy judges for a period of weeks--a methodology very similar to that used to develop the bankruptcy case weights that existed in 2003 at the time of our report. The accuracy of the new case weights could be assessed using standard errors. The second part represents experimental research to determine if it is possible to make future revisions of the weights without conducting a time study. The data from the time study could be used to validate the feasibility of this approach. If the research determined that this were possible, the case weights could be updated more frequently with less cost than required by a time study. We believe this approach would provide (1) more accurate weighted case filings than the design developed and used for the development of the 2004 district court case weights, and (2) a sounder method of developing and testing the accuracy of case weights that were developed without a time study. With regard to our recommendation improving the case-related workload measure for the courts of appeals, the Chair of the Committee on Judicial Resources commented that the workload of the courts of appeals entails important factors that have defied measurement, including significant differences in case processing techniques. We recognize that there are significant methodological challenges in developing a more precise workload measure for the courts of appeals. However, using the data available, neither we nor the Judicial Conference can assess the accuracy of adjusted case filings as a measure of the case-related workload of courts of appeals judges. That concludes my statement, Mr. Chairman, and I would be pleased to respond to any questions you or other members of the Committee may have. For further information about this statement, please contact William O. Jenkins Jr., Director, Homeland Security and Justice Issues, on (202) 512- 8777 or [email protected]. In addition to the contact named above the following individuals from GAO's Homeland Security and Justice Team also made major contributors to this testimony: Ann Laffoon, Assistant Director; John Vocino, Analyst-in-Charge, and Laura Kaskie, Communications Analyst. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Biennially, the Judicial Conference, the federal judiciary's principal policymaking body, assesses the need for additional judges. The assessment is based on a variety of factors, but begins with quantitative case-related workload measures. This testimony focuses on (1) whether the judiciary's quantitative case-related workload measures from 1993 were reasonably accurate; and (2) the reasonableness of any proposed methodologies to update the 1993 workload measures. The comments in this testimony are based on a report GAO issued in May 2003. In 2003, GAO reported that the 1993 district court case weights were reasonably accurate measures of the average time demands that a specific number and mix of cases filed in a district court could be expected to place on the district judges in that district. At the time of GAO's 2003 report, the Judicial Conference was using case weights approved in 1993 to assess the need for additional district court judgeships. The weights were based on data judges recorded about the actual in-court and out-of-court time spent on specific cases from filing to disposition. This methodology permitted the calculation of objective, statistical measures of the accuracy of the final case weights. In 2003, GAO reviewed the research design the Judicial Conference's Subcommittee on Judicial Statistics had approved for updating the 1993 district court case weights, and had two concerns about the design. First, the design assumed that the judicial time spent on a case could be accurately estimated by viewing the case as a set of individual tasks or events in the case. Information about event frequencies and, where available, time spent on the events would be extracted from existing databases and used to develop estimates of the judge-time spent on different types of cases. However, for event data, the research design proposed using data from two data bases that had yet to be integrated to obtain and analyze the data. Second, unlike the methodology used to develop the 1993 case weights, the design for updating the case weights included limited data on the time judges actually spent on specific types of cases. Specifically, the proposed design included data from judicial databases on the in-court time judges spent on different types of cases, but did not include collecting actual data on the noncourtroom time that judges spend on different types of cases. Instead, estimates of judges' noncourtroom time were derived from the structured, guided discussions of about 100 experienced judges meeting in 12 separate groups (one for each geographic circuit). Noncourtroom time was likely to represent the majority of judge time used to develop the revised case weights. The accuracy of case weights developed on such consensus data cannot be assessed using standard statistical methods, such as the calculation of standard errors. Thus, it would not be possible to objectively, statistically assess how accurate the new case weights are--weights on whose reasonable accuracy the Judicial Conference relies in assessing judgeship needs. The case-related workload measure for courts of appeals judges is adjusted case filings in which all cases are considered to take an equal amount of judge time except for pro se cases--those in which one or more of the parties is not represented by an attorney--which are discounted. In our 2003 review, we found no empirical basis on which to assess the accuracy of this workload measure. Although a number of alternatives to the adjusted filings measure have been considered, the Judicial Conference has been unable to agree on a different approach that could be applied to all courts of appeal.
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As reflected by federal statutes and a number of executive orders, it is the policy of the federal government to encourage the participation of small businesses, including businesses owned and controlled by socially and economically disadvantaged individuals, in the performance of federal procurement contracts. The Small Business Act established SBA as an independent agency of the federal government to aid, counsel, assist, and protect the interests of small business concerns; preserve free competitive enterprise; and maintain and strengthen the overall economy of the nation. Among other things, the act sets a minimum governmentwide goal for small business participation of not less than 23 percent of the total value of all prime contract awards for each fiscal year and makes SBA responsible for reporting annually on agencies' achievements on their procurement goals. The act authorizes the President to establish the annual governmentwide goals. To meet its responsibilities under the act, SBA negotiates annual procurement goals with each federal executive agency with the intent to ultimately achieve the 23 percent governmentwide goal. Some agencies have goals higher than 23 percent, while others may have goals that are lower than or equal to 23 percent--SBA negotiates all of them with the intent that the governmentwide small business participation rate will not be less than the goal of 23 percent. Among the agencies we reviewed for this report, annual small business procurement goals for fiscal year 2005 ranged from 16 percent (NASA) to 56 percent (Interior). DOD's goal was set at 23 percent, Treasury's at 24 percent, and HHS's at 30 percent. The Small Business Act also sets annual prime contract dollar goals for participation by certain types of small businesses that agencies strive to meet as part of their efforts to meet their overall small business participation goal. Specifically, these include goals for participation by SDBs (5 percent), businesses owned and controlled by women or service- disabled veterans (5 and 3 percent, respectively), and, businesses located in historically underutilized business zones (HUBZones, 3 percent). "Each department or agency that contracts with businesses to develop advertising for the department or agency or to broadcast Federal advertising shall take an aggressive role in ensuring substantial minority-owned entities' participation, including 8(a), SDB, and Minority Business Enterprise (MBE) in Federal advertising-related procurements." The criteria for determining a firm's status as an 8(a) or SDB are set forth in section 8 of the Small Business Act and related regulations, while the definition of MBE is set forth in Executive Order 11625. Specifically, The 8(a) program, authorized by section 8(a) of the Small Business Act, was created to help small disadvantaged businesses compete in and access the federal procurement market. Generally, in order to be certified under SBA's 8(a) program, a firm must satisfy SBA's applicable size standards, be owned and controlled by one or more socially and economically disadvantaged individuals who are citizens of the United States, and demonstrate potential for success. Black Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans are presumptively socially disadvantaged for purposes of eligibility. The personal net worth of an individual claiming economic disadvantage must be less than $250,000 at the time of initial eligibility and less than $750,000 thereafter. To qualify for SDB certification, a firm must be owned and controlled by one or more socially and economically disadvantaged individuals or a designated community development organization. Individuals presumed to be socially disadvantaged for purposes of the 8(a) program are also presumed to be socially disadvantaged for purposes of determining eligibility for SDB certification. In contrast to the 8(a) program applicants, businesses applying for SDB certification need not demonstrate potential for success, and the personal net worth of the owners may be up to $750,000 at the time of certification. SDBs are eligible for incentives such as price evaluation adjustments of up to 10 percent when bidding on federal contracts in certain industries. Prime contractors that achieve SDB subcontracting targets may receive evaluation credits for doing so. Section 8(a) firms automatically qualify as SDBs, but other firms may apply for SDB-only certification. Executive Order 11625 defines minority business enterprises as those businesses that are owned or controlled by one or more socially or economically disadvantaged persons. The order states that disadvantages could arise from cultural, racial, or chronic economic circumstances or background or from similar causes. Under the order, socially or economically disadvantaged individuals include, but are not limited to, African-Americans, Puerto Ricans, Spanish-speaking Americans, American Indians, Eskimos, and Aleuts. While the definition of "MBE" is similar to the definition of "socially and economically disadvantaged small business" for purposes of the 8(a) and federal SDB programs, unlike these programs, the order does not limit the term "MBE" to small businesses. Executive Order 13170 spells out specific responsibilities for SBA, OMB, and executive agencies with procurement authority. Generally, the order gives SBA responsibility for setting goals with agencies and publicly reporting the progress toward those goals. Although the order gives OMB general oversight responsibility for implementing the order, OMB and SBA officials told us that the two agencies had agreed that SBA would take on the oversight responsibilities because SBA already had programs in place to oversee the small business programs of federal agencies. Section 2(b) of the order directed federal agencies with procurement authority to develop long-term, comprehensive plans to, among other things, aggressively seek to ensure that businesses classified as 8(a), small disadvantaged, and minority-owned are aware of contracting opportunities and report annually on efforts to increase utilization of these businesses. Section 2(b) also directed OMB to review each of these plans and report to the President on the sufficiency of each plan to carry out the terms of the executive order. The federal government awards contracts for advertising-related services for a variety of reasons, but primarily to deliver messages about its programs and services. According to Advertising Age, the largest amount of federal advertising spending goes to procure television and magazine advertising. Within the federal government, as we noted earlier, the biggest buyer of these services is DOD, which is very often doing so as part of ongoing recruiting campaigns by the military services. Additionally, for example, the Treasury's Bureau of Engraving and Printing procures the services of an advertising firm to promote public awareness and acceptance of changes to U.S. currency (e.g., the introduction of the redesigned currency). Similarly, NASA also uses advertising firms to help plan and carry out a variety of events held around the country intended to publicize its programs and ongoing space research as well to support internal purposes, such as organizing off-site conferences. The five agencies we reviewed implemented Executive Order 13170 primarily by continuing their existing efforts to broadly identify potential contracting opportunities with all types of small businesses, while three of the agencies addressed section 4 of the order by initiating new actions specific to advertising-related contracts. For example, HHS and NASA cited ongoing training efforts directed to procurement staff or small businesses as one way their agencies addressed the order. The five agencies' focus on ongoing efforts was consistent with SBA's and OMB's views that several provisions of the order duplicated program requirements under existing legislation. Specific to advertising, Treasury officials indicated that the agency was building on existing relationships with trade associations in order to identify advertising contracting for SDBs. Earlier this year, Treasury also established new outreach efforts and reporting requirements for advertising contracts with 8(a), SDB, and minority-owned businesses. Rather than develop plans focused specifically on section 4 of the executive order, for the most part the five agencies that we reviewed said that they already had programs in place to address similar requirements in previous legislation and that these activities were consistent with the expectations of the order. In response to the order, agencies generally reemphasized to procurement officers in subagencies around the country (who are responsible for awarding contracts) each agency's small business program policies and goals. While not directed specifically toward advertising contracts, these existing programs were designed to encourage the participation of small and minority-owned businesses in federal procurement. Treasury, HHS, and NASA spelled out their strategies for addressing the executive order in written implementation plans that they prepared pursuant to the requirements of section 2(b) of the order. DOD and Interior did not, as directed, prepare such plans at that time, but agency officials from those departments described to us the efforts they undertook. More specifically, to ensure that 8(a)s, SDBs, and minority- owned businesses were aware of contracting opportunities: Treasury indicated in its implementation plan that it would continue to maintain a Web site for small business procurement and would post annual forecasts of contracting opportunities there. Further, the agency stated that it would publicize contracting opportunities in the Commerce Business Daily and FedBizOpps (an Internet-based point-of-entry for federal government procurement opportunities) and use its existing relationship with a variety of trade associations to foster the development of small minority-owned and women-owned businesses to increase awareness of contracting opportunities. HHS's plan stated that the agency would continue to train program and procurement officials through the HHS Acquisition Training Program on policies that affect federal procurement awards to 8(a), small disadvantaged, and minority-owned businesses. NASA's plan stated that it would continue to provide a 3-day course, "Training and Development of Small Businesses in Advanced Technologies," that was designed to increase the knowledge base of small businesses--including disadvantaged, 8(a), and women-owned businesses, and minority educational institutions--by improving their ability to compete for contracts in NASA's technical and complex environment. Interior officials told us that they had disseminated information on future contracting opportunities to small businesses through the Internet, developed an advanced procurement plan, and conducted quarterly outreach meetings with potential small business contractors. DOD officials noted that the department's Small Business Program adhered to the requirements set forth in the Small Business Act and other applicable statutory provisions and federal regulations. The officials further explained that they used FPDS-NG and the department's internal database to monitor DOD's progress toward meeting its small business program goals. The five agencies' focus on enhancing their ongoing small business procurement programs to address section 4 of Executive Order 13170 was consistent with SBA's and OMB's views that some requirements in the order reflected previous legislation. Specifically, officials from SBA and OMB told us that several provisions of the executive order paralleled procurement program requirements under the Small Business Act and other existing legislation. As a result, these two agencies, which were assigned certain oversight and reporting responsibilities in section 2 of the order, agreed that SBA should address such responsibilities as part of its ongoing oversight activities under the Small Business Act. For example, the order requires SBA to conduct semiannual evaluations of the achievements in meeting governmentwide prime and subcontracting goals and the actual prime and subcontract awards to 8(a)s and SDBs for each agency and to make the information publicly available. However, prior to the issuance of the order, SBA was already evaluating awards to SDBs and publishing the information in its annual reports on the goals and achievements of each agency's procurement efforts. SBA's goaling requirements were previously established by the Small Business Act. Our comparison of the order to existing legislation also showed that almost all of the requirements in the order had already been reflected in previous legislation. For example, the order required agencies to ensure that minority-owned businesses are aware of future prime contracting opportunities, an existing requirement under the Small Business Act and the Federal Acquisition Regulation (FAR). Similarly, the order requires that the directors of the Offices of Small and Disadvantaged Business Utilization (OSDBU) carry out their responsibilities to maximize the participation of 8(a)s and SDBs in federal procurement, a requirement that was previously set forth in the Small Business Act. Specifically, the Small Business Act requires each covered agency to establish an OSDBU to be responsible for, among other things, the implementation and execution of the functions and duties under the sections of the act that pertain to the 8(a) and SDB programs in each agency. We found that many of the activities mentioned in the agencies' implementation plans or described to us highlighted actions that the agencies already had in place in their small business programs. Although agency officials at all five agencies indicated that their current small business programs broadly addressed procuring services from 8(a)s, SDBs, and minority-owned businesses, including advertising-related services, three of the five agencies we reviewed--HHS, Treasury, and Interior--planned new activities to increase federal advertising contracting opportunities for these businesses. For example, HHS stated in its implementation plan that it would make every effort to develop alternative strategies to maximize small and minority business participation in its advertising contracts at both the prime contracting and subcontracting levels. HHS also directed staff from its OSDBU to work with its operational divisions to ensure that all advertising efforts were properly structured under the Federal Acquisition Regulation. In order to direct federal advertising procurement opportunities to 8(a)s, SDBs, and minority-owned businesses, Treasury stated in its implementation plan that it would identify contracting opportunities for SDBs in advertising and information technology by building on its existing relationships with trade associations. Treasury had previously established a memorandum of understanding (MOU) with several trade associations, including the Minority Business Summit Committee and the U.S. Pan Asian American Chamber of Commerce. Treasury intended the MOU to foster an environment that would allow small and minority-owned firms to compete successfully for Treasury contracts and subcontracts. According to Treasury officials, the focus on advertising in Executive Order 13170 allowed the department to leverage an existing program by adding a component specifically for advertising and information technology services. In addition to the efforts to partner with trade organizations that it began in 2001, Treasury issued an acquisition bulletin in January 2007 establishing additional outreach efforts and reporting requirements relating to the procurement of federal advertising services from 8(a)s, SDBs, and minority-owned businesses. The bulletin requires (1) small business specialists located at Treasury's bureaus to use databases and other sources to identify minority-owned entities to solicit for advertising- related services, and (2) Treasury's bureaus to report all contract actions related to federal advertising to the Office of Procurement Executive for contracts awarded from March 1, 2007, through September 30, 2007. Interior, which had previously relied on its existing small business program to address the order, is currently drafting an implementation plan that will, according to the department's OSDBU officials, propose activities to increase advertising opportunities for 8(a)s, SDBs, and minority-owned businesses. Interior plans to convey through its efforts that the department's OSDBU is available to make the process of doing business with Interior simpler and more consistent across Interior's component subagencies. Interior plans to target all small businesses whose owners include representatives from socioeconomic groups identified as disadvantaged in the Small Business Act. Overall, from fiscal years 2001 through 2005, 8(a), small disadvantaged, and minority-owned businesses received about 5 percent of the $4.3 billion in advertising-related obligations awarded by DOD, Interior, HHS, Treasury, and NASA. These businesses accounted for 12 percent of the contract actions that the five agencies awarded, but the percentages the agencies awarded varied substantially. For example, Treasury awarded less than 2 percent of its advertising-related dollars to 8(a)s, SDBs, and minority-owned businesses over the 5-year period, while HHS awarded about 25 percent to these business types. Advertising dollars also varied from one year to the next at individual agencies, sometimes significantly, primarily because of large advertising campaigns that the respective agencies undertook to publicize new programs or promote their mission (e.g., public health). The extent to which agencies' yearly increases in overall advertising obligations affected obligations to 8(a), small disadvantaged, and minority-owned firms also varied. According to federal procurement data, the federal government obligated about $4.8 billion to contractors for advertising-related services from fiscal years 2001 through 2005. During this period, the five agencies obligated $4.3 billion for advertising-related services--about 92 percent of total advertising-related obligations for the federal government (this amount consists of $3.4 billion of their own funds, and another $919 million on behalf of other agencies). As shown in figure 1, DOD accounted for over half of all advertising-related obligations during this period. Treasury (Other agency funded) From fiscal years 2001 through 2005, the five agencies we reviewed collectively obligated about $218 million to businesses designated as 8(a), small disadvantaged, or minority-owned; individually, their utilization of these businesses varied widely (fig. 2). Specifically, HHS awarded the highest dollar amount to 8(a), SDB, and minority-owned businesses during the 5-year period--about $122 million--and NASA awarded the highest percentage of its dollars to these businesses--89 percent, or about $41 million. During this period, the five agencies awarded a total of 6,279 contract actions, about 12 percent of which (725) were awarded to businesses with these designations (fig. 3). Individually, the extent to which agencies awarded contract actions to 8(a), SDB, and minority-owned businesses varied widely, with Treasury awarding none on behalf of other agencies to these types of businesses and NASA awarding 45 percent. The number of contract actions awarded to 8(a)s, SDBs, and minority-owned businesses ranged from 0 at Treasury (administered for other agencies) to 449 at DOD. Individually, the agencies we reviewed awarded different percentages of their advertising-related contracting dollars and actions to these types of small businesses. For example, on average, NASA awarded more than 80 percent of its total advertising-related obligations to businesses in each of these categories for the 5-year period. Except for 8(a)s and SDBs in 2001, NASA consistently awarded 66 percent or more of its advertising-related obligations to the three types of businesses. In contrast, Treasury and DOD on average awarded 1.7 percent or less of their advertising-related obligations to 8(a), SDB, or minority-owned businesses. Figure 4 shows the amount of advertising-related obligations awarded by each agency to each of the three business types for 5 fiscal years as well as the total for the 5-year period. Similarly, figure 5 shows the number of advertising- related contact actions awarded by each agency to each of the three business types for each year and the total for the 5-year period. Contracting dollars and actions awarded directly to businesses can be counted in more than one category, so the dollars and actions awarded to various types of small businesses are not mutually exclusive. As we noted earlier in this report, federal agencies award contracts for advertising-related services for a variety of reasons, the primary one being to deliver messages about the agencies' programs and services. The advertising services that agencies procured ranged from recruiting and public service announcements to public relations. We found that advertising dollars for agencies sometimes varied significantly from one year to the next (table 1) and that these differences were mostly the result of large advertising campaigns specific to the individual agencies. While we noted the year-to-year variations in agencies' overall advertising obligations, we also observed that these variations did not always translate into a direct effect on the share of agencies' advertising obligations that went to 8(a)s, SDBs, or minority-owned businesses (fig. 4). For example, during the 5-year period under review, DOD showed an upward trend of increasing obligations for advertising-related procurement, with the largest increase occurring in fiscal year 2005 (about 31 percent). DOD officials attributed the increase in advertising expenses to confronting the challenge of continuing to fill the military ranks with recruits and reenlistees in the midst of war. More specifically, during fiscal year 2005 DOD awarded multiple actions on four ongoing unrelated large contracts with obligations ranging from about $60 million to $175 million. None of these new fiscal year 2005 contract actions used 8(a)s, SDBs, or minority- owned businesses. Overall, however, DOD increased its advertising-related obligations to each of the three business types (from 2004 to 2005). HHS officials told us that HHS's higher advertising-related obligations in fiscal years 2001 and 2003 were mostly attributable to the Centers for Disease Control and Prevention's (CDC) development of a Youth National Media Program. In support of this initiative, two advertising programs were conceived: the National Youth Media Campaign and the Targeted Communities-Youth Media Campaign. HHS obligated $151 million for these two campaigns. A portion of these obligations--just over $48 million--was awarded to two minority-owned businesses, one of which was also certified as a SDB. These campaigns included HHS's VERB advertisement targeted toward children and teens to promote more physical activity (fig. 6). The increase in HHS's overall advertising obligations from 2002 to 2003 did not have a uniformly similar effect on the obligations the agency directed to 8(a)s, SDBs, and minority-owned firms, even though, as we note, some of the spending for the youth initiative was directed to small disadvantaged and minority-owned firms. Specifically, as a percentage of the agency's total advertising obligations, HHS's total obligations to 8(a) and minority-owned firms decreased from 2002 to 2003, and its obligations to SDBs showed an increase of less than 1 percent. About 84 percent of NASA's obligations were related to two contracts. The first of these was a contract NASA's Langley Research Center awarded in fiscal year 2001 to an SDB for a variety of public relations activities. For example, this contractor provided services such as preparing written and photographic materials for media and selected internal and external communications programs and administrative support for outreach and special events. The contractor also developed, installed, and maintained exhibits for events and provided logistical and general services to plan and conduct conferences, symposia, peer reviews, and workshops for off-site conferences and events. From fiscal years 2001 through 2005, NASA obligated over $5 million for this contract. The second NASA contract was awarded in fiscal year 2002 as a multiple- year contract by its Marshall Space Flight Center. The contract was originally awarded to a business classified as minority-owned that was later admitted to the 8(a) and SDB programs. The contractor was primarily responsible for providing support services to human resources, educational programs, government and community relations, public exhibits, internal communications, employee training, and organizational development. More recently, the contractor has helped with several public events, including an air show called Thunder in the Valley in Columbus, Georgia, in March 2007 and the X-Prize Cup in Las Cruces, New Mexico, in October 2006. Between fiscal years 2002 and 2005, NASA obligated over $33 million for this contract. Generally, agency officials told us that the procurement decisions reflected in their overall contracting data and specifically the advertising contracting data we present here were more often driven by needs identified at the subagency or local area level than by the departments' needs. These decisions are made by contracting officers at procurement offices, which are located around the country. For example, NASA has contracting officers at each of its 10 field centers. Each center specializes in different areas of research and technology specific to NASA. The Marshall Space Flight Center in Huntsville, Alabama, for example, focuses on space exploration, with specific emphasis on completing the international space station and returning to the moon. Contract-related needs for the Marshall Space Flight Center seek to advance technology in the space exploration area, and officials at the center identify contracting opportunities to meet those needs. Officials in NASA's OSDBU told us that they did not tell contracting officers what services should be directed to small businesses, because the businesses that were selected to provide a service were chosen based on need (as identified by the centers' contracting officers and other officials) and ability to meet the center's requirements. We provided SBA, OMB, GSA, DOD, Treasury, HHS, Interior, and NASA with a draft of this report for review and comment. After reviewing the report, all agencies responded that they did not have any comments, including any of a technical nature. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the Ranking Member of the Senate Committee on Small Business and Entrepreneurship, the Chair and Ranking Member of the House Committee on Small Business, and other interested congressional committees. In addition, we will send copies to the Secretaries of Defense, Treasury, Health and Human Services, and Interior, as well as NASA's Administrator, the Administrator of General Services, the Administrator of the Small Business Administration, and the Director of the Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me 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 report. GAO staff who made major contributions to this report are listed in appendix II. In this report, we describe (1) strategies that the Departments of Defense (DOD), Interior, Health and Human Services (HHS), Treasury, and National Aeronautics and Space Administration (NASA) used to address section 4 of Executive Order 13170, and (2) the total obligations, the number of contract actions, and the percentage of total obligations represented by these contract actions that each of the five agencies awarded to businesses in the Small Business Administration's (SBA) 8(a) and federal small disadvantaged business (SDB) programs and to minority- owned businesses for advertising-related services. We queried the Federal Procurement Data System-Next Generation (FPDS-NG) using the product service codes for advertising and public relations to identify advertising- related activity. Using these data, we judgmentally selected the four agencies that had obligated the most funds (DOD, Interior, HHS, and Treasury) and one that had a high participation of 8(a), small disadvantaged, and minority-owned businesses (NASA), based on identification in the FPDS-NG of awards to 8(a)s, SDBs, and minority- owned businesses for advertising-related contracts for fiscal years 2001 to 2005. In total, these agencies represented about 92 percent of all federal advertising-related obligations for this 5-year period. To describe strategies used by the five federal agencies to address section 4 of Executive Order 13170, we obtained documentation from the agencies outlining the actions they planned to take to implement the order, interviewed agency officials regarding their plans and actions taken, and compared both their planned actions as well as actions taken to the requirements presented in the order. We also interviewed officials at SBA and Office of Management and Budget (OMB) regarding the oversight responsibilities each was given in implementing the order. Furthermore, we identified a number of federal statutes and regulations pertaining to executive agency procurement and small business programs, including the Small Business Act and the Federal Acquisition Regulations, that were consistent with the requirements of section 2 of the Executive Order 13170. To determine the total dollar amount for each of the five agency's advertising-related obligations for fiscal years 2001 through 2005 and the dollar amount and percentage for obligations and contract actions awarded to businesses designated as 8(a)s, SDBs, or minority-owned during that same time period, we extracted key data fields from FPDS-NG. These data fields included contracting department, procurement instrument identifier (contract/order number), advertising-related product or service codes (R701 and R708), SDB firm designation, 8(a) firm designation, minority-owned designation, and funding agency. We then analyzed the data to identify the total amount of advertising-related obligations for each agency for each fiscal year and the amount and percentage of the total for obligations and number of contract actions awarded to 8(a)s, SDBs, and minority-owned businesses. We did not use FPDS data from before fiscal year 2001 because agencies did not consistently report certain data elements important to our analysis, such as minority ownership. Even after the General Services Administration (GSA) upgraded the system to FPDS-NG in 2003 (to capture, among other things, a data element for minority ownership from fiscal year 2004 forward), agencies varied in the extent to which they modified earlier years' data to reflect this information. In assessing the reliability of federal contracting data, we interviewed officials from GSA, the agency responsible for maintaining FPDS-NG. Additionally, we performed specific steps using the FPDS-NG data. First, we compared FPDS-NG advertising totals to the Federal Procurement Data System, the previous governmentwide contracting system, for the five agencies for fiscal years 2001 through 2003. For the DOD data, we also compared FPDS-NG advertising totals to DD-350 (DOD's internal contracting database) totals for fiscal years 2001 through 2005. In these comparisons, we found some differences between the databases that we determined could be attributed to the fact that FPDS-NG was a real-time system that allowed for editing and updates, such as updates to the primary purpose of a multiple-year contract in later years. FPDS and DD- 350 did not allow for such real-time changes. On the basis of this assessment, we concluded that FPDS-NG data were sufficiently reliable for the purposes of our report. Next, we tested the reliability of the 8(a), SDB, and minority-owned designations in FPDS-NG. To do this, we electronically compared the FPDS-NG designations for 8(a) and SDB to SBA's list of certified 8(a)s and SDBs. We found a small number of certified 8(a) businesses that were not designated as such in FPDS-NG. For DOD contractors that the DD-350 also identified as being 8(a), we modified our data to reflect the certified 8(a) status. To determine the reliability of the minority-owned data in FPDS- NG, we compared FPDS-NG contractor data for fiscal years 2004 and 2005 to the self-reported minority-owned designations in SBA's Small Disadvantaged Businesses file and the Central Contractor Registration database (the DOD database that also serves as the primary vendor database for the U.S. government). We found that the number of minority- owned businesses that received advertising-related contracts from these five agencies was undercounted in the FPDS-NG for fiscal years 2004 and 2005. We could not determine the degree of undercounting because our analysis was not based on a sample that could be generalized to the population of advertising-related contractors. Other than the minor differences that we found, we determined that the business designations were sufficiently reliable for the purposes of our report. We conducted our work in Washington, D.C., between October 2006 and June 2007 in accordance with generally accepted government auditing standards. In addition to the individual named above, Bill MacBlane, Assistant Director; Johnnie Barnes; Michelle Bracy; Emily Chalmers; Julia Kennon; Lynn Milan; Marc Molino; Omyra Ramsingh; and Rhonda Rose made key contributions to this report.
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In 2005, federal spending on advertising exceeded $1 billion. Five agencies--DOD, Treasury, HHS, Interior, and NASA--together made up over 90 percent of this spending from 2001 to 2005. Executive Order 13170, signed in October 2000, directs agencies to take an aggressive role in ensuring substantial participation in federal advertising contracts by businesses in the Small Business Administration's (SBA) 8(a) and small disadvantaged business (SDB) programs and minority-owned businesses. This report describes (1) strategies DOD, HHS, Treasury, Interior, and NASA used to address Executive Order 13170, and (2) the total obligations, number of contract actions, and percentage of total obligations represented by these actions that each agency awarded to 8(a)s, SDBs, and minority-owned businesses for advertising services. In conducting this study, GAO analyzed agency contracting data and executive order implementation plans and interviewed agency procurement officials. Because much of Executive Order 13170 was consistent with existing legislation, the five agencies we reviewed generally addressed the order's emphasis on advertising contracts by continuing existing programs designed to identify potential contracting opportunities with all types of small businesses. The five agencies' focus on ongoing efforts was consistent with SBA's and the Office of Management and Budget's (OMB) views that several provisions of the order paralleled procurement program requirements under the Small Business Act. Three agencies--HHS, Treasury, and Interior--also planned additional activities that targeted the agency's contracting efforts for advertising services. For example, one of Treasury's additional activities was to work with trade associations to identify opportunities for SDBs in advertising. From fiscal years 2001 through 2005, 8(a), SDB, and minority-owned businesses received about 5 percent of the $4.3 billion in advertising-related obligations of DOD, Treasury, HHS, Interior, and NASA and 12 percent of the contract actions that these agencies awarded; the percentages varied substantially among each of the five agencies. For example, Treasury awarded less than 2 percent of its advertising-related dollars to 8(a)s, SDBs, and minority-owned businesses collectively over the 5-year period, while NASA awarded about 89 percent to these types of businesses. Overall advertising obligations also varied from one year to the next at individual agencies, sometimes significantly. Year-to-year increases were driven by large campaigns that the respective agencies undertook to publicize new programs or promote their mission (e.g., public health). Agencies varied in the extent to which year-to-year increases in overall advertising obligations had a similar effect on obligations to 8(a), small disadvantaged, and minority-owned firms.
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Historically, the mining of hardrock minerals, such as gold, lead, copper, silver, and uranium, was an economic incentive for exploring and settling the American West. However, when the ore was depleted, miners often left behind a legacy of abandoned mines, structures, safety hazards, and contaminated land and water. Even in more recent times, after cleanup became mandatory, many parties responsible for hardrock mining sites have been liquidated through bankruptcy or otherwise dissolved. Under these circumstances, some hardrock mining companies have left it to the taxpayer to clean up the mining site. BLM, the Forest Service, EPA, and OSM play a role in cleaning up these abandoned mining sites and ensuring that currently operating sites are reclaimed after operations have ceased. BLM and the Forest Service are responsible for managing more than 450 million acres of public lands in their care, including land disturbed and abandoned by past hardrock mining activities. BLM manages about 258 million acres in 12 western states, including Alaska. The Forest Service manages about 193 million acres across the nation. In 1997, BLM and the Forest Service each launched a national Abandoned Mine Lands Program to remedy the physical and environmental hazards at thousands of abandoned hardrock mines on the federal lands they manage. According to a September 2007 report by these two agencies, they had inventoried thousands of abandoned sites and, at many of them, had taken actions to clean up hazardous substances and mitigate safety hazards. BLM and the Forest Service are also responsible for managing and overseeing current hardrock operations on their lands, including the mining operators' reclamation of the land disturbed by hardrock mining. Although reclamation can vary by location, it generally involves such activities as regrading and reshaping the disturbed land to conform with adjacent land forms and to minimize erosion; removing or stabilizing buildings and other structures to reduce safety risks; removing mining roads to prevent damage from future traffic; and establishing self- sustaining vegetation. One of the agencies' key responsibilities is to ensure that adequate financial assurances, based on sound reclamation plans and cost estimates, are in place to guarantee reclamation costs. If a mining operator fails to complete required reclamation, BLM or the Forest Service can take steps to obtain funds from the financial assurance provider to complete the reclamation. BLM requires financial assurances for both notice-level hardrock mining operations--those disturbing 5 acres of land or less--and plan-level hardrock mining operations--those disturbing over 5 acres of land and those in certain designated areas, such as the national wild and scenic rivers system. For hardrock operations on Forest Service lands, agency regulations require reclamation of sites after operations cease, but do not require financial assurances for the reclamation. However, according to a Forest Service official, if the proposed hardrock operation is likely to cause a significant disturbance, the Forest Service requires financial assurances. Both agencies allow several types of financial assurances to guarantee estimated reclamation costs for hardrock operations on their lands. According to regulations and agency officials, BLM and the Forest Service allow cash, letters of credit, certificates of deposit or savings accounts, and negotiable U.S. securities and bonds in a trust account. BLM also allows surety bonds, state bond pools, trust funds, and property. Neither agency centrally tracks all the types of financial assurances in place for hardrock operations on its lands. BLM's LR2000 tracks most of the types, and BLM is updating the database to include more types of financial assurances, but data are incomplete for the types of assurances currently in the system. The Forest Service does not have readily available information on the types of financial assurances in use, but it is developing a database to collect this and other information on hardrock operations by late summer 2008, according to Forest Service officials. EPA administers the Superfund program, which was established under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to address the threats that contaminated waste sites, including those on nonfederal lands, pose to human health and the environment. The act also requires that the parties statutorily responsible for pollution bear the cost of cleaning up contaminated sites, including abandoned hardrock mining operations. Some contaminated hardrock mine sites have been listed on Superfund's National Priorities List--a list of seriously contaminated sites. Typically, these sites are expensive to clean up and the cleanup can take many years. According to EPA's Office of Inspector General in 2004, 63 hardrock mining sites were on the National Priorities List and another 93 sites had the potential to be added to the list. Regarding financial assurances, EPA has statutory authority under the Superfund program to require businesses handling hazardous substances on nonfederal lands to provide financial assurances, and according to agency officials, is currently exploring options for implementing this authority. OSM's Abandoned Mine Land Program primarily focuses on cleaning up abandoned coal mine sites. However, OSM, under amendments to the Surface Mining Control and Reclamation Act (SMCRA) of 1977, can provide grants to fund the cleanup and reclamation of certain hardrock mining sites either (1) after a state certifies that it has cleaned up its abandoned coal mine sites and the Secretary of the Interior approves the certification, or (2) at the request of a state or Indian tribe to address problems that could endanger life and property, constitute a hazard to the public and safety, or degrade the environment, and the Secretary of the Interior grants the request. OSM has provided more than $3 billion to clean up dangerous abandoned mine sites. Its Abandoned Mine Land Program has eliminated safety and environmental hazards on 314,108 acres since 1977, including all high-priority coal problems and non-coal problems in 27 states and on the lands of three Indian tribes. Between fiscal years 1998 and 2007, the four federal agencies we examined--BLM, the Forest Service, EPA, and OSM--spent at least $2.6 billion to reclaim abandoned hardrock mines on federal, state, private, and Indian lands. EPA has spent the most--$2.2 billion. Although the amount each agency spent annually varied considerably, the median amount spent for the public lands by BLM and the Forest Service was about $5 million and about $21 million, respectively. EPA spent substantially more--a median of about $221 million annually--to clean up mines that are generally on nonfederal lands. Finally, OSM provided grants with an annual median value of about $18 million to states and Indian tribes through its SMCRA program for hardrock mine cleanups. Table 1 summarizes information on expenditures and hardrock mine cleanup activities at BLM, the Forest Service, EPA, and OSM. See appendix II for more detailed information on agency expenditures by fiscal year. According to available data, as of September 30, 2007, BLM had spent the largest share of its funds in Montana--about $18 million; EPA had spent the largest share of its funds in Idaho--about $352 million; and Wyoming was the largest recipient of OSM grants for cleaning up hardrock mine sites--receiving about $99 million. Wyoming was eligible for OSM grants after OSM's acceptance of the state's certification that it had completed its cleanup of coal mine sites. The Forest Service was unable to provide this information by state. See appendix II for BLM, EPA, and OSM total funding by state. Previous state estimates of the number of abandoned hardrock mine sites vary widely in the six studies that we reviewed because, in part, there is no generally accepted definition for a hardrock mine site and the studies rely on the states' different definitions of hardrock mine sites. In addition, we found problems with BLM's and the Forest Service's estimate of 100,000 abandoned hardrock mines on their lands because the agencies included non-hardrock mines and mines that may not be on their lands. Using our consistent definition, 12 western states and Alaska estimated a total of at least 161,000 abandoned hardrock mine sites in their states on state, private, or federal lands. We identified six studies conducted in the past 10 years that estimated the number of abandoned hardrock mine sites in the 12 western states and Alaska. The estimates in each of these studies were developed by asking states to provide data on the number of abandoned hardrock mine sites in their states, generally without regard to whether the mine was on federal, state, Indian, or private lands. The estimates for a particular state do, in some cases, vary widely from study to study. For example, for Nevada, the Western Governors' Association/National Mining Association estimated that the state had 50,000 abandoned hardrock mine sites in 1998, while in 2004 EPA estimated that the state had between 200,000 to 500,000 abandoned sites. The estimates also reflect the different definitions that states used for abandoned hardrock mining sites for a given study. For example, we found that, within the same study, some states define an abandoned mine site as a mine opening or feature, while others define a site as all associated mine openings, features, or structures at a distinct location. As a result, an abandoned hardrock operation with two mine openings, a pit, and a tailings pile could be listed as one site or four sites, depending on the definitions and methodologies used. See appendix III for more information on estimates from these studies. In addition, some regional or state estimates included coal and other non- hardrock mineral sites because it was (1) not important to distinguish between the type of minerals mined or (2) difficult to determine what mineral had been mined. In 2004, EPA commented on this problem, noting, "it is important to keep in mind that a universally applied definition of an does not exist at present...therefore, the various agencies and state-developed...inventories presented may possess inconsistencies and are not intended for exact quantitative comparisons." BLM and the Forest Service have also had difficulty determining the number of abandoned hardrock mines on their lands and have no definitive estimates. In September 2007, the agencies reported that there were an estimated 100,000 abandoned hardrock mine sites, but we found problems with this estimate. For example, the Forest Service had reported that it had approximately 39,000 abandoned hardrock mine sites on its lands. However, we found that this estimate includes a substantial number of non-hardrock mines, such as coal mines, and sites that are not on Forest Service land. At our request, in November 2007, the Forest Service provided a revised estimate of the number of abandoned hardrock mine sites on its lands, excluding coal or other non-hardrock sites. According to this estimate, the Forest Service may have about 29,000 abandoned hardrock mine sites on its lands. That said, we still have concerns about the accuracy of the Forest Service's recent estimate because it includes a large number of sites on lands with "undetermined" ownership, and therefore these sites may not all be on Forest Service lands. BLM has also acknowledged that its estimate of abandoned hardrock mine sites on its lands may not be accurate because it includes sites on lands that are of unknown or mixed ownership (state, private, and federal) and a few coal sites. In addition, BLM officials said that the agency's field offices used a variety of methods to identify sites in the early 1980s, and the extent and quality of these efforts varied greatly. For example, they estimated that only about 20 percent of BLM land has been surveyed in Arizona. Furthermore, BLM officials said that the agency focuses more on identifying sites closer to human habitation and recreational areas than on identifying more remote sites, such as in the desert. Table 2 shows the Forest Service's and BLM's most recent available estimates of abandoned mine sites on their lands. To estimate abandoned hardrock mining sites in the 12 western states and Alaska, we developed a standard definition for these mine sites. In developing this definition, we consulted with mining experts at the National Association of Abandoned Mine Land Programs; the Interstate Mining Compact Commission; and the Colorado Department of Natural Resources, Division of Reclamation, Mining and Safety, Office of Active and Inactive Mines. We defined an abandoned hardrock mine site as a site that includes all associated facilities, structures, improvements, and disturbances at a distinct location associated with activities to support a past operation, including prospecting, exploration, uncovering, drilling, discovery, mine development, excavation, extraction, or processing of mineral deposits locatable under the general mining laws. We also asked the states to estimate the number of features at these sites that pose physical safety hazards and the number of sites with environmental degradation. See appendix I for the complete definition we used when asking states for their estimates. Using this definition, states reported to us the number of abandoned sites in their states, and we estimated that there are at least 161,000 abandoned hardrock mine sites in their states. At these sites, on the basis of state data, we estimated that at least 332,000 features may pose physical safety hazards, such as open shafts or unstable or decayed mine structures; and at least 33,000 sites have degraded the environment, by, for example, contaminating surface water and groundwater or leaving arsenic- contaminated tailings piles. Table 3 shows our estimate of the number of abandoned hardrock mine sites in the 12 western states and Alaska, the number of features that pose significant public health and safety hazards, and the number of sites with environmental degradation. While states used our definition to provide data on the estimated number of mine sites and features, these data have two key limitations. First, the methods and sources used to identify and confirm abandoned sites and hazardous features vary substantially by state. For example, some states, such as Colorado and Wyoming, indicated they had done extensive and rigorous fieldwork to identify sites and were reasonably confident that their estimates were accurate. Other states, however, relied less on rigorous fieldwork, and more on unverified, readily available records or data sources, such as published or unpublished geological reports, mining claim maps, and the Mineral Availability System/Mineral Industry Locator System (MAS/MILS), which states indicated were typically incomplete. Several of those states that relied primarily on literature used the literature only as a starting point, and then estimated the number of features on the basis of experience. For example, while one state estimated that there were about three times the number of public safety hazards as identified by the literature, another state estimated that there were four times as many, and a third state estimated that there were up to six times as many. Second, because states have markedly different data systems and requirements for recording data on abandoned mines, some states were less readily able to provide the data directly from their systems without manipulation or estimation. For example, New Mexico estimated the number of abandoned mine sites from the data it maintains on hazardous features, and Nevada estimated the number of abandoned hardrock mine sites from the data it maintains on the number of mining districts in the state. As of November 2007, hardrock mining operators had provided financial assurances valued at approximately $982 million to guarantee the reclamation costs for 1,463 hardrock mining operations on BLM lands in 11 western states, according to BLM's Bond Review Report. The report also indicates that 52 of the 1,463 hardrock mining operations had inadequate financial assurances--about $28 million less than needed to fully cover estimated reclamation costs. We determined, however, that the financial assurances for these 52 operations should be more accurately reported as about $61 million less than needed to fully cover estimated reclamation costs. Table 4 shows total hardrock mining operations by state, the number of operations with inadequate financial assurances, the financial assurances required, BLM's calculation of the shortfall in assurances, and our estimate of the shortfall, as of November 2007. The $33 million difference between our estimated shortfall of nearly $61 million and BLM's estimated shortfall of nearly $28 million occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This calculation approach has the effect of offsetting the shortfalls in some operations with the financial assurances of other operations. However, the financial assurances that are greater than the amount required for an operation cannot be transferred to an operation with inadequate financial assurances. In contrast, we totaled the difference between the financial assurance in place for an operation and the financial assurances needed for that operation to determine the actual shortfall for each of the 52 operations for which BLM had determined that financial assurances were inadequate. BLM's approach to determining the adequacy of financial assurances is not useful because it does not clearly lay out the extent to which financial assurances are inadequate. For example, in California, BLM reports that, statewide, the financial assurances in place are $1.5 million greater than required, suggesting reclamation costs are being more than fully covered. However, according to our analysis of only those California operations with inadequate financial assurances, the financial assurances in place are nearly $440,000 less than needed to fully cover reclamations costs. BLM officials agreed that it would be valuable for the Bond Review Report to report the dollar value of the difference between financial assurances in place and required for those operations where financial assurances are inadequate and have taken steps to modify LR2000. BLM officials said that financial assurances may appear inadequate in the Bond Review Report when expansions or other changes in the operation have occurred, thus requiring an increase in the amount of the financial assurance; BLM's estimate of reclamation costs has increased and there is a delay between when BLM enters the new estimate into LR2000 and when the operator provides the additional bond amount; and BLM has delayed updating its case records in LR2000. Conversely, hardrock mining operators may have financial assurances greater than required for a number of reasons; for example, they may increase their financial assurances because they anticipate expanding their hardrock operations. In addition, according to the Bond Review Report, there are about 2.4 times as many notice-level operations--operations that cause surface disturbance on 5 acres or less--as there are plan-level operations on BLM land--operations that disturb more than 5 acres (1,033 notice-level operations and 430 plan-level operations). However, about 99 percent of the value of financial assurances is for plan-level operations, while 1 percent of the value is for notice-level operations. While financial assurances were inadequate for both notice- and plan-level operations, a greater percentage of plan-level operations had inadequate financial assurances than did notice-level operations--6.7 percent and 2.2 percent, respectively. Finally, over one-third of the number of all hardrock operations and about 84 percent of the value of all financial assurances are for hardrock mining operations located in Nevada. See appendix IV for further details on the number of plan- and notice-level operations in each state. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee 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, Director, Natural Resources and Environment (202) 512-3841 or [email protected]. Key contributors to this testimony were Andrea Wamstad Brown (Assistant Director); Casey L. Brown; Kristen Sullivan Massey; Rebecca Shea; and Carol Herrnstadt Shulman. To determine the (1) federal funds spent to clean up abandoned hardrock mine sites since 1998, (2) number of abandoned hardrock mine sites and the number of associated hazards, and (3) value and coverage of the financial assurances operators use to guarantee reclamation costs on the Department of the Interior's Bureau of Land Management (BLM) land, we interviewed officials at the BLM, the U.S. Department of Agriculture's Forest Service, the Environmental Protection Agency (EPA), and the Department of the Interior's Office of Surface Mining Reclamation and Enforcement (OSM); examined agency documents and data; and reviewed relevant legislation and regulations. Specifically, to answer our first objective, we interviewed officials involved with the abandoned mine cleanup programs at BLM, the Forest Service, EPA, and OSM to request expenditure data, to understand how they tracked and monitored expenditures to clean up abandoned hardrock mines, and to request and ensure that we would receive the data we needed. We reviewed agency documents, budget justification reports and reports detailing agencies' cleanup efforts and programs. We obtained data on total expenditures for cleaning up and reclaiming abandoned hardrock mine sites that were compiled from BLM's Financial Accounting and Reporting System, EPA's Superfund eFacts Database, OSM's Abandoned Mine Land Inventory System, and Forest Service officials. BLM officials told us that in addition to the expenditure data they provided, the agency receives funding allocations from other sources, such as the Department of the Interior's Central Hazardous Materials fund. Since BLM does not track the expenditures from these other sources, we were unable to provide this information. Because the four agencies' abandoned hardrock mine programs started in different years, start years for expenditure data vary. Specifically, BLM's data were for fiscal years 1997 through 2007; Forest Service's data, for fiscal years 1996 through 2007; EPA's data, for fiscal years 1988 through 2007; and OSM's data, for fiscal years 1993 to 2007. We performed a limited reliability assessment of the expenditure data and determined that we would limit our year-by-year presentation of expenditure data to the past 10 years (1998 through 2007) because of (1) variability in the program start year across the agencies, (2) inconsistencies across the agencies in their methods for tracking and reporting the data, and (3) some data recording errors in early years at some agencies. We presented these data in 2008 constant dollars. Because of limited time in preparing this testimony, we were unable to fully assess the reliability of the agencies' expenditure data and the data are therefore of undetermined reliability. However, we concluded that the data are appropriate as used and presented to meet our objectives because we (1) attribute the data to what agencies report as their expenditures, (2) present rounded data to minimize the perception of precision, and (3) do not base any conclusions or recommendations on the data. To answer our second objective, we summarized selected prior survey efforts by federal agencies and organizations to document differences in estimates, definitions, and methodologies. We also consulted experts in mining and abandoned mine land programs at the National Association of Abandoned Mine Land Programs; the Interstate Mining Compact Commission; and the Colorado State Department of Natural Resources, Division of Reclamation, Mining and Safety, Office of Active and Inactive Mines to develop a standard definition for estimating the number of abandoned hardrock mine sites, features, and sites with environmental degradation. Other efforts to assess the magnitude of the abandoned mine situation have acknowledged limitations in their efforts to develop a nationwide estimate because of inconsistencies in states' definitions and methods for estimating abandoned sites. Consequently, through iterative consultation with state and other mining experts, the definition we ultimately chose was clear and incorporated enough flexibility for all major hardrock mining states--the 12 western states and Alaska--to reasonably comply with our request, despite differences in how the states might define and maintain abandoned mine data. We then provided states with an edit-controlled data collection instrument that requested data specifically tailored to our definitions and methods. Our definition of abandoned hardrock mine sites includes all associated facilities, structures, improvements, and disturbances at a distinct location associated with activities to support a past operation, including prospecting, exploration, uncovering, drilling, discovery, mine development, excavation, extraction, or processing of mineral deposits locatable under the general mining laws; can range from an isolated prospect shaft and its associated waste rock pile and adjacent prospect pits, to a complex site with multiple entries, shafts, open pits, mill buildings, waste rock piles, a tailings pond, and associated environmental problems; and includes only hardrock (also known as locatable), non-coal sites. Features that pose a significant hazard to public health and safety include features, such as mine openings, structures, and highwalls; and impoundments that pose a threat to public health and safety and require actions to secure, remedy or reclaim. Sites with environmental degradation include features that lead to environmental degradation, and, consequently, require remediation of air, water, or ground pollution. Rather than reporting, as requested, the number of features leading to environmental degradation, most states reported only the number of sites with environmental degradation, if they reported data for this request at all. Because most states do not maintain environmental degradation data by feature, states could only speculate about this figure, or compute it by estimating an average number of features per site and multiplying that by the overall number of sites with environmental degradation. Because of these limitations with feature-level data, we report only the number of sites with data on environmental degradation in order to ensure more reliable and consistent reporting across the states. As a secondary confirmation that states provided data consistent with the definition, our data collection instrument included a section for states to provide a brief description of how the various data points were calculated, and whether the data provided were actual or estimated values. Based on comments in these fields, and basic logic checks on the data, we followed up as needed through telephone interviews to clarify and confirm problematic responses. Our definitional and editing processes provided us with reasonable assurance that the data were as clean and consistent as possible, and using these final edited data, we calculated the estimated number of abandoned mine sites, the number of features that pose physical safety and environmental hazards, and the number of abandoned mine sites with environmental degradation in the 12 western states and Alaska. To answer our third objective--to determine the value and coverage of financial assurances in place to guarantee coverage of reclamation costs-- we requested the BLM Bond Review Report from BLM's Legacy Rehost System 2000 (LR2000) database. Because we had previously reported reliability problems with data on financial assurances in LR2000, we conducted a limited reliability assessment of the bond report data. This limited assessment included (1) basic logic checks on the data we received, (2) interviews with BLM minerals management officials knowledgeable of the changes made to LR2000 to address GAO's 2005 recommendations, and (3) a review of BLM's June 14, 2006, Instruction Memorandum 2006-172 for processing and entering Bond Review Report data in LR2000. Although the data are of undetermined reliability, our limited assessment indicates that management controls were improved for the generation of bond review reports from LR2000. We concluded that the data are appropriate as used and presented, and we did not base any conclusions or recommendations on these data. This appendix provides information on federal expenditures used to clean up abandoned hardrock mines by fiscal year (table 5) and by state (table 6). Range of estimated abandoned mines previously (2001) (2007) Mineral Policy Center (2003) Earthworks (formerly Mineral Policy Center) (2007) (2004) "openings" No data provided Western Governors' Association and National Mining Association, Cleaning Up Abandoned Mines: A Western Partnership, 1998. This appendix provides information from BLM's November 2007 Bond Review Report, which includes information on the number of financial assurances in place for hardrock operations on BLM lands in 11 western states (table 7); the value of these financial assurances by state (table 8); the number of inadequate financial assurances for notice- and plan-level operations, by state (table 9); and BLM's and our analyses of the differences between financial assurance requirements and actual value of financial assurances in place for notice- and plan-level operations by state (table 10).
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The Mining Act of 1872 helped foster the development of the West by giving individuals exclusive rights to mine gold, silver, copper, and other hardrock minerals on federal lands. However, miners often abandoned mines, leaving behind structures, safety hazards, and contaminated land and water. Four federal agencies--the Department of the Interior's Bureau of Land Management (BLM) and Office of Surface Mining Reclamation and Enforcement (OSM), the Forest Service, and the Environmental Protection Agency (EPA)--fund the cleanup of some of these sites. To curb further growth in the number of abandoned hardrock mines on federal lands, in 1981 BLM began requiring mining operators to reclaim lands when their operations ceased. In 2001, BLM began requiring all operators to provide financial assurances to guarantee funding for reclamation costs if the operator did not complete the task as required. This testimony provides information on the (1) federal funds spent to clean up abandoned hardrock mine sites since 1998, (2) number of abandoned hardrock mine sites and hazards, and (3) value and coverage of financial assurances operators use to guarantee reclamation costs on BLM land. To address these issues, GAO, among other steps, asked 12 western states and Alaska to provide information on the number of abandoned mine sites and associated features in their states using a consistent definition. Between fiscal years 1998 and 2007, BLM, the Forest Service, EPA, and OSM spent at least $2.6 billion (in 2008 constant dollars) to reclaim abandoned hardrock mines. BLM and the Forest Service have reclaimed abandoned hardrock mine sites on the lands they manage; EPA funds the cleanup of these sites, primarily on nonfederal lands through its Superfund program; and OSM provides some grants to states and Indian tribes to clean up these sites on their lands. Of the four agencies, EPA has spent the most--about $2.2 billion (in 2008 constant dollars) for mine cleanups. BLM and the Forest Service spent about $259 million (in 2008 constant dollars), and OSM awarded grants totaling about $198 million (in 2008 constant dollars) to support the cleanup of abandoned hardrock mines. Over the last 10 years, estimates of the number of abandoned hardrock mining sites in the 12 western states and Alaska have varied widely, in part because there is no generally accepted definition for a hardrock mine site. Using a consistent definition that GAO provided, 12 western states and Alaska provided estimates of abandoned hardrock mine sites. On the basis of these data, GAO estimated a total of at least 161,000 such sites in these states with at least 332,000 features that may pose physical safety hazards and at least 33,000 sites that have degraded the environment. According to BLM's information on financial assurances as reported in its November 2007 Bond Review Report, mine operators had provided financial assurances valued at approximately $982 million to guarantee reclamation costs for 1,463 hardrock operations on BLM land. The report also estimates that 52 mining operations have financial assurances that amount to about $28 million less than needed to fully cover estimated reclamation costs. However, GAO found that the financial assurances for these 52 operations are in fact about $61 million less than needed to fully cover estimated reclamation costs. The $33 million difference between GAO's estimated shortfall and BLM's occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This calculation approach has the effect of offsetting the shortfalls in some operations with the financial assurances of other operations. However, financial assurances that are greater than the amount required for an operation cannot be transferred to another operation that has inadequate financial assurances. BLM officials agreed that it would be valuable for the Bond Review Report to report the dollar value of the difference between financial assurances in place and required for those operations where financial assurances are inadequate, and BLM has taken steps to correct this. GAO discussed the information in this testimony with officials from the four federal agencies, and they provided GAO with technical comments, which were incorporated as appropriate.
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At the federal level, CMS, within the Department of Health and Human Services (HHS), is responsible for overseeing the design and operation of states' Medicaid programs, and states administer their respective Medicaid programs' day-to-day operations. In conformance with federal requirements, states establish beneficiaries' eligibility for Medicaid, and determine the services that will be provided to beneficiaries and how they will be provided in their state. Eligibility for Medicaid is based on a variety of categorical and financial requirements. Historically, categories of Medicaid eligibility included pregnant women, low-income children and their parents, individuals who are aged, and individuals with disabilities. In 2014, certain low-income adults who did not fall into one of these groups may be eligible for Medicaid in states that chose to expand coverage to these individuals under PPACA. Dual-eligible beneficiaries, who are eligible for both Medicaid and Medicare, generally fall into two categories: (1) low-income seniors (individuals aged 65 years old and over) and (2) individuals with disabilities under the age of 65. While some characteristics of state programs vary, Medicaid generally covers a wide range of health care services. These include hospital care; outpatient services, such as physician services, laboratory and other diagnostic tests; prescription drugs; dental care; and LTSS in institutions Non-institutional LTSS include home health and and in the community.personal care services, among other services. Medicaid is the nation's primary payer for LTSS, and provided approximately 41 percent of LTSS funding in the United States in 2010. As we have previously reported, nearly all states enroll some Medicaid beneficiaries in a form of managed care. the scope of services they provide and the populations they enroll in managed care. Some states contract with managed care organizations to provide the full range of covered Medicaid services to certain enrollees, for which they pay a set, or capitated, amount per member per month. Alternatively, states may rely on arrangements, such as limited benefit plans--which provide a limited set of services, including dental care or behavioral health services--or primary care case management programs in which enrollees are assigned a primary care provider who is responsible for providing primary care services and for coordinating other needed health care. States often provide long-term care services outside of managed care arrangements. GAO, Medicaid: States' Use of Managed Care, GAO-12-872R (Washington, D.C.: Aug. 17, 2012). top 10 percent of Medicaid spending were responsible for 51 percent of Medicaid spending on dual-eligible beneficiaries. The research also indicates that there is a subset of Medicaid-only beneficiaries who are very costly, such as those with institutional care needs or chronic conditions. One study showed that high-expenditure Medicaid beneficiaries in 2001 included subgroups from each eligibility category, with the elderly and disabled making up the greatest shares of this high-expenditure group. The largest portions of spending were for hospital care for children and adults, intermediate care for individuals with disabilities, and nursing home care for the elderly. showed that annual per capita expenditures ranged from $8,000 to nearly $16,000 for Medicaid beneficiaries with chronic conditions, including asthma, coronary heart disease, congestive heart failure, diabetes, or hypertension. This study also noted that annual per capita expenditures may double and sometimes triple when single chronic conditions are coupled with mental illness and a drug or alcohol disorder. Intermediate care included intermediate care facility services for persons with intellectual disabilities, services in institutions for mental disease for the elderly, and inpatient psychiatric care under age 21. Kaiser Family Foundation, Medicaid's High Cost Enrollees (Washington, D.C.: March 2006). beneficiaries (less than 1 percent of the total Medicaid population) and 21.9 percent of total Medicaid expenditures on other dual-eligible beneficiaries (13.8 percent of total Medicaid beneficiaries). (See fig. 1). At the beneficiary level, per-capita spending on high-expenditure Medicaid-only beneficiaries greatly exceeded that of all other Medicaid- only beneficiaries, but was less than what was spent on high-expenditure dual-eligible beneficiaries. (See table 1.) Overall, per capita spending by states on high-expenditure Medicaid-only beneficiaries was approximately 18 times higher than per capita spending on all other Medicaid-only beneficiaries. This was similar to the pattern of spending for dual-eligible beneficiaries, with per capita spending significantly higher for high- expenditure dual-eligible beneficiaries compared with all other dual- eligible beneficiaries. At the state level, there was wide variation in spending per capita on high- expenditure Medicaid-only beneficiaries. (See fig. 2.) Per-capita expenditures by state per beneficiary ranged from $20,896 to $83,365. Key characteristics--such as having a disability, having certain conditions, delivery/childbirth, and residing in a LTC facility--were strongly associated with being a high-expenditure Medicaid-only beneficiary. These key characteristics had consistently strong associations with being a high-expenditure Medicaid-only beneficiary even when the data were examined separately for each eligibility group. We found that about two-thirds of the high-expenditure group was comprised of beneficiaries who were eligible for Medicaid due to disability. only beneficiary was 18.3 percent for disabled Medicaid-only beneficiaries, which was higher than for any other eligibility group. (See table 2.) In contrast, non-disabled children and adult beneficiaries each had less than a 3 percent probability of being in the high-expenditure group, but made up 16.1 and 15 percent, respectively, of the high- expenditure Medicaid-only beneficiaries. Overall, hospital services and LTSS represented the bulk of spending for high expenditure Medicaid-only beneficiaries--almost 65 percent. In contrast, payments to managed care organizations and premium assistance constituted the largest proportion of expenditures for all other Medicaid-only beneficiaries. In addition, when we examined Medicaid- only high-expenditure and other beneficiaries separately by eligibility group, the differences in service use were generally consistent, but the proportion of expenditures for the different services varied. Separately examining high-expenditure Medicaid-only beneficiaries in LTC institutions and beneficiaries with spending in the top 1 percent of expenditures showed that these beneficiaries had the highest spending for hospital services and LTSS. For high-expenditure Medicaid-only beneficiaries as a whole, hospital services comprised 30.6 percent, LTSS in non-institutional settings comprised 24.3 percent, and LTSS in institutions comprised 9.7 percent of their expenditures. Other expenditures were for drugs, managed care and premium assistance, and non-hospital acute care. In contrast to high- expenditure Medicaid-only beneficiaries, the largest share of total expenditures for all other Medicaid-only beneficiaries was for managed care and premium assistance (57.2 percent), followed by non-hospital acute care (16.6 percent), hospital services (11.9 percent), drugs (9.7 percent) and LTSS in non-institutional settings (4.5 percent). (See fig. 3.) The general pattern of greater hospital and LTSS service use by high expenditure Medicaid-only beneficiaries compared with greater spending on managed care and premium support by all other Medicaid-only beneficiaries was consistent across eligibility groups. However, there were some differences in expenditures by eligibility category among high- expenditure Medicaid-only beneficiaries and all other Medicaid-only beneficiaries. Beneficiary Profile Beneficiary A was a 61-year-old disabled African American male in 2009, with $73,539 in total Medicaid expenditures in that year. He was not enrolled in managed care at any point in the year. He was indicated to have diabetes, a mental health condition, and resided in a long-term care facility. His expenditures were highly concentrated in LTSS non-institutional care (81.9 percent). About 10 percent of his expenditures were for prescription drugs. Disabled: For high expenditure Medicaid-only beneficiaries in the disabled category, LTSS non-institutional (27.5 percent), hospital (24.8 percent), and LTSS institutional services (11.9 percent) represent almost two-thirds of their expenditures. (See fig. 4.) In contrast, all other Medicaid-only beneficiaries in the disabled category had over half of their expenditures for managed care and premium assistance (52.1 percent), and had almost no LTSS institutional expenditures (0.1 percent). Overall, 79.5 percent of expenditures for Medicaid-only beneficiaries in the disabled group were for the high- expenditure beneficiaries. Children: Medicaid-only children had almost no LTSS institutional expenditures (less than 1 percent), whether in the high-expenditure group or not. (See fig. 5.) High-expenditure Medicaid-only children had 70 percent of their expenditures for hospital (46.1 percent) and LTSS non-institutional services (23.9 percent). For all other Medicaid-only children, over 58 percent of their expenditures were for managed care and premium assistance, followed by non-hospital acute (18.8 percent) and hospital services (9.8 percent). About 22 percent of expenditures for Medicaid-only children were for those in the high-expenditure group. Adults: Similar to children, Medicaid-only adult beneficiaries had almost no LTSS institutional expenditures (less than 1 percent of each of their total expenditures) whether in the high-expenditure group or not. (See fig. 6.) Hospital services represented over half the expenditures for high-expenditure adult beneficiaries. The remaining expenditures were almost equally distributed between non-hospital acute care (15.2 percent), drugs (14.2 percent), and managed care and premium support (14.1 percent). LTSS non-institutional services were a relatively small part of their total expenditures (3.4 percent). The greatest share of expenditures for all other Medicaid-only adult beneficiaries were for managed care and premium support (58.4 percent) followed by hospital (16.2 percent) and non-hospital acute care (15.4 percent) services. About 22 percent of expenditures for Medicaid-only adult beneficiaries were for the high-expenditure group. Aged: For the aged, both high-expenditure and all other Medicaid- only beneficiaries had LTC institutional expenditures, but the share of those expenditures differed--28.2 percent compared with 4.2 percent. Among the high-expenditure Medicaid-only aged beneficiaries, hospital (28.6 percent), LTSS institutional (28.2 percent), and LTSS non-institutional (15.4 percent) services represented over 70 percent of total expenditures. (See fig.7.) For all other Medicaid-only aged beneficiaries, managed care and premium support represented 48.3 percent of their expenditures, followed by drugs (18.2 percent), hospital (13.7 percent), and non-hospital acute care (10.6 percent) services. Over 73 percent of expenditures for the Medicaid-only aged were for those in the high-expenditure group. LTSS spending differed for high expenditure Medicaid-only beneficiaries living in LTC facilities and those living in the community. (See fig. 8.) Among high-expenditure Medicaid-only beneficiaries residing in a LTC facility, expenditures for LTSS in institutional settings (50 percent), hospital services (27.2 percent), and LTSS in non-institutional settings (7.3 percent) accounted for almost 85 percent of their total expenditures. Among high-expenditure beneficiaries not residing in a LTC facility, expenditures for LTSS in non-institutional settings (28.4 percent) were much greater, and expenditures for hospital services were similar (31.4 percent)--and these two services represented almost 60 percent of their total expenditures. In addition, the percentage of expenditures on drugs and non-hospital acute care was greater for high expenditure Medicaid-only beneficiaries who were not living in LTC facilities. While hospital services were the largest expenditure category among high-expenditure beneficiaries not residing in a LTC facility, per-capita hospital expenditures for beneficiaries residing in a LTC facility were over two times as much ($21,589 compared with $9,978). (See table 4.) Beneficiaries with expenditures within the top 1 percent for their state-- the top one-fifth of the high-expenditure group--had a greater share of spending on hospital services, LTSS in non-institutional settings, and LTSS in institutional settings compared with all of the high-expenditure beneficiaries. Spending on these services comprised almost 80 percent of the total expenditures for beneficiaries with expenditures within the top 1 percent for their state. (See app. IV for complete table of results, and app. V for the demographic characteristics and spending for some randomly selected beneficiaries in that group.) HHS reviewed a draft of this report and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of HHS and to interested congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. This appendix describes the methodology for addressing three objectives that examine: (1) states' spending for high-expenditure beneficiaries, both Medicaid-only and dual-eligible beneficiaries, compared with other Medicaid beneficiaries; (2) the characteristics associated with high- expenditure Medicaid-only beneficiaries; and (3) the services that contributed to high expenditures for Medicaid-only beneficiaries, and how they compared with service usage by all other Medicaid-only beneficiaries. We analyzed data from the fiscal year 2009 Medicaid Statistical Information System (MSIS) Annual Person Summary File. The summary file consolidates individual beneficiaries' claims for the fiscal year, including data on their enrollment and information on their expenditures. The summary file also includes beneficiary specific information regarding enrollment categories, expenditures among six categories, dual eligibility status, age, gender, payment arrangements--including fee-for-service payments and capitated payments made to managed care organizations--and indicators for five conditions and two service categories.in the full claims files (for example, the summary file may not include The summary file excludes some encounter details included details regarding the care encounter, such as individual cost per encounter; however, it does include monthly enrollment data). We made several adjustments to the summary file in order to ensure that the data were reliable for our purposes. Specifically we excluded: records with unknown eligibility status (eliminated 5,166,648 records, or 7.21 percent of total records); all records associated with duplicate MSIS IDs or Social Security numbers within a state (eliminated 277,363 records, or 0.39 percent of total records); records with negative total spending amounts (eliminated 975,869 records, or 1.36 percent of total records), which may reflect adjustments to claims made in the prior year; records of individuals who were only enrolled in a stand-alone, separate Children's Health Insurance Program during the year (eliminated 471,507 records, or 0.66 percent of total records); records associated with a payment adjustment rather than an individual (eliminated 202,456 records, or 0.28 percent of total records); records of individuals whose age appeared to conflict with their identified eligibility group (eliminated 65,016 records, or 0.09 percent of total records). For example, records of individuals in the child eligibility group whose age was 85 and older; records with unknown dual status (eliminated 698 records, or less than 0.01 percent of total records); and, records of individuals whose age was over 65, but indicated as having delivered a child (eliminated 126 records, or less than 0.01 percent of total records). After making these adjustments, we were able to retain 64,457,343, or 90 percent, of the summary file's 71,617,026 original records. In order to determine variations in states' spending for high-expenditure Medicaid-only beneficiaries compared with other Medicaid beneficiaries, we calculated the total number of Medicaid enrollees and total Medicaid expenditures in each state. We then calculated these same statistics for our subpopulations of Medicaid-only and dual-eligible beneficiaries based on the "last-best" indicator of dual eligibility status available in the summary file. Medicaid-only beneficiaries were eligible for Medicaid but not Medicare. Dual-eligible beneficiaries were eligible for both Medicaid and Medicare. Next, we determined the number of beneficiaries whose total expenditures fell within the top 5 percent of total expenditures within each state (we calculated these figures separately for Medicaid-only and dual-eligible beneficiaries). We termed these 2,763,407 beneficiaries as high-expenditure beneficiaries. We then separately calculated the total expenditures for our high-expenditure beneficiaries and other beneficiaries in each state for Medicaid-only and dual-eligible beneficiaries, and summed this data at a national level. To examine the characteristics associated with high-expenditure Medicaid-only beneficiaries, we determined the percentage of high- expenditure Medicaid-only beneficiaries with key characteristics and used logistic regression to examine the effect of having key beneficiary characteristics on the probability of being a high-expenditure Medicaid- only beneficiary. The key beneficiary characteristics for which we describe the high-expenditure beneficiary population and represented as independent variables in our logistic regression model included: eligibility group (disabled, child, adult, aged), age, gender, race/ethnicity, geographic location, participation in capitated managed care, period of enrollment in Medicaid (whether full year or partial year), as well as whether the beneficiaries had any of five health conditions or had received any of two services. Finally, our logistic regression models included characteristics of states' Medicaid programs, including their spending on high-expenditure beneficiaries and long-term services and supports (LTSS) in non-institutional settings (also called home and community based services) and capitated managed care penetration rates.beneficiary population, as well as the probabilities that demonstrate the association of each characteristic with the likelihood of being in the high- expenditure group if all beneficiaries had a particular characteristic while holding all other characteristics constant. Probabilities were calculated by converting the odds that resulted from our logistic regression models. The size of the independent effect of each enrollee characteristic is expressed as a probability, with greater values reflecting a greater chance that the characteristic increased the likelihood of being a high-expenditure beneficiary. Medicaid-only beneficiaries had a hypothetical 5 percent probability of being in the high-expenditure group by chance alone. All probabilities were significant at the 0.05 level. We report percentages that describe the high-expenditure In order to determine which service categories contributed to expenditures for high-expenditure Medicaid-only beneficiaries, we examined how total expenditures for high-expenditure Medicaid-only beneficiaries were distributed among the following six expenditure categories: (1) hospital care, (2) non-hospital acute care, (3) drugs, (4) managed care and premium assistance, (5) long-term services and supports (LTSS) in non-institutional settings, and (6) long-term services and supports in institutional settings. of spending among each of the six expenditure categories for beneficiaries in our high-expenditure group compared to the distribution of spending among each of the six expenditure categories for all other Medicaid-only beneficiaries. The summary file includes information on spending for 30 types of services. We consolidated 28 of these types of services into the six categories we report. We conducted this performance audit from September 2012 through February 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The table below demonstrates the characteristics of high-expenditure Medicaid-only beneficiaries, and how expenditures were distributed within each characteristic of interest. For each subpopulation, we also calculated the per-capita expenditures in dollars. High-expenditure Medicaid-only beneficiaries who resided in a long-term care (LTC) facility during fiscal year 2009 had the highest per capita expenditures ($79,464). Our logistic regression analysis found that key characteristics--such as having a disability, having certain conditions, delivery/childbirth, and residing in a LTC facility--were consistently strongly associated with being a high-expenditure Medicaid-only beneficiary when looking at all records, and when the data was examined separately for each eligibility group. The table below demonstrates the characteristics of Medicaid-only beneficiaries with expenditures in the top 1 percent of total expenditures (558,798 beneficiaries). For each subpopulation, we also calculated the per capita expenditures in dollars. The top 1 percent of Medicaid-only beneficiaries had per capita spending of $94,821, over 2.5 times that of beneficiaries in the top 5 percent of total expenditures whose per capita spending was $35,983 (top 1 percent included). We examined individual cases of a random group of Medicaid-only beneficiaries in the top 1 percent of expenditures. Some of these beneficiaries illustrated the trends identified in our analysis, but we also found beneficiaries who demonstrated that there was diversity among the high-expenditure group. Below are some examples of the characteristics and spending patterns for individual beneficiaries. Overall, per capita spending in the top 1 percent ranged from $19,068 to $43,728,641, with an average expenditure of $94,821. In addition to the contact named above, Sheila K. Avruch, Assistant Director; Giselle Hicks; Drew Long; Vikki Porter; Kristal Vardaman; Eric Wedum; Jennifer Whitworth; and Carla Willis made key contributions to this report. Medicaid: States Reported Billions More in Supplemental Payments in Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012. High Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. Medicaid: CMS Needs More Information on the Billions of Dollars Spent on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30, 2008. Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.: January 31, 2008. Medicaid Long-Term Care: Information Obtained by States about Applicants' Assets Varies and May Be Insufficient. GAO-12-749. Washington, D.C.: July 26, 2012. Medicaid: Data Sets Provide Inconsistent Picture of Expenditures. GAO-13-47. Washington, D.C.: October 29, 2012. Medicaid Home and Community-Based Waivers: CMS Should Encourage States to Conduct Mortality Reviews for Individuals with Developmental Disabilities. GAO-08-529. Washington, D.C.: May 23, 2008. Medicaid: States' Use of Managed Care. GAO-12-872R. Washington, D.C.: August 17, 2012.
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Medicaid is an important source of health coverage for millions of low-income individuals. Research on Medicaid has demonstrated that a small percentage of beneficiaries account for a disproportionately large share of Medicaid expenditures. Understanding states' expenditures for high-expenditure populations--both those dually eligible for Medicare and Medicaid, and those who are Medicaid-only--could enhance efforts to manage Medicaid expenditures. GAO was asked to examine the demographics and service usage of Medicaid beneficiaries, particularly those who are not eligible for Medicare. This report examines high-expenditure Medicaid-only beneficiaries, considering (1) states' spending on them compared with all other Medicaid beneficiaries; (2) their key characteristics; and (3) their service usage compared with all other Medicaid-only beneficiaries. GAO analyzed beneficiary and expenditure data from the Medicaid Statistical Information System Annual Person Summary File for 2009, the most recent year available at the time GAO conducted its work. GAO defined high-expenditure beneficiaries as those with total expenditures in the top 5 percent of expenditures within each state. GAO combined these data at a national level, and analyzed the characteristics associated with being a high-expenditure beneficiary, the probability of being a high-expenditure Medicaid beneficiary, and what services contributed to high expenditures. In fiscal year 2009, states spent nearly a third (31.6 percent) of all Medicaid expenditures on the most expensive Medicaid-only beneficiaries, who were 4.3 percent of total Medicaid beneficiaries. States spent another third (33.1 percent) on all other Medicaid-only beneficiaries, who represented 81.2 percent of total Medicaid beneficiaries. Among dual eligible beneficiaries, a similar pattern existed, with a small proportion of the population accounting for a disproportionate share of expenditures. Certain characteristics significantly increased the probability of being a high-expenditure Medicaid-only beneficiary. Specifically, the results of GAO's analyses indicate that the probability of being a high-expenditure Medicaid-only beneficiary was: 24.4 percent for those residing in a long-term care facility, 20.8 percent for those with human immunodeficiency virus/acquired immunodeficiency syndrome, 18.3 percent for those with disabilities, and 13.3 percent for new mothers or infants. Overall, hospital services and long-term services and supports in non-institutional and institutional settings comprised nearly 65 percent of the total expenditures for high-expenditure Medicaid-only beneficiaries, with smaller proportions for drugs, payments to managed care organizations and premium assistance, and non-hospital acute care. In contrast to high-expenditure beneficiaries, payments to managed care organizations and premium assistance comprised 57.2 percent of total expenditures for all other Medicaid-only beneficiaries. HHS provided technical comments on a draft of this report, which were incorporated as appropriate.
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In 1989, the Congress established the National Commission on Severely Distressed Public Housing (the Commission) to explore the factors contributing to structural, economic, and social distress in public housing; identify strategies for remediation; and propose a national action plan to eradicate distressed conditions by the year 2000. In 1992, the Commission reported that approximately 86,000, or 6 percent, of the nation's public housing units were severely distressed. According to the Commission, these units qualified as severely distressed because of their physical deterioration and uninhabitable living conditions; high levels of poverty; inadequate and fragmented services; institutional abandonment; and location in neighborhoods often as blighted as the sites themselves. Although the Commission did not identify specific locations as severely distressed, it recommended that funds be made available to address distressed conditions, and that these funds be added to the amounts traditionally appropriated for modernizing public housing. The Commission also encouraged the development of supportive services for residents in distressed housing developments. In response to the Commission's report, Congress established the Urban Revitalization Demonstration Program, more commonly known as HOPE VI, at HUD. By providing funds for a combination of capital improvements and community and supportive services, the program seeks to (1) improve the living environment for public housing residents of severely distressed public housing through the demolition, rehabilitation, reconfiguration, or replacement of obsolete public housing; (2) revitalize sites on which such public housing is located, and contribute to the improvement of the surrounding neighborhood; (3) provide housing that will avoid or decrease the concentration of very low-income families; and (4) build sustainable communities. To achieve these objectives, the program provides demolition and revitalization grants to public housing authorities (PHA). Demolition grants fund the demolition of distressed public housing, the relocation of residents affected by the demolition, and the implementation of supportive services for permanently relocated residents. Revitalization grants fund, among other things, the capital costs of major rehabilitation, new construction, and other physical improvements; demolition of severely distressed housing; and community and supportive service programs for residents, including those relocated as a result of revitalization efforts. Through fiscal year 2001, HUD had awarded 177 demolition grants totaling approximately $293 million and 165 revitalization grants totaling about $4.5 billion. According to HUD, HOPE VI started as an embellished modernization program but has evolved into a comprehensive and complex transformation in how housing authorities provide affordable housing to low-income families. A significant stage in that evolution was the issuance of the Mixed-Finance Rule in 1996. Under this rule, for the first time PHAs were allowed to use public housing funds designated for capital improvements, including HOPE VI funds, to leverage other public and private investment to develop public housing units. The rule also permitted PHAs to provide public housing capital funds to a third party so that the third party could develop public housing units. The third party would then own the resulting public housing units and could receive capital or operating assistance for the units from HUD through the PHA. HUD emphasizes that this mixed-finance approach to public housing development is the single most important development tool currently available to PHAs. The approach encourages the formation of new public and private partnerships to ensure the long-term sustainability of the public housing development and surrounding community. The mixed- finance approach can produce developments that include both public housing and nonpublic housing units, such as low-income housing tax credit units or market rate units. Mixed-finance HOPE VI projects are often undertaken in development phases. A housing authority may not begin a phase to be financed with a combination of public and private funds until it has submitted, and HUD has approved, a mixed-finance proposal for that phase. The mixed-finance proposal presents the fundamental information that HUD needs to evaluate a mixed-finance phase. For example, it contains basic descriptive information such as the number and types of units planned, the development schedule, the sources and uses of funding, and the operating budget for the phase. Because of the time that is needed to plan HOPE VI projects and develop specific proposals, most of the proposals that HUD approved through fiscal year 2001 were funded with revitalization grants awarded several years earlier. PHAs with revitalization grants can use a variety of other public and private funds to develop their HOPE VI sites. Public funding can come from federal, state, and local sources. For example, PHAs can use federal resources HUD has already awarded for capital improvements at public housing developments. These capital funds can be used for a variety of purposes, including the development, financing, and modernization of public housing and the replacement of obsolete utility systems and dwelling equipment. PHAs can also use funds raised through federal low- income housing tax credits. Under this program, states are authorized to allocate federal tax credits as an incentive to the private sector to develop rental housing for low-income households. After the state allocates tax credits to developers, the developers typically offer the credits to private investors. The private investors use the tax credits to offset taxes otherwise owed on their tax returns. The money private investors pay for the credits is paid into the projects as equity financing. In addition, PHAs may obtain some of the funding needed for infrastructure and public improvements from state and local governments. Private sources can include private mortgage financing and financial or in-kind contributions from nonprofit organizations. See appendix II for more information on the types of funds that may be invested at HOPE VI sites. According to our analysis of HUD data, housing authorities expect to leverage, for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001, an additional $1.85 in funds from other sources. Our figure is slightly lower than the $2.07 that HUD considers to be the projected amount leveraged per HOPE VI dollar because, unlike HUD, we do not consider funds such as HOPE VI demolition grants to be leveraged funds. Also, HUD data indicate that, of the total funds that housing authorities with revitalization grants have budgeted for their HOPE VI sites, 46 percent come from federal sources. However, this percentage does not include funds that grantees receive through low- income housing tax credits, which are a direct cost to the federal government. Our analysis of all mixed-finance proposals HUD approved through fiscal year 2001 indicates that 79 percent of the budgeted funds came from federal sources, when low-income housing tax credit funding was included. Our analysis of data in HUD's HOPE VI reporting system shows that housing authorities that received HOPE VI revitalization grants in fiscal years 1993 to 2001 expect to leverage an additional $1.85 for every HOPE VI dollar received. However, HUD considers the amount of leveraging to be an additional $2.07 for every HOPE VI dollar received because it includes other HUD-provided public housing funds as leveraged funds. In total, $964 million in public housing funds have been budgeted for HOPE VI sites. The $964 million includes capital funds and $150 million in HOPE VI demolition grant funds. Grantees would have received the capital funds regardless of whether they received a HOPE VI revitalization grant, and the demolition grants are another category of HOPE VI funds. When the $964 million in public housing funds are not included as leveraged funds, the overall projected leveraging per HOPE VI dollar is reduced from $2.07 to $1.85. Even when public housing funds are excluded from leveraged funds, our analysis of HUD data shows that leveraging has increased over the life of the HOPE VI program. According to HUD's HOPE VI reporting system, housing authorities that received a revitalization grant in fiscal year 1993 expected to raise an additional $0.58 (excluding public housing funds) for every HOPE VI grant dollar awarded to them. By fiscal year 2001, housing authorities expected to augment every HOPE VI revitalization grant dollar awarded to them with an additional $2.63 from other sources (excluding public housing funds). Though mixed-finance development was not an official option for housing authorities until 1996, housing authorities were permitted, prior to 1996, to use a mix of public funds to redevelop distressed public housing sites. According to HUD officials, the amounts leveraged by housing authorities should increase over time, as potential investors become more familiar with the HOPE VI program and housing authorities become more sophisticated in seeking and securing other sources of funds. Figure 2 shows that amounts leveraged by housing authorities have generally increased over time. Our analysis of the mixed-finance proposals that HUD approved through fiscal year 2001 shows that 79 percent of the funding comes from federal sources. However, HUD's data shows that 46 percent of all resources budgeted for HOPE VI sites come from the federal government. HUD's HOPE VI reporting system contains funding projections for all revitalization grants awarded through fiscal year 2001. As shown in figure 3, the reporting system divides budgeted resources into four categories, as follows: HOPE VI funds--HOPE VI revitalization grant funds awarded to a housing other public housing funds--other HOPE VI funding, such as demolition grants, and resources HUD allocates to housing authorities, such as capital funds; other federal funds--all other federal sources of funding; and nonfederal funds--funds from state and local governments, private funds, and equity raised from low-income housing tax credits. The sale of low-income housing tax credits to investors generates private capital to acquire, construct, or rehabilitate housing targeted to households earning less than 60 percent of median income; therefore, HUD defines the funds generated as private funds. However, tax credits represent forgone federal income and, therefore, are a direct cost to the federal government. Our reports have consistently described low-income housing tax credits as federal housing assistance. Because housing authorities do not have to report individually each source included in the nonfederal funding category, we could not use the data in HUD's HOPE VI reporting system to determine the specific amounts raised through low-income housing tax credits. In order to distinguish low- income housing tax credit funds from nonfederal funds, we examined 85 mixed-finance proposals that HUD had approved through the end of fiscal year 2001. These proposals list all of the funding sources and amounts separately. As shown in figure 4, our analysis shows that 79 percent of all the budgeted funds come from federal sources--HOPE VI funds, other public housing funds, and other federal funds, including equity raised from low-income housing tax credits. Equity raised from low-income housing tax credits made up 27 percent of total budgeted sources. Nonfederal funds comprised 21 percent of all budgeted resources--12 percent from private sources and 9 percent from state and local sources. Overall, housing authorities that received revitalization grants in fiscal years 1993 to 2001 have budgeted a total of about $714 million for community and supportive services--$418 million in HOPE VI funds (59 percent) and $295 million (41 percent) in leveraged funds. The $418 million in HOPE VI funds accounts for 9 percent of total revitalization grant funds awarded. HUD's annual notice of funding availability--which sets forth the program's current requirements and available funds--sets a limit on the amount of grant funds that housing authorities can spend on supportive services. All of the notices since 1999 have included incentives that encourage housing authorities to leverage additional funds for supportive services. There is no cap on the amount of leveraged funds that housing authorities can spend on supportive services. Housing authorities are encouraged to obtain in-kind, financial, and other types of resources necessary to carry out and sustain supportive service activities from organizations such as local Boards of Education, public libraries, private foundations, nonprofit organizations, faith-based organizations, and economic development agencies. As shown in figure 5, the amount of funds set aside by each year's grantees for supportive services has varied over the life of the program. Although the majority of funds budgeted overall for supportive services are HOPE VI funds, the amount of non-HOPE VI funds budgeted for supportive services has increased dramatically since the program's inception. As shown in figure 6, the percentage of total supportive services funding made up of leveraged funds jumped significantly after 1997. Specifically, while 22 percent of the total funds budgeted for supportive services by fiscal year 1997 grantees consisted of leveraged funds, 59 percent of the total funds budgeted by fiscal year 2001 grantees consisted of leveraged funds. This increase may be attributable, in part, to the fact that, starting in fiscal year 1998, HUD began to consider the leveraging of additional resources (for physical improvements and supportive services) as one of its criteria for evaluating grant applications. Since 1999, HUD has specifically considered the extent to which PHAs have leveraged funds for supportive services. Housing authorities have complied with HUD's limits on the amounts of public housing funds that may be used to develop public housing units at HOPE VI sites. They have also budgeted funds from other sources that are not subject to these limits. As required by the Quality Housing and Work Responsibility Act of 1998, HUD adopted a revised total development cost policy in 1999. This policy, as specified in the Act, limits the amount of public housing funds, including HOPE VI funds, that housing authorities can spend to construct public housing units. These funding limits are the amounts that HUD has determined are adequate to develop units of good and sound quality. As mandated in the Act, some demolition, site remediation, and extraordinary site costs--costs that HUD has determined are not purely development-related costs--are excluded. Specifically, demolition and site remediation costs are prorated with respect to the number of new public housing units being developed on the site. For example, if a PHA is planning to demolish 300 public housing units and to put 100 new public housing units back on the site, it has to consider only one-third of the demolition and remediation costs when comparing public housing development costs with the funding limit. Extraordinary site costs--such as removal or replacement of extensive underground utility systems, construction of extensive street and other public improvements, and dealing with flood plains--are also excluded. An independent engineer must verify extraordinary site costs. Our analysis of 77 (out of 87) approved mixed-finance proposals shows that housing authorities have complied with HUD's cost policy. The actual costs of developing units at HOPE VI sites are often higher than the public housing funds budgeted for developing public housing units. In the 64 mixed-finance proposals for which there was sufficient detailed information to perform our analysis, $525 million in public housing funds, including HOPE VI funds, were subject to HUD's established funding limits. However, total funds of $1.3 billion were approved in the mixed- finance proposals. Therefore, the average amount of public housing funds (including HOPE VI funds, capital funds, and other public housing development funds) budgeted per public housing unit subject to HUD's funding limits was $98,097, while the average amount of total funds budgeted per unit was $171,541. HUD has been required to report leveraging and cost information annually to the Congress since 1998; however, it has not done so. Section 535 of the Quality Housing and Work Responsibility Act of 1998 requires HUD to submit an annual report to the Congress on the HOPE VI program. As provided by the Act, this annual report is to include, among other things, the cost of public housing units revitalized under the program and the amount and type of financial assistance provided under and in conjunction with the program. Agency officials in charge of the HOPE VI program acknowledge that HUD has not issued the annual reports to the Congress required under the Act. They noted that they have provided program information through other means. In June 2002, HUD submitted a report to the House and Senate appropriation committees as directed by House Conference Report 107- 272. This report discusses best practices and lessons learned in the HOPE VI program between 1992 and 2002. It also includes some of the information required in the annual report, such as the extent of leveraging. HOPE VI officials also noted that they have provided information to the Congress through other means that the agency has deemed appropriate, such as budget documents, the agency's performance and accountability reports, and testimonies by HUD officials. However, neither HUD's most recent budget justification nor its most recent performance and accountability report contains detailed information on leveraging or the cost of public housing units developed under the HOPE VI program. Although HUD's fiscal year 2003 budget justification provides information on the amount of outside funds leveraged by HOPE VI funds, it does not describe the sources of these funds or provide cost information. Further, HUD's fiscal year 2001 performance and accountability report focuses on four key outputs of the HOPE VI program: families relocated, units demolished, new and rehabilitated units completed, and units occupied. The report does not provide information on HOPE VI leveraging or the cost of units developed under the program. Agency officials responsible for administering HOPE VI agreed that preparing the annual report as required under the Act would help provide the Congress and other interested stakeholders with useful information with which to assess the cost effectiveness and results of the program. The Congress faces difficult choices when deciding how to provide affordable housing. One of the objectives of the HOPE VI program is to leverage program funds, and such leveraging has increased over the life of the HOPE VI program--albeit primarily from other federal sources. However, HUD's HOPE VI reporting system does not identify funds that housing authorities obtain specifically from low-income housing tax credits, which are a direct cost to the federal government, as federal funds. Furthermore, applying HUD's total development cost policy does not provide a comprehensive picture of the actual costs of developing units at HOPE VI sites. This policy, which HUD established in accordance with the Quality Housing and Work Responsibility Act of 1998, was not intended to determine the actual cost of development at HOPE VI sites. Instead, it is designed to determine cost limits for the development of public housing with public housing funds. The type of data that HUD is required to report annually to the Congress would provide information needed to evaluate the program's cost to the federal government and its cost effectiveness. We recommend that the Secretary of Housing and Urban Development provide annual reports on the HOPE VI program to the Congress as required by law and include in these annual reports, among other things, information on the amounts and sources of funding used at HOPE VI sites, including equity raised from low-income housing tax credits, and the total cost of developing public housing units at HOPE VI sites, including the costs of items subject to HUD's development cost limits and those that are not. We provided a draft of this report to HUD for its review and comment. In a letter from the Assistant Secretary for Public and Indian Housing (see app. III), HUD stated that it found the report to be fair and accurate in its assessment of HOPE VI financing. HUD also agreed with our recommendation to submit annual reports and noted that it plans to submit an annual report for fiscal year 2002 by December 31, 2002. According to the agency, the fiscal year 2002 report will include the amounts and sources of funding used at HOPE VI sites, including equity raised by low-income housing tax credits categorized as private sources, and the total cost of developing public housing units at HOPE VI sites. HUD also provided clarifications on several technical points, which have been included in 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 15 days after the date of this letter. At that time, we will send copies of this report to the Ranking Member, Subcommittee on Housing and Transportation, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman, Vice Chairman, and Ranking Minority Member, Subcommittee on Housing and Community Opportunity, House Committee on Financial Services; and the Chairman and Vice Chairman, House Committee on Financial Services. We will also send copies to the Secretary of Housing and Urban Development and the Director of the Office of Management and Budget. We will make copies available to others upon request. This letter will also be available at no charge on GAO's home page at http://www.gao.gov. Please call me at (202) 512-8678 if you or your staff have any questions about this report. Key contributors to this report are listed in appendix IV. Our objectives were to describe the extent to which housing authorities with HOPE VI revitalization grants have (1) leveraged funds from other sources, particularly other federal sources; (2) leveraged funds specifically for community and supportive services; and (3) complied with HUD's funding limits for developing public housing units and budgeted additional funds not subject to these limits. We also determined the extent to which HUD has reported cost information to the Congress. To determine the extent to which grantees have leveraged federal and nonfederal funds, we analyzed data from HUD's HOPE VI reporting system and reviewed all mixed-finance proposals approved through September 30, 2001. Specifically, we obtained data as of the quarter that ended June 30, 2002, for all 165 revitalization grants awarded through fiscal year 2001. We used this data to determine the projected amount of funds leveraged per HOPE VI dollar. In addition, we analyzed HUD's data to determine the percentage of total funding that grantees expect to derive from HOPE VI revitalization grants, other public housing funds, other federal funds, and nonfederal funds. To assess the reliability of HUD's data, we reviewed information about the system and performed electronic testing to detect obvious errors in completeness and reasonableness. To determine the federal and nonfederal funds actually obtained by grantees, we requested excerpts from all of the mixed-finance proposals approved through the end of fiscal year 2001. For example, we requested the budget that shows the sources and uses of funds and the total development cost limit analysis. Although HUD reported that it had approved 87 mixed-finance proposals through September 30, 2001, it was able to provide the documentation we needed to analyze funding sources only for 85 proposals. The two remaining proposals lacked sufficient budget information for us to perform our analysis. The 85 mixed-finance proposals we reviewed were for phases to be constructed under 48 different revitalization grants and represented 13 percent of all funds budgeted through June 30, 2002, and 16 percent of all revitalization grant funds budgeted over the life of the program. To gain an understanding of the mixed-finance development approach, we interviewed headquarters officials in HUD's Office of Public Housing Investments and reviewed HUD's Mixed-Finance Guidebook. To determine the extent to which grantees have budgeted leveraged funds specifically for community and supportive services, we analyzed financial data from HUD's HOPE VI reporting system reported as of June 30, 2002. Specifically, we used this data to identify the amounts of HOPE VI revitalization funds and leveraged funds budgeted for supportive services overall and by grant year. We also used this data to determine the proportion of HOPE VI funds budgeted for supportive services relative to the total amount of HOPE VI revitalization grant funds awarded. Moreover, we used this data to identify trends in the use of leveraged funds for supportive services. To determine why the use of leveraging increased after 1997, we interviewed headquarters officials in HUD's Office of Public Housing Investments and reviewed HUD's guidance to grantees and the notices of funding availability for fiscal years 1993 through 2001. To determine the extent to which grantees have complied with HUD's funding limits for developing public housing units and have budgeted additional funds not subject to these limits, we reviewed HUD's total development cost policy and established what costs are subject to the policy and what costs are excluded. We then analyzed all 87 mixed-finance proposals approved through fiscal year 2001 to determine if they complied with HUD's cost policy. We were not able to determine compliance for 10 of the 87 proposals because the documentation provided did not contain the level of detail required. In order to compare the per-unit cost of a public housing unit according to HUD's cost policy with the actual cost of developing the unit, we again analyzed the mixed-finance proposals. For 64 of the 87 mixed-finance proposals, we determined the per-unit cost of a public housing unit according to HUD's cost policy, which includes only public housing funds and excludes certain costs. For the same 64 proposals, we then determined the actual per-unit cost by dividing the total funds budgeted by the total number of units. We were not able to perform these analyses for 23 of the 87 proposals because the Office of Public Housing Investments could not provide the detailed total development cost limit analysis needed. For example, in some cases, the office was able to provide only the information necessary to calculate the per-unit cost of a public housing unit for an entire HOPE VI project, as opposed to the particular phase for which we had the approved budget. To determine the extent to which HUD has reported cost information to the Congress, we reviewed the HOPE VI reporting requirements in the Quality Housing and Work Responsibility Act of 1998. We then interviewed headquarters officials in HUD's Office of Public Housing Investments to determine the type of program information the Department has reported to the Congress, and in what format. Finally, we reviewed HUD's fiscal year 2003 budget justification and its fiscal year 2001 performance and accountability report. We performed our work from November 2001 through September 2002 in accordance with generally accepted government auditing standards. Public housing authorities (PHA) with HOPE VI revitalization grants use funds from a variety of federal and nonfederal sources to develop their HOPE VI sites. Federal sources include additional public housing funds, other HUD funds, and low-income housing tax credits. Nonfederal sources include state and local funds, private donations, and tax-exempt bonds. Listed below are brief descriptions of some of these funding sources. Capital Fund Program (CFP) Under CFP, HUD provides annual formula grants to PHAs for capital and management activities, including the development, financing, and modernization of public housing. The funds may not be used for luxury improvements, direct social services, costs funded by other HUD programs, or ineligible activities, as determined by HUD on a case-by-case basis. Community Development Block Grant (CDBG) Program The CDBG funding that HUD provides is split between states and local jurisdictions called "entitlement communities." Funds are awarded on a formula basis to entitled metropolitan cities and urban counties. States distribute the funds to localities that do not qualify as entitlement communities. CDBG funds can be used to implement a wide variety of community and economic development activities directed toward neighborhood revitalization, economic development, and improved community facilities and services. Comprehensive Grant Program (CGP) Under CGP, HUD provided funds, on a formula basis, to help large PHAs (those with at least 250 units) correct physical, management, and operating deficiencies and keep units in the housing stock as safe and desirable homes for low-income families. The Quality Housing and Work Responsibility Act of 1998 shifted CGP into the Capital Fund. Comprehensive Improvement Assistance Program (CIAP) Under CIAP, HUD provided competitive grants to help smaller PHAs (those with fewer than 250 units) to correct physical, management, and operating deficiencies and keep units in the housing stock as safe and desirable homes for low-income families. The Quality Housing and Work Responsibility Act of 1998 shifted assistance to smaller PHAs from the competitive CIAP to a formula grant under the Capital Fund in 1999. Historic rehabilitation tax credits are available to rehabilitate certified historic structures that will need substantial rehabilitation. Eligible applicants receive a tax credit equal to 20 percent of the amount of qualified rehabilitation expenditures. Home Investment Partnership Program (HOME) Through HOME, HUD provides annual formula grants to states and localities to fund a wide range of activities designed to build, buy, or rehabilitate affordable housing or provide direct rental assistance to low- income people. Specifically, states and localities use HOME funds for grants, direct loans, loan guarantees or other forms of credit enhancement, rental assistance, and security deposits. Low-Income Housing Tax Credits (LIHTC) Under the LIHTC program, states are authorized to issue federal tax credits for the acquisition, rehabilitation, or new construction of affordable rental housing. The credits are generally sold to outside investors to raise development funds for a project. These outside investors use the tax credit to offset taxes otherwise owed on their tax returns. To qualify for credits, a project must have a specific proportion of its units set aside for lower-income households, and the rents on these units must be limited to 30 percent of qualifying income. The amount of credit that can be provided to a project is determined by size of the allocation, eligible costs, number of tax credit units, type of credit, and investor pricing. Credits are provided for 10 years. State housing credit agencies usually award tax credits through competitive rounds. Each state receives an annual allocation of $1.75 per capita. States must reserve a minimum of 10 percent of the credits for nonprofit developers. Major Reconstruction of Obsolete Projects (MROP) Under MROP, which last funded new development in 1994, HUD provided funds to PHAs to perform major reconstruction of obsolete public housing or to maintain or expand the supply of housing for low-income families. Projects formerly funded as MROP are now funded through the Capital Fund. Through the Operating Fund, HUD provides PHAs with a subsidy, on a formula basis, to fund the operating and maintenance expenses of the developments they own or operate. It enables PHAs to keep rents affordable for lower-income families and to cover a variety of expenses, including maintenance, utilities, and tenant and protective services. Public Housing Drug Elimination Program (PHDEP) Eligible PHAs received PHDEP grants from HUD to reduce or eliminate drug-related crime in and around public housing. Grantees were encouraged to develop a plan that included initiatives that could be sustained over a period of several years for addressing the problem of drug-related crime in and around public housing. The program was eliminated in the fiscal year 2002 HUD budget. Renewal Community/Empowerment Zone/Enterprise Community Initiative (RC/EZ/EC) In urban areas that HUD has designated as Renewal Communities, Empowerment Zones, and Enterprise Communities, grants and tax incentives are provided. They stimulate the creation of new jobs empowering low-income persons and families receiving public assistance to become economically self-sufficient, and they promote the revitalization of economically distressed areas. The program subsidizes long-term financing for very low- , low- , and moderate-income families. The Federal Home Loan Banks provide from their annual net earnings low-cost funding and other credit to stockholder members on a districtwide competitive basis. Members--which include commercial banks, savings institutions, credit unions, and insurance companies--use this credit to meet the housing finance and credit needs of their communities. Housing trust funds are distinct funds established by cities, counties, and states that permanently dedicate a source of public revenue to support the production and preservation of affordable housing. There are at least 257 housing trust funds in the United States. Housing trust funds support a variety of housing activities for low- and very low-income households, including new construction, preservation of existing housing, emergency repairs, homeless shelters, housing-related services, and capacity building for nonprofit organizations. Nonprofit and faith-based organizations, developers, private banks and lending institutions, universities, large corporations, independently owned businesses, and residents of the HOPE VI projects provide resources for various purposes. For example, developers may have equity at risk, and future residents provide down payments on homeownership units. Universities donate land and assist in developing educational programs. National corporations provide training and employment for public housing residents. State and local governments provide a range of resources, including capital improvement funds for infrastructure and community facilities and direct financial contributions or provision of in-kind services. Some municipalities provide tax-foreclosed properties for redevelopment, matching funds for community and supportive services, and assistance with zoning and other local requirements. Eligible issuers, such as housing finance agencies and local governments, sell bonds to investors with interest not subject to federal income tax and use proceeds to finance below-market rate-mortgage loans. The lower interest rate on the bond is passed on to borrowers as a reduced mortgage interest rate. The uses of the proceeds raised through tax-exempt bond financing include acquisition, rehabilitation, and construction. Tax Increment Financing (TIF) allows a municipality to provide financial incentives to stimulate private investment in a designated area (a TIF district) where blight has made it difficult to attract new development. The TIF program can be used to support new development or the rehabilitation of existing buildings in industrial, commercial, residential, or mixed-use development proposals. Funding for TIF eligible activities is derived from the increase in incremental tax revenues generated by new construction or rehabilitation projects within the boundaries of the TIF district. States determine what activities are eligible with TIF funds, and these activities may include land acquisition, site preparation, building rehabilitation, public improvements, and interest subsidy. In addition to those named above, Anne Dilger, John McGrail, Sara Moessbauer, Lisa Moore, Ginger Tierney, Paige Smith, Mijo Vodopic, Carrie Watkins, and Alwynne Wilbur made key contributions to this report.
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The Department of Housing and Urban Development (HUD) requested that we review the HOPE VI program. Because of the scope of the request, we agreed with the office of the Chairman, Senate Subcommittee on Housing and Transportation, Committee on Banking, Housing, and Urban Affairs, to provide the information in a series of reports. This first report focuses on the financing of HOPE VI developments. We describe the extent to which grantees have (1) leveraged funds from other sources, particularly other federal sources; (2) leveraged funds specifically for community and supportive services; and (3) complied with HUD's funding limits for developing public housing units and budgeted additional funds not subject to these limits. Because the Quality Housing and Work Responsibility Act of 1998 requires HUD to report HOPE VI cost information to Congress, we also discuss the extent to which HUD has complied with this requirement. Housing authorities expect to leverage, for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001, an additional $1.85 in funds from other sources. HUD considers this amount to be slightly higher because it treats as "leveraged" both (1) HOPE VI grant funds competitively awarded for the demolition of public housing units and (2) other public housing capital funds that the housing authorities would receive even in the absence of the revitalization grants. Our analysis of the mixed-finance proposals HUD approved through fiscal year 2001 indicates that, when low-income housing tax credit funding is included, 79 percent of the budgeted funds are from federal sources. The remainder of budgeted funds are from nonfederal sources, including private sources and state and local governments. Housing authorities that have received revitalization grants expect to leverage $295 million in additional funds for community and supportive services and have budgeted a total of about $714 million in HOPE VI revitalization grant funds and leveraged funds for community and supportive services. Leveraging for community and supportive services increased dramatically after 1997, when HUD instituted incentives to encourage this practice--from 22 percent in FY 1997 to 59 percent in FY 2001. Housing authorities have complied with HUD's total development cost policy when developing public housing units at HOPE VI sites. However, housing authorities have often budgeted additional funds that are not subject to the funding limits in the policy. HUD's policy applies only to the use of public housing funds, and it excludes some costs from counting against the limits. Although HUD has been required to report leveraging and cost information to Congress annually since 1998, it has not done so. Section 535 of the act requires HUD to submit an annual report to Congress on the HOPE VI program. This annual report is to include the cost of public housing units revitalized under the program and the amount and type of financial assistance provided under and in conjunction with the program. HUD has not issued these required annual reports to Congress. However, in June 2002, HUD submitted a report to the House and Senate appropriation committees as directed by House Conference Report 107-272. This report includes some of the information required in the annual report, such as the extent of leveraging. However, neither HUD's most recent budget justification nor its most recent performance and accountability report contains detailed information on the amount of leveraged funds or the cost of public housing units revitalized under the HOPE VI program.
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As part of its efforts to ensure the safety and quality of imported drugs, FDA may conduct inspections of foreign establishments manufacturing drugs, including APIs, that are imported into the United States. FDA relies on these establishment inspections to determine compliance with current good manufacturing practice regulations (GMP). The purpose of these inspections is to ensure that foreign establishments meet the same requirements as domestic establishments to ensure the quality, purity, potency, safety, and efficacy of drugs marketed in the United States. Requirements governing FDA's inspection of foreign and domestic establishments differ. Specifically, FDA is required to inspect every 2 years those domestic establishments that manufacture drugs in the United States, but there is no comparable requirement for inspecting foreign establishments that market their drugs in the United States. However, drugs manufactured by foreign establishments that are offered for import may be refused entry to the United States if FDA determines-- through the inspection of an establishment, a physical examination of drugs when they are offered for import at a point of entry, or otherwise-- that there is sufficient evidence of a violation of applicable laws or regulations. FDA conducts two primary types of drug manufacturing establishment inspections. Preapproval inspections of domestic and foreign establishments may be conducted before FDA will approve a new drug to be marketed in the United States. In addition, FDA conducts GMP inspections at establishments manufacturing drugs already marketed in the United States to determine ongoing compliance with laws and regulations. Although inspections of foreign drug manufacturing establishments-- which are intended to assure that the safety and quality of drugs are not jeopardized by poor manufacturing practices--are an important element of FDA's oversight of the supply chain, our previous work has shown that FDA conducts relatively few inspections of the establishments that it considers subject to inspection. Specifically, in our 2008 report, we estimated that FDA inspected 8 percent of such foreign drug establishments in fiscal year 2007. At this rate, we estimated that it would take FDA about 13 years to inspect all foreign establishments the agency considers subject to inspection. In 2010, we reported that FDA had increased its inspection efforts in fiscal year 2009. We estimated that FDA inspected 11 percent of foreign establishments subject to inspection and it would take FDA about 9 years to inspect all such establishments at this rate. FDA's inspection efforts in fiscal year 2009 represent a 27 percent increase in the number of inspections the agency conducted when compared to fiscal year 2007--424 and 333 inspections, respectively. In contrast, FDA conducts more inspections of domestic establishments and the agency inspects these establishments more frequently. For example, in fiscal year 2009, FDA conducted 1,015 domestic inspections, inspecting approximately 40 percent of domestic establishments. We estimated that at this rate FDA inspects domestic establishments approximately once every 2.5 years. To address these discrepancies, we recommended that FDA conduct more inspections to ensure that foreign establishments manufacturing drugs currently marketed in the United States are inspected at a frequency comparable to domestic establishments with similar characteristics. FDA agreed that the agency should be conducting more foreign inspections, but FDA officials have since acknowledged that the agency is far from achieving foreign drug inspection rates comparable to domestic inspection rates and, without significant increases to its inspectional capacity, the agency's ability to close this gap is highly unlikely. In addition to conducting few foreign drug manufacturing inspections, the types of inspections FDA conducts generally do not include all parts of the drug supply chain. For example, FDA officials told us during our review of the contaminated heparin crisis that the agency typically does not inspect manufacturers of source material--which are not required to be listed on applications to market drugs in the United States--and generally limits its inspections to manufacturers of the finished product and APIs. Furthermore, once FDA conducts an inspection of a foreign drug manufacturer, it is unlikely that the agency will inspect it again, as the majority of the foreign inspections FDA conducts are to inform decisions about the approval of new drugs before they are marketed for sale in the United States. Despite increases in foreign drug establishment inspections in recent years, FDA continues to face unique challenges conducting inspections abroad. Specifically, as we identified in our 2008 report on FDA's foreign drug inspections, FDA continues to experience challenges related to limits on the agency's ability to require foreign establishments to allow the agency to inspect their facilities. For example, while inspecting establishments in China during the heparin crisis, Chinese crude heparin consolidators refused to provide FDA full access during inspections--in particular, one consolidator refused to let FDA inspectors walk through its laboratory and refused FDA access to its records. As a result, FDA officials said they focused on the manufacturers' responsibilities to ensure that these establishments could trace their crude heparin back to qualified suppliers that produce an uncontaminated product and requested that manufacturers conduct their own investigations of any heparin products for which they received complaints or that did not meet specifications. Furthermore, FDA faces other challenges conducting foreign inspections, such as logistical issues that necessitate the agency notifying the manufacturer of the agency's intention to inspect the establishment in advance. In contrast to domestic inspections which are conducted without prior notice, FDA contacts foreign manufacturers prior to inspection to ensure that the appropriate personnel are present and that the establishment is manufacturing its product during the time of the inspection. In some cases, FDA must obtain permission from the foreign government of the country in which an establishment is located in order to conduct an inspection. FDA officials report that inspections may be conducted several months after an establishment has been notified of FDA's intent to conduct an inspection due to the need to obtain visas and other delays. As a result of such advance notice, FDA staff conducting inspections may not observe an accurate picture of the manufacturer's day-to-day operations. Our previous reports indicated that FDA has experienced challenges maintaining complete information on foreign drug manufacturing establishments. This lack of information, which is critical to understanding the supply chain, hampers the agency's ability to inspect foreign establishments. In 2008, we reported that FDA did not maintain a list of foreign drug establishments subject to inspection, but rather the agency relied on information from their drug establishment registration and import databases to help select establishments for inspection. However, we found that these databases contained incorrect information about foreign establishments and did not contain an accurate count of foreign establishments manufacturing drugs for the U.S. market. For example, in our 2008 report, we identified that for fiscal year 2007, FDA's registration database contained information on approximately 3,000 foreign drug establishments that registered with FDA to market drugs in the United States, while the import database contained information on about 6,800 foreign establishments that offered drugs for import into the United States. Some of the inaccuracies in the registration database reflected the fact that, despite being registered, some foreign establishments did not actually manufacture drugs for the U.S. market. Additionally, the inaccurate count of establishments in the import database was the result of unreliable manufacturer identification numbers generated by customs brokers when a drug is offered for import. As a result of these inaccuracies, FDA did not know how many foreign establishments were subject to inspection. To address these inaccuracies, we recommended that FDA enforce the requirement that establishments manufacturing drugs for the U.S. market update their registration annually and establish mechanisms for verifying information provided by the establishment at the time of registration. Since then, FDA has taken steps to address these deficiencies and improve the information it receives from both the registration and import databases, though these efforts have not yet fully addressed the concerns we raised in 2008. For example, in June 2009, FDA began requiring all drug establishments marketing their products in the United States to submit their annual registration and listing information electronically, rather than submitting the information on paper forms to be entered into the registration database. FDA indicated that, as of September 2011, the implementation of this requirement has eliminated the human error that has been associated with the transcription of information from paper forms to electronic files. As part of electronic registration, FDA has also requested the each establishment provide a unique identification number--a Dun and Bradstreet Data Universal Numbering System (D-U-N-S®️) Number--as a way to help avoid duplications and errors in FDA's data systems. In addition, in September 2011, FDA officials reported that the agency had begun to take steps to enforce its annual registration requirement. They indicated that FDA will now conduct outreach to establishments that have not submitted an annual registration to confirm that they are no longer producing drugs for the U.S. market or to ensure they register, as required, if they are continuing to manufacture drugs for the U.S. market. They said that if an establishment does not respond to FDA's outreach, it is to be removed from the registration database. To further address concerns with the import database, FDA has an initiative underway to eliminate duplicate information by taking steps to identify and remove all duplicate drug establishment records from existing import data over the next few years. Given the difficulties that FDA has faced in inspecting and obtaining information on foreign drug manufacturers, and recognizing that more inspections alone are not sufficient to meet the challenges posed by globalization, the agency has begun to explore other initiatives to improve its oversight of the drug supply chain. We reported that FDA's overseas offices had engaged in a variety of activities to help ensure the safety of imported products. These included establishing relationships with foreign regulators, industry, and U.S. agencies overseas; gathering information about regulated products to assist with decision making; and, in China and India, conducting inspections of foreign establishments. Although we noted that the impact of the offices on the safety of imported products was not yet clear, FDA staff, foreign regulators, and others pointed to several immediate benefits, such as building relationships. However, they also described challenges related to some of their collaborations with domestic FDA offices and the potential for increasing demands that could lead to an unmanageable workload. We reported that FDA was in the process of long-term strategic planning for the overseas offices, but had not developed a long-term workforce plan to help ensure that it is prepared to address potential overseas office staffing challenges, such as recruiting and retaining skilled staff. We recommended that FDA enhance its strategic planning and develop a workforce plan to help recruit and retain overseas staff and FDA concurred with our recommendations. In September 2011, FDA indicated that it had developed a 2011 to 2015 strategic plan and was in the process of updating it, and it had initiated a workforce planning process. FDA has also implemented collaborative efforts with foreign regulatory authorities to exchange information about planned inspections as well as the results of completed inspections. In December 2008, FDA, along with its counterpart regulatory authorities of the European Union and Australia, initiated a pilot program under which the three regulators share their preliminary plans for and results of inspections of API manufacturing establishments in other countries. For example, FDA could receive the results of inspections conducted by these regulatory bodies and then determine if regulatory action or a follow-up inspection is necessary. FDA contends that prospectively sharing this information could allow these regulatory bodies to more efficiently use their resources by minimizing the overlap in their inspection plans. According to agency officials, the agency had used inspection reports from the other regulators to improve its knowledge of a small number of API manufacturing establishments, most of which had not been inspected in the last 3 years, but that it was interested in inspecting due to a pending drug application. FDA has also taken other steps to improve the information that the agency maintains on foreign establishments shipping drugs to the United States. In August 2008, FDA contracted with two external organizations to implement the Foreign Registration Verification Program. Through this program, contractors conduct site visits to verify the existence of foreign establishments that are registered with FDA and confirm that they manufacture the products that are recorded in U.S. import records. According to FDA officials, establishments that are new to the U.S. market or are importing products not typically manufactured at the same establishment are considered candidates for the verification program. For example, FDA officials told us about an establishment that was selected for the program because, according to agency records, it was offering for import into the United States pickles and an API--two products not normally manufactured at the same establishment. As of September 2011, the contractors had visited 142 foreign drug establishments located in Asia, Australia, Africa, Canada, and Europe, 27 of which did not appear to exist at the address provided by the establishments at the time of registration. According to FDA, the agency uses the information obtained from the contractors as screening criteria to target drug products from those establishments for review at the border. FDA is also developing initiatives that would assist its oversight of products at the border. For example, FDA is in the process of establishing its Predictive Risk-based Evaluation for Dynamic Import Compliance Targeting (PREDICT) import screening system. The system is intended to automatically score each entry based on a range of risk factors and identify high-risk items for review. FDA piloted this system on seafood products in the summer of 2007. FDA determined that the system expedited the entry of lower-risk products, while identifying a higher rate of violations among products that were tested when they were offered for import. The agency planned to have the system implemented in all locations and for all FDA-regulated products by June 2011, although its deployment has been delayed. According to FDA, full deployment of PREDICT is currently slated for December 2011. FDA also identified statutory changes that would help improve its oversight of drugs manufactured in foreign establishments. These include authority to (1) suspend or cancel drug establishment registrations to address concerns, including inaccurate or out-of-date information; (2) require drug establishments to use a unique establishment identifier; and (3) implement a risk-based inspection process, with flexibility to determine the frequency with which both foreign and domestic establishments are inspected, in place of the current requirement that FDA inspect domestic establishments every 2 years. Globalization has fundamentally altered the drug supply chain and created regulatory challenges for FDA. In our prior reports we identified several concerns that demonstrate the regulatory difficulties that FDA faces conducting inspections of, and maintaining accurate information about, foreign drug establishments. While inspections provide FDA with critical information, we recognize that inspections alone are not sufficient to meet all the challenges of globalization. FDA should be credited for recent actions, such as collaborating with and exchanging information on drug establishments with foreign governments, that represent important initial steps toward addressing these challenges. However, as the agency has acknowledged, there are additional steps that it still needs to take. We have previously made recommendations to address some challenges, such as poor information and planning, and the agency has identified additional authorities that could provide it with necessary enforcement tools. In light of the growing dependence upon drugs manufactured abroad and the potential for harm, FDA needs to act quickly to implement changes across a range of activities in order to better assure the safety and availability of drugs for the U.S. market. Chairman Harkin, Ranking Member Enzi, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions you may have at this time. For further information about this testimony, please contact Marcia Crosse 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. GAO staff who made key contributions to this testimony include Geraldine Redican-Bigott, Assistant Director; William Hadley; Cathleen Hamann; Rebecca Hendrickson; and Lisa Motley. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Food and Drug Administration: Response to Heparin Contamination Helped Protect Public Health; Controls That Were Needed for Working With External Entities Were Recently Added. GAO-11-95. Washington, D.C.: October 29, 2010. Drug Safety: FDA Has Conducted More Foreign Inspections and Begun to Improve Its Information on Foreign Establishments, but More Progress Is Needed. GAO-10-961. Washington, D.C: September 30, 2010. Food and Drug Administration: Overseas Offices Have Taken Steps to Help Ensure Import Safety, but More Long-term Planning Is Needed. GAO-10-960. Washington, D.C.: September 30, 2010. Food and Drug Administration: FDA Faces Challenges Meeting Its Growing Medical Product Responsibilities and Should Develop Complete Estimates of Its Resource Needs. GAO-09-581. Washington, D.C.: June 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Drug Safety: Better Data Management and More Inspections Are Needed to Strengthen FDA's Foreign Drug Inspection Program. GAO-08-970. Washington, D.C.: September 22, 2008. Medical Devices: FDA Faces Challenges in Conducting Inspections of Foreign Manufacturing Establishments. GAO-08-780T. Washington, D.C.: May 14, 2008. Drug Safety: Preliminary Findings Suggest Recent FDA Initiatives Have Potential, but Do Not Fully Address Weaknesses in Its Foreign Drug Inspection Program. GAO-08-701T. Washington, D.C.: April 22, 2008. Medical Devices: Challenges for FDA in Conducting Manufacturer Inspections. GAO-08-428T. Washington, D.C.: January 29, 2008. Drug Safety: Preliminary Findings Suggest Weaknesses in FDA's Program for Inspecting Foreign Drug Manufacturers. GAO-08-224T. Washington, D.C.: November 1, 2007. Food and Drug Administration: Improvements Needed in the Foreign Drug Inspection Program. GAO/HEHS-98-21. Washington, D.C.: March 17, 1998. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Globalization has placed increasing demands on the Food and Drug Administration (FDA) in ensuring the safety and effectiveness of drugs marketed in the United States. The pharmaceutical industry has increasingly relied on global supply chains in which each manufacturing step may be outsourced to foreign establishments. As part of its efforts, FDA may conduct inspections of foreign drug manufacturing establishments, but there are concerns that the complexity of the drug manufacturing supply chain and the volume of imported drugs has created regulatory challenges for FDA. FDA has begun taking steps to address some of these concerns, such as the establishment of overseas offices. This statement discusses (1) FDA's inspection of foreign drug manufacturing establishments, (2) the information FDA has on these establishments, and (3) recent FDA initiatives to improve its oversight of the supply chain. The statement presents findings based primarily on GAO reports since 2008 related to FDA's oversight of the supply chain. These reports include Food and Drug Administration: Overseas Offices Have Taken Steps to Help Ensure Import Safety, but More Long-Term Planning Is Needed ( GAO-10-960 , Sept. 30, 2010) and Drug Safety: FDA Has Conducted More Foreign Inspections and Begun to Improve Its Information on Foreign Establishments, but More Progress Is Needed ( GAO-10-961 , Sept. 30, 2010). GAO supplemented this prior work with updated information obtained from FDA in August and September 2011. Inspections of foreign drug manufacturers are an important element of FDA's oversight of the supply chain, but GAO's prior work showed that FDA conducts relatively few such inspections. In 2008, GAO reported that in fiscal year 2007 FDA inspected 8 percent of foreign establishments subject to inspection and estimated that, at that rate, it would take FDA about 13 years to inspect all such establishments. GAO recommended that FDA increase the number of foreign inspections it conducts at a frequency comparable to domestic establishments with similar characteristics. FDA subsequently increased the number of foreign establishment inspections. FDA's inspection efforts in fiscal year 2009 represent a 27 percent increase in the number of inspections it conducted, when compared to fiscal year 2007--424 and 333 inspections, respectively. However, FDA officials acknowledged that FDA is far from achieving foreign drug inspection rates comparable to domestic inspection rates--the agency inspected 1,015 domestic establishments in fiscal year 2009. Also, the types of inspections FDA conducts generally do not include all parts of the drug supply chain. Conducting inspections abroad also continues to pose unique challenges for the agency. For example, FDA faces limits on its ability to require foreign establishments to allow it to inspect their facilities. Furthermore, logistical issues preclude FDA from conducting unannounced inspections, as it does for domestic establishments. GAO previously reported that FDA lacked complete and accurate information on foreign drug manufacturing establishments--information critical to understanding the supply chain. In 2008, GAO reported that FDA databases contained incorrect information about foreign establishments and did not contain an accurate count of foreign establishments manufacturing drugs for the U.S. market. FDA's lack of information hampers its ability to inspect foreign establishments. GAO recommended that FDA address these deficiencies. FDA has taken steps to do so, but has not yet fully addressed GAO's concerns. Given the difficulties that FDA has faced in inspecting and obtaining information on foreign drug manufacturers, and recognizing that more inspections alone are not sufficient to meet the challenges posed by globalization, the agency has begun to implement other initiatives to improve its oversight of the drug supply chain. FDA's overseas offices have engaged in a variety of activities to help ensure the safety of imported products, such as training foreign stakeholders to help enhance their understanding of FDA regulations. GAO recommended that FDA enhance its strategic and workforce planning, which FDA agreed it would do. FDA has also taken other positive steps, such as developing initiatives that would assist its oversight of products at the border, although these are not yet fully implemented. Finally, FDA officials identified statutory changes that FDA believes it needs to help improve its oversight of drugs manufactured in foreign establishments. For example, in place of the current requirement that FDA inspect domestic establishments every 2 years, officials indicated the agency would benefit from a risk-based inspection process with flexibility to determine the frequency with which both foreign and domestic establishments are inspected. In light of the growing dependence upon drugs manufactured abroad and the potential for harm, FDA needs to act quickly to implement changes across a range of activities in order to better assure the safety and availability of drugs for the U.S. market.
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RECA establishes a procedure to make partial restitution to individuals who contracted serious diseases, such as certain types of cancers, presumably resulting from their exposure to radiation from aboveground nuclear tests or as a result of their employment in uranium mines. The law established three claimant categories--uranium mine employees (those who worked in underground uranium mines in certain specified states), downwinders (those who were downwind from aboveground nuclear weapons tests conducted at the Nevada test sites), and onsite participants (those who actually participated onsite in aboveground nuclear weapons tests). Table 1 summarizes the key provisions of RECA by type of claim, prior to the RECA 2000 Amendments. In addition to creating eligibility criteria for compensation, the law stipulates that appropriated funds be held in the Trust Fund to pay claims. By law, the Trust Fund is to be administered by the Secretary of the Treasury but maintained by the Attorney General. The Attorney General is also responsible for reviewing applications to determine whether applicants qualify for compensation and establishing procedures for paying claims. To discharge these two responsibilities, the Attorney General issued a final regulation implementing RECP on April 10, 1992. The regulation established RECP within Justice's Civil Division and charged it with administering claims adjudication and compensation under the act. To file for compensation, applicants submit the appropriate claims forms along with corroborating documentation to RECP, whose claims examiners and legal staff review and adjudicate the claims. If the claim is approved, Justice authorizes the Treasury Department to make payment from the Trust Fund. If the victim is deceased, compensation may be awarded to the victim's eligible survivors (e.g., the victim's spouse or children). Figure 1 shows RECP's claims adjudication process, including the procedures for refiling and administratively appealing denied claims. If RECP denies a claim, it notifies the claimant in writing of the basis for the denial and the claimant's rights to refile or appeal the claim. Claimants may refile a claim with new information to RECP up to two times. If denied, claimants may file an administrative appeal to a Justice Appeals Officer, who can affirm or reverse the original decision or remand the claim back to RECP for further action. Applicants may also appeal denied claims in the U.S. district courts. RECP officials said that through July 3, 2001, claimants sought a judicial remedy only eight times. More recently, the Attorney General approved revisions to the regulations, effective April 21, 1999, to assist claimants in establishing entitlement to an award. The revised regulations modified eligibility restrictions regarding the claimants' use of tobacco. Prior to the revision, RECP would apply stricter standards if the victim contracted certain qualifying diseases and was a "heavy smoker" or "heavy drinker." The revised regulations, among other things, allow claimants to submit affidavits to establish smoking use histories and to submit pathology reports showing specified diseases. In addition, the changes permit applicants, whose claims were denied prior to the implementation of these regulations, to file another three times. The RECA Amendments of 2000, signed into law by the President on July 10, 2000, expanded the criteria for compensation, opening RECP to more people and establishing a prompt payment period. Some of the major changes include: permitting eligible aboveground uranium mine employees, uranium mill workers, and individuals, who transported uranium ore, to qualify for compensation; they are entitled to a payment of $100,000; increasing the geographic areas included for eligibility and extending the time period considered for radiation exposure for uranium mine employees; expanding the list of specified diseases that may qualify individuals for compensation to include other types of cancer and also noncancers (e.g., salivary gland, brain, and colon cancer); decreasing the level of radiation exposure that is necessary to qualify for compensation for uranium mine employees; making certain medical documentation requirements less stringent for eliminating distinctions between smokers and nonsmokers pertaining to diseases such as lung cancer and nonmalignant respiratory diseases; and requiring the Attorney General to ensure that a claim is paid within 6 weeks of approval. In addition to RECA, other programs provide compensation to persons who have presumably become ill as a result of working for the federal government in producing or testing nuclear weapons. For example, the Radiation-Exposed Veterans Compensation Act of 1988, in general, provides monthly compensation to veterans who were present at certain atomic bomb exercises, served at Hiroshima and Nagasaki during the post World War II occupation of Japan, or were prisoners of war in Japan. In addition, on October 30, 2000, the President signed into law The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001. Title XXXVI of this act establishes the "Energy Employees Occupational Illness Compensation Program" to, in general, compensate covered employees who contracted certain illnesses resulting from exposure to certain ultra- hazardous materials during employment in Department of Energy facilities that processed or produced radioactive materials used in the production of atomic weapons. Certain uranium employees who are eligible for compensation under RECA may also be eligible for additional compensation and medical benefits under title XXXVI. This would be RECP's administrative responsibility. To determine the outcomes of the claims adjudication process, including the number of approved and denied claims, the timeliness of the claims adjudication process, the primary reasons for denials, and the amount of money awarded, we obtained and analyzed RECA-related case information from DOJ's Civil Division's case histories database. Our analysis was done on claims filed during fiscal years 1992 through 2000. Our analysis was done using the case histories database, as of February 26, 2001. We also analyzed claims payment information from the Civil Division's Office of Planning, Budget and Evaluation (OPB&E). We discussed the basis for any major fluctuations with RECP officials. While we did not independently verify the accuracy of the RECA data extracted from the database, we did, however, ask the Civil Division's Office of Management Information, the office that maintains the database, to complete a data reliability questionnaire about the design specifications and documentation for the database. The reliability questionnaire also posed questions about quality controls and procedures used to ensure data reliability. Our analysis of the questionnaire responses did not indicate any data reliability problems. To determine the cost of administering the RECP and the FTE program staff levels, we requested that OPB&E provide us with RECP administrative costs by budget object class for the end of fiscal years 1992 through 2000. The cost provided includes items such as personnel compensation and benefits, travel and transportation of persons, and printing and reproduction costs. To determine FTE staffing levels, the office provided us with FTE staff levels for RECP at the end of fiscal years 1992 through 2000. To determine the nature of expenditures from the Trust Fund, we evaluated annual Trust Fund activity (appropriations, interest earned on investments in government securities, and payments to awarded individuals) from fiscal years 1992 through 2000 provided by OPB&E. To verify that compensation awarded by RECP was paid as authorized, we randomly selected 30 individual payments from DOJ's Civil Division's case histories database of 1,592 RECA payments made from fiscal years1996 through 2000. We then obtained financial documentation for each payment from OPB&E, including (1) RECP's payment authorization letter to OPB&E, (2) the fiscal payment request invoice approval sheet from OPB&E to the Justice Management Division's (JMD) Financial Operations Service, and (3) the payment certification summary generated from a JMD financial database that shows that the Department of the Treasury made payments electronically or by check to the authorized individuals. We interviewed officials from RECP, OPB&E, and JMD to determine how they authorize, process, and certify payments from the Trust Fund. Finally, we interviewed officials from Treasury's Financial Management Service to clarify Treasury's role in disbursing the awarded RECA compensation. To determine the nature of RECP's outreach activities, we interviewed RECP officials who described the elements of their outreach efforts and provided us with a list of the office's outreach-related onsite visits that could be identified from existing records. To obtain insights on RECP's outreach efforts, we conducted telephone interviews with a judgmental sample of 11 NGOs that (1) had members who could be eligible for compensation under RECA or (2) provided assistance and information about the program to potentially eligible candidates. We selected these organizations from a list provided by RECP, an Internet search, and a list of those who testified before the Congress in a RECA-related 1998 hearing. In addition, we asked officials from these organizations to suggest other related groups for us to contact, some of which we contacted. As agreed, we focused our review on Justice's administration of RECA from its inception in fiscal year 1992 through the end of fiscal year 2000. We began our review in October 2000 and performed our audit work from January to August 2001 in Washington, D.C., in accordance with generally accepted government auditing standards. When RECP reviews and adjudicates a claim, the process ends in one of two possible outcomes--approval or denial of the claim. If approved, Justice electronically submits a request for payment to Treasury. If denied, applicants may refile their claims or pursue other avenues of appeal. Through the end of fiscal year 2000, RECP received 7,819 applications for compensation. During this period, RECP approved and denied roughly equal numbers of applications, awarding compensation to about 46 percent of the claimants, and denying compensation to about 46 percent. Moreover, approximately 8 percent of the applications were still pending at the time of our analysis. RECA claims are most frequently denied because the disease contracted by the victim is not specifically designated as eligible for compensation under the RECA program. Through the end of fiscal year 2000, $245.1 million was paid from the Trust Fund to 5,150 victims or their survivors, but some of the claims awarded by RECP were not paid because money in the Trust Fund was depleted. Although lack of funds may have prevented timely payment of compensation in some cases, RECP generally processed claims in a timely fashion. Our analysis of information from the case histories database showed that about 89 percent of claims were awarded or denied within the mandated 12-month time frame. The agency reported that the remaining claims were sometimes not processed within the 12-month period due to mitigating circumstances, such as claimants requesting extra time to find documentation to substantiate their claims. Our analysis of RECA-related claims information from the case histories database shows that from the April 1992 inception of the claims adjudication program through the end of fiscal year 2000, RECP had received 7,819 applications for compensation. As shown in table 2, there were 3,627 uranium mine employee-based applications (about 46 percent of the total); 3,140 downwinder-based applications (about 40 percent of the total); and 1,052 onsite participant-based applications (the remaining 14 percent of the total). Of the 7,819 claims filed, RECP approved 3,598 and denied 3,568. These amounts represent almost an even split between approvals and denials-- about 46 percent for each. The remaining 8 percent of the claims were still pending at the time of our analysis. RECP approved about 47 percent of the uranium mine employee-based claims, about 53 percent of the downwinder-based claims, and about 21 percent of the onsite participant- based claims. Through the end of fiscal year 2000, applicants had filed claims amounting to almost $600 million, and RECP had awarded (or obligated) about $269 million to individuals on the basis of these claims. Of the amount awarded, only $245.1 million was paid through the end of fiscal year 2000 because the Trust Fund was depleted (see further discussion in the next section). RECP awarded $170 million to eligible individuals based on uranium mine employee applications (or about 63 percent of the total), $83 million based on downwinder applications (or about 31 percent of the total), and $16 million based on onsite participant applications (or about 6 percent of the total). Appendix I contains data on refiled and appealed applications. RECP denies claims when the applicants fail to meet eligibility requirements established by RECA and the Department of Justice's implementation regulations. Our analysis of RECA-related information from the case histories database shows that through the end of fiscal year 2000, RECP denied claims for compensation for 13 different reasons. The most frequent reason for denial for all three types of RECA claims was that the disease contracted by the victim was not specifically designated as eligible for compensation under the RECA program (in about 46 percent of the cases). By type of claim, the primary reasons for denial were as follows: Uranium mine employee-based claims--The victim did not meet the minimum exposure to radiation requirements (in about 53 percent of the cases) or did not contract a disease that was eligible for compensation (in about 36 percent of the cases). Downwinder-based claims--The victim did not contract an eligible disease (in about 49 percent of the cases), was not physically present in the designated areas during the required time period (in about 21 percent of the cases), or was either under or over the required age when first exposed to radiation (in about 17 percent of the cases). Onsite participant-based claims--The victim did not contract a disease that was eligible for compensation under RECA (64 percent of the denied cases) or did not qualify as an onsite participant (in 17 percent of the cases). According to OPB&E, through the end of fiscal year 2000, Treasury paid about $245.1 million in awarded compensation to 5,150 individuals from the Trust Fund. The number of individuals who received compensation exceeds the number of claims awarded compensation. For example, in certain instances where the victim was deceased, compensation was awarded to the victim's eligible children. On May 9, 2000, the amount of money awarded to claimants exceeded the amount of funds available in the Trust Fund. By the end of fiscal year 2000, 227 awards totaling $19.2 million had not been paid because money in the Trust Fund was depleted. As shown in table 3, the Congress initially appropriated $30 million to the Trust Fund in fiscal year 1992. Additional appropriations were made in fiscal years 1993, 1997, 1998, and 2000. Money remaining in the Trust Fund at the end of any given fiscal year is generally carried forward to the next fiscal year. According to Justice officials, money on deposit in the Trust Fund that is not needed in the short run for award payments may be invested in interest-bearing U. S. Treasury securities. The paid interest is then added to the account balance. According to OPB&E, Justice requested that $21.7 million be appropriated to the Trust Fund in fiscal year 2000; however, the Congress appropriated $3.2 million. Combined with funds carried over from fiscal year 1999, a total of $11.6 million was on deposit in the Trust Fund at the beginning of fiscal year 2000. These funds were fully committed by May 9, 2000, and payment of awards was deferred. RECP notified the eligible candidates by letter that although they qualified for compensation, their award could not be paid until additional funds became available. By the end of fiscal year 2000, payments for 227 approved claims amounting to about $19.2 million were delayed. Subsequently, on December 21, 2000, the President signed into law an appropriation of $10.8 million for the Trust Fund, with the stipulation that the money was only to be used to pay applicants who qualified under RECA as it existed on June 1, 2000, prior to the RECA 2000 Amendments. As of June 2001, according to RECP, 70 of the 227 delayed payments from fiscal year 2000 have been made--this amounted to about $5.2 million. On July 24, 2001, the President signed into law a supplemental appropriations act, which provided the Trust Fund with ". . . such funds as may be necessary. . . ." to pay approved claims through the end of fiscal year 2001. The RECA legislation requires that applications be processed within 1 year. As shown in table 4, about 89 percent of the applications were processed within 12 months. According to RECP officials, applicants may request additional time to submit more documentation to support their claims. We could not readily determine how many of the 692 applications that were not processed within 1 year were due to such requests. Processing times for claims differed among the three applicant types. Our analysis of information from the case histories database showed that for fiscal years 1992 through 2000 the average processing time from the date the application was filed until its disposition was 269 days for uranium miner employee-based claims, 190 days for downwinders-based claims, and 245 days for onsite participant-based claims. As shown in table 5, the average processing times for approved and denied applications varied by application type from fiscal year 1992 through fiscal year 2000. RECP attributed fluctuations in the time required to process claims to the unique characteristics associated with each claim and the different factors involved in the review and application of the law for the three claims categories. RECP told us that since the inception of the program, its policy has been to assist claimants in any way that it can. In addition, rather than denying a claim, RECP said that it allows the claimant additional time to provide corroborating documentation. RECP cited other reasons for delays in processing claims, including RECP's need, in certain cases, to gather medical records to address the statutory restrictions on certain compensable diseases and in other cases to gather the documentation necessary to establish that the victim meets the radiation exposure eligibility requirements. RECP said that in these instances, staff would conduct additional research on behalf of the claimant or allow the claimant more time to provide the proof necessary to establish exposure. Justice processed and adjudicated 496 claims that were subsequently refiled. On average, these 496 claims were initially processed and adjudicated within 317 days. For those claims that were refiled for the first time, RECP took on average 258 days to process and adjudicate them. Furthermore, for those 21 claims refiled for a second time, RECP took on average 212 days to process and adjudicate them. When denied RECA claims were administratively appealed to Justice, Justice took on average 115 days to process and adjudicate appealed claims when it affirmed the denials and 262 days when it reversed the denials. As shown in table 6, RECP's FTE staff levels and administrative costs have fluctuated from the first full year of the program in fiscal year 1993 through the end of fiscal year 2000. In fiscal year 2000, RECP employed a staff of 11.1 FTEs. Administrative costs were $2.1 million in fiscal year 1993, $1.1 million in fiscal year 1999, and $1.3 million for fiscal year 2000. Costs as measured by the average number of applications processed per FTE staff member and the average administrative cost for processing each application has shown substantial variation for fiscal years 1993 through 2000. The average number of applications processed per FTE ranged from 61 in fiscal year 1998 to 210 in fiscal year 1993. The average cost for processing applications per FTE ranged from $725 in fiscal year 1993 to $1,667 in fiscal year 1998. RECP officials said that the average cost for processing RECA applications fluctuated because many of the claims RECP received when the program began in 1992 were more complete than those received later. RECP officials told us that these later claims were typically far more complex than those initially processed, and RECP staff spent more time in assisting claimants with establishing eligibility. RECP officials told us that as a result of the RECA 2000 amendments, claims are being received at a record pace, far exceeding even the initial phase of operations in 1992. The officials said that RECP has also received an unprecedented number of telephone and written inquiries and requests for claim forms, program information, and information regarding the status of claims. According to RECP officials, staff responding to a significant number of inquiries regarding the status of funding to pay approved RECA claims has stretched RECP's operational resources further. The officials told us that, to date, RECP has not received an increase in administrative funds to accommodate its increased workload. Justice has procedures in place to certify that funds are appropriately disbursed from the Trust Fund. Our review of the payment documentation for 30 randomly selected RECA cases, where compensation was awarded, indicated that all payments were made as authorized. According to the law, moneys on deposit in the Trust Fund are to be used solely to pay compensation to eligible RECA claimants. Treasury is to disburse payments from the Trust Fund on the basis of authorization and certification from Justice. Justice has established procedures for authorizing and certifying the payment of awarded claims from the Trust Fund. When a claim is approved, according to Justice officials, RECP authorizes payment to the eligible applicants. OPB&E obligates the funds, and JMD certifies the approved claim for payment on the basis of the supporting documents. JMD then electronically submits a request for payment to Treasury's Disbursement Center. Treasury confirms to JMD on a daily basis that it has received the request and made payment as directed. A JMD official told us that payment is generally made within 24 hours of JMD's electronic submission. At the end of each month, Treasury sends a list of disbursements made for that month back to JMD, which then reconciles the list with its own records. On the basis of our review of a random sample of 30 of the approximately 1,592 RECA payments made from fiscal years 1996 through 2000 where compensation was awarded by RECP (from the Trust Fund) to eligible individuals, we found that the payments were made as authorized to these individuals. We obtained and examined the financial authorization and certification documents for each of these 30 RECA payments from OPB&E. Using these documents, we traced RECA payments from authorization by RECP, through obligation by OPB&E, certification by JMD, and disbursement by Treasury. The monthly list of disbursements submitted by Treasury to JMD contains the schedule payment numbers for both electronic direct deposit and Treasury payments and also the Treasury check number. Financial summary information from this database allowed us to verify that all payments from our sample were made as authorized. As a result, at the 95-percent level of statistical confidence, we estimate that no more than 9 percent of the approximately 1,592 individual payments from which the sample was drawn could have resulted in unauthorized payments. To identify and inform people of their potential eligibility for compensation under the program and to help them apply for compensation, RECP engages in three primary outreach activities. We spoke with 11 organizations that assist potential RECA claimants. These groups had mixed comments about the extent of RECP's outreach efforts. RECP has established an Internet website, conducts onsite visits, and operates a toll-free telephone number for program queries. Internet website--According to RECP officials, the Internet website was launched in November 1999 and is linked to Justice's main website. Claimants can download background information about RECA and related programs, statistical information dealing with awards and payments, and application forms. Claimants can also e-mail questions and requests for information through the website. In calendar year 2000, there were 3,727 "hits" to the RECP website. Onsite visits--Based on a review of travel records, RECP officials have identified at least 36 outreach-related onsite visits that they have made from fiscal years 1992 through 2000. The officials told us that in many cases they did not maintain historical records of the specific organizations or groups they visited or the nature of their outreach activities during these visits. However, the summary information that RECP was able to provide shows that these onsite visits were primarily made to the five western states covered under the act--Arizona, Colorado, Nevada, New Mexico, and Utah. To inform potential applicants of planned onsite visits, officials told us that they place advertisements on local radio stations and in local newspapers. During these visits, the officials provide candidates with program regulations, instruction booklets, and applications. The officials told us that they explain the program, the application process, and assist the candidates with completing the forms. RECP does not produce any leaflets, flyers, or brochures that explain the RECA program for public distribution. Toll-free telephone Number--RECP maintains a toll-free number for queries about the program and assigns a staff member and two alternates to answer the telephone. RECP officials told us that contract personnel assist with answering the telephone and routing the calls to the appropriate staff members. According to RECP officials, the toll-free number is included on RECP correspondence, applications, instruction booklets, and the website, and it is also provided to potential applicants by health-related organizations that may come into contact with them. Over the life of the program, most of the queries have dealt with requests for claims forms and the status of claims in process. RECP officials told us that they initiated their outreach activities in 1991, when they announced through press releases that RECP would be conducting town hall meetings at various sites in Colorado, Nevada, Utah, and Wyoming. RECP said that these first outreach meetings were an attempt to reach wide audiences and inform them about RECA. Also, RECP told us that they compiled mailing lists from meeting attendance sheets, which were later used as the basis for mailing claims applications packages to the meeting participants. According to RECP officials, because a large percentage of the uranium mine employee population were members of the Navajo Nation and because of the language and cultural barriers, RECP began to focus its outreach efforts on the Navajo Nation. RECP told us that from mid-1992 through mid-1994, RECP staff went out to various chapter houses of the Navajo Nation in Arizona and New Mexico to conduct outreach meetings. The attendance at these meetings varied from as few as 20 people up to 100 people. The RECP officials informed us that in May 1994, RECP staff set up an office at the facilities of the Office of Navajo Uranium Mine Workers in Shiprock, New Mexico. They said that this outreach office was used by RECP until 1997. During this time, according to the officials, RECP outreach efforts were concentrated in Shiprock and at the various Navajo Nation fairs in Arizona and New Mexico. According to RECP officials, they have also contacted organizations such as the Health and Human Services' National Institute of Occupational Safety and Health; St. Mary's Hospital in Grand Junction, Colorado; the University of New Mexico Health Clinic in Albuquerque, New Mexico; and the Miners' Colfax Medical Center in Raton, New Mexico, to help publicize the program. Program officials also reported that since RECP's inception, they have publicized the program through press releases. We conducted structured telephone interviews with representatives from 11 NGOs that are involved with RECA-related activities in order to gather their views on RECP's outreach efforts. The NGOs that we contacted included medical research institutes, Native American assistance groups, an atomic veteran's association, a uranium workers council, a RECA reform coalition, an association of radiation survivors, and downwinders' associations. Our interviews focused on the NGOs' experiences with respect to RECP's outreach efforts to inform potential applicants about the program and how helpful RECP was in assisting claimants with the application process. The NGOs were generally mixed in their comments about RECP's efforts to inform them about the compensation program. Five of the 11 NGOs told us that RECP had made an effort to inform them about potential eligibility for compensation under the program, but 8 of the 11 said that RECP had made no attempt to coordinate its outreach efforts with their organizations. Six of the groups said that RECP had succeeded in informing potential claimants about the program from some extent to a great extent. Five groups said that RECP was somewhat to very responsive to their written requests for information. Eight groups said that RECP was somewhat to very responsive to their telephone calls. Four groups told us that RECP was somewhat to very responsive to their e-mail queries. Eight organizations were familiar RECP's website and had used the website to gather general program information and six used the website to obtain claims applications. The NGOs' views of RECP's efforts to assist potential claimants with the application process also varied. Six of the organizations believed that RECP was of little to no help in explaining the requirements for documentation to substantiate applicant claims, but five believed that RECP was generally to very helpful. However, six organizations claimed that RECP was somewhat to very helpful in explaining the eligibility criteria for RECA compensation, while four believed that RECP was not very helpful. Regarding our telephone interviews with the NGOs, RECP officials told us that they are looking into the concerns the NGOs raised and are actively exploring new techniques for meeting the needs of claimants and others interested in the program. We provided a draft of this report to the Attorney General for review and comment. On August 28, 2001, we met with a Department of Justice RECP official (an Assistant Director of the Civil Division's Torts Branch), who provided us with consolidated comments from RECP. The Assistant Director said that RECP generally agreed with our draft report. In addition, the Assistant Director provided technical comments, which have been incorporated in this report where appropriate. Copies of this report are being sent to the Attorney General; the Director, Office of Management and Budget; and any other interested parties. We will also make copies available to others upon request. If you or your staffs have any questions about this report, please contact James M. Blume or me at (202) 512-8777 or at [email protected]. Key contributors to this report are acknowledged in appendix II. Applicants whose claims are denied may refile their applications with Justice's Radiation Compensation Program (RECP), appeal the denial to a separate official within Justice's Civil Division, or appeal the denial in U.S. district courts. Claimants who choose to refile must provide documentation to correct the deficiency previously noted by RECP. Also, according to RECP, claims may be refiled by providing documentation to establish eligibility (1) as a result of regulatory or legislative changes to eligibility requirements subsequent to the denied application (e.g., changes mandated by the Radiation Exposure Compensation Amendments of 2000 and/or those required by the July 1, 1999, Attorney General regulations), or (2) under a different claim category (e.g., filing a downwinder-based claim after being denied compensation on an onsite participant-based claim). Our analysis of the RECA case-related information from the case histories database showed that from April 1992 through the end of fiscal year 2000, a total of 496 applicants refiled claims--395 were uranium mine employee- based claims, 70 were downwinder-based claims, and 31 were onsite participant-based claims. Of these refiled claims, 250 were awarded compensation, 116 were denied compensation, and the remaining 130 were still pending resolution, at the time of our analysis. Of the 116 denied claims, 28 applicants refiled for a second time--all of these were uranium mine employee-based claims. Of the 28 denied claims, 21 were awarded compensation and the remaining 7 were still pending at the time of our review. Applicants may also administratively appeal denied claims to a separate official (an Appeals Officer) within the Department of Justice's Civil Division. The applicants must do so within 60 days of the denial. Of the 3,568 claims denied by RECP, 710 (or about 20 percent) of the applicants administratively appealed the decision to Justice, as shown in table 7. In 553 of these cases (or 78 percent of the cases), the Appeals Officer affirmed the denials. Uranium miner claimants represented about 47 percent of the administratively appealed cases, downwinders about 31 percent, and onsite participants the remaining 22 percent. The denials were affirmed upon appeal for the vast majority of these cases. According to RECP, once claimants exhaust their administrative remedies within Justice, they may appeal their cases in U.S. district courts. RECP records showed that from program inception in 1992 through July 3, 2001, eight claims denied by RECP have been appealed to the district courts. Two of these appeals were consolidated into one court case. The courts affirmed RECP's denials in three of the seven cases and remanded three of the cases back to RECP for readjudication. RECP again denied one of these three remanded cases, approved the claim in the second case, and the third case was still pending RECP review, as of July 3, 2001. In the seventh case, RECP reassessed and approved the claim. Michael G. Kassack, Bethany L. Letiecq, David P. Alexander, E. Anne Laffoon, Geoffrey R. Hamilton, Robert C. DeRoy, and Bassel Alloush made key contributions to this report.
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From 1945 through 1962, the United States conducted a series of aboveground atomic weapons tests. Many people exposed to radiation from this nuclear weapons testing program later developed serious diseases, including cancer. To begin the process of making partial restitution to these victims, the President signed into law the Radiation Exposure Compensation Act (RECA) in 1990. RECA established the Radiation Exposure Compensation Trust Fund (Trust Fund), criteria for determining claimant eligibility for compensation, and a program (administered by the Attorney General) to process and adjudicate claims under the act. The Department of Justice (DOJ) established the Radiation Exposure Compensation Program (RECP) within its Civil Division to administer its responsibilities under the act. Through the end of fiscal year 2000, RECP received 7,819 applications for compensation. Roughly equal numbers of applications have been approved and denied, awarding compensation to about 46 percent of the claimants and denying compensation to about 46 percent. RECA claims are most often denied because the victim's disease is not eligible for compensation under the RECA program. The costs for administering RECP have fluctuated from the first full year of program implementation, fiscal year 1993, through fiscal year 2000. For example, administrative costs were $2.1 million in fiscal year 1993 and $1.3 million in fiscal year 2000. DOJ has procedures in place to certify that funds are appropriately disbursed from the Trust Fund. A review of the payment documentation for 30 randomly selected RECA cases in which compensation was awarded indicated that all payments were made as authorized. To identify and inform candidates of their potential eligibility for compensation under the program and to help them apply for funds, RECP engages in three primary outreach programs. The program has established an Internet website, conducts onsite visits to groups and organizations to promote the program, and operates a toll-free telephone line for program queries.
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U.S. troops were reportedly exposed before, during, and after the Gulf War to a variety of potentially hazardous substances. These substances include decontaminating and protective compounds used without proper safeguards (particularly decontaminating solution 2, or DS2, and chemical agent resistant coating); diesel fuel used as a sand suppressant in and around encampments, fuel oil used to burn human waste; fuel in shower water; and leaded vehicle exhaust used to dry sleeping bags. Other potential hazards included infectious diseases (most prominently leishmaniasis, a parasitic infection); pyridostigmine bromide and vaccines (to protect against chemical and biological weapons); depleted uranium (contained in certain ammunition and in residues from the use of this ammunition); pesticides and insect repellents, chemical and biological warfare agents; and compounds and particulate matter contained in the extensive smoke from the oil-well fires at the end of the war. Over 100,000 of the approximately 700,000 Gulf War veterans have participated in health examination programs that the Department of Defense (DOD) and the Department of Veterans Affairs (VA) established between 1992 and 1994. Of those veterans examined by DOD and VA, nearly 90 percent have reported a wide array of health complaints and disabling conditions, including fatigue, muscle and joint pain, gastrointestinal complaints, headaches, depression, neurologic and neurocognitive impairments, memory loss, shortness of breath, and sleep disturbances. Some of the veterans fear that they are suffering from chronic disabling conditions because of exposure during the war to substances with known or suspected health effects. The federal government, primarily through DOD and VA, has sponsored a variety of research on Gulf War veterans' illnesses. DOD's research is one component of a broader agenda coordinated under the aegis of the Persian Gulf Veterans' Coordinating Board (PGVCB), which comprises the Secretaries of the Department of Health and Human Services, VA, and DOD. The details of this agenda are described in the PGVCB publication entitled A Working Plan for Research on Persian Gulf Veterans' Illnesses. This agenda was developed in response to an Institute of Medicine conclusion that the DOD and VA should determine specific research questions that need to be answered and design epidemiologic research to these questions. Accordingly, most of the research sponsored under this agenda is characterized by PGVCB as epidemiological. The objectives of epidemiologic research are to determine the extent of diseases and illness in the population or subpopulations, the causes of disease and its modes of transmission, the natural history of disease, and the basis for developing preventive strategies or interventions. To conduct such research, investigators must follow a few basic generally accepted principles. First, they must specify diagnostic criteria to (1) reliably determine who has the disease or condition being studied and who does not and (2) select appropriate controls (people who do not have the disease or condition). Second, the investigators must have valid and reliable methods of collecting data on the past exposure(s) of those in the study and possible factors that may have caused the symptoms. The need for accurate, dose-specific exposure information is particularly critical when low-level or intermittent exposure to drugs, chemicals, or air pollutants is possible. It is important not only to assess the presence or absence of exposure but also to characterize the intensity and duration of exposure. To the extent that the actual exposure of individuals is misclassified, it is difficult to detect any effects of the exposure. Another means of linking environmental factors to disease is to determine whether or not evidence shows that as the exposure increases, the risk of disease also increases. However, this dose-response pattern can be detected only if the degree of exposure among different groups can be determined. Finally, in addition to specific case definition and dose-specific exposure information with known accuracy, it is important that a sufficient number of persons be studied to have a reasonable likelihood of detecting any relationship between exposures and disease. To the extent that this relationship is subtle or obscured in particular investigations by "loose" case definition (that is, a case definition that is too broad and encompasses different types of illnesses) or problems in measuring exposure, larger samples would be required. For example, the Institute of Medicine noted that "very large groups must be studied in order to identify the small risks associated with low levels of exposure, whereas a relatively small study may be able to detect the effect of heavy or sustained exposure to a toxic substance. In this way, a study's precision or statistical power is also linked to the extent of the exposure and the accuracy of its measurement. Inaccurate assessment of exposure can obscure the existence of such a trend and thus make it less likely that a true risk will be identified." Similarly, if an exposure had an effect only on a particular birth defect for example, this effect might be missed by studying all birth defects as a group. Although Gulf War veterans' health problems began surfacing in the early 1990s, the vast majority of research was not initiated until 1994 or later. And much of that research responded to legislative requirements or external reviewers' recommendations. As noted by external reviewers, since federal research goals and objectives were not identified until 1995, after most research activities had been initiated, the research reflects a rationalization of ongoing activity rather than a research management strategy. The government's 3-year delay complicated the researchers' tasks and limited the amount of completed research available. Of the 91 studies receiving federal funding, over 70 had not been completed at the time of our review. The results of some studies will not be available until after 2000. By the time research was accelerated and broadened, opportunities had been missed to collect critical data that researchers cannot accurately reconstruct. Even efforts to measure the chemical content of the oil-fire smoke, begun only 2 months after the fires began burning, were initiated after most troops had left the affected areas and the climatological dynamics were different. Consequently, researchers had to use statistical models of the behavior of smoke plumes in order to infer the ground-level exposures experienced by the large numbers of troops who had departed by the time they began collecting data. Even if such models could accurately explain the behavior of the smoke plumes, they had not been validated as measures of individual exposure, and their accuracy for this purpose could not be presumed. Similar and even more serious problems were caused in the measurement of other exposures by the failure to collect data promptly and maintain adequate records. The delay in starting research has also hindered accurate reporting of exposures by Gulf War veterans. At the time of our review, 6 years after the war ended, questionnaires were being distributed requesting information from veterans on their exposures to certain agents during the war. Early federal research appeared to emphasize risks associated with psychological factors such as stress. To support this emphasis, DOD pointed out that the psychological state of mind can influence physical well-being. DOD also pointed to a recent argument that from the American Civil War onward (and perhaps even earlier), a small number of veterans have reacted to the stress of war by suffering symptoms similar to those reported by some Gulf War veterans. Of the 19 studies initiated before 1994, roughly half focused on exposures to stress or the potential for posttraumatic stress disorder (PTSD) among returning troops. As late as December 1996, the Presidential Advisory Committee noted that "stress is the risk factor funded for the greatest fraction of total - 32 studies (30 percent)." While research on exposures to stress received early emphasis, other hypotheses have received scant support. In its Final Report, the Institute of Medicine discusses the evidence for a number of disease hypotheses, including multiple chemical sensitivity, fibromyalgia, and organophosphate-induced delayed neuropathy. However, the federal research program has supported only one study of the relationship between symptoms reported by veterans and fibromyalgia. In addition, prior to October 1996, only one of the studies initiated in response to Gulf War veterans' illnesses focused on the health effects of potential exposures to chemical warfare agents. While multiple studies of the role of stress in the veterans' illnesses have been supported with federal research dollars, other hypotheses have been pursued largely outside the federal research program. Although veterans raised concerns about potential chemical exposures soon after the war, the federal research plan was not modified to include an investigation of these concerns until 1996, when DOD acknowledged potential exposures to chemical agents at Khamisiyah, Iraq. The failure to fund such research cannot be traced to an absence of investigator-initiated submissions. According to DOD officials, three recently funded proposals on low-level chemical exposure had previously been rejected. A substantial body of research suggests that low-level exposures to chemical warfare agents or chemically related compounds, such as certain pesticides, are associated with delayed or long-term health effects. For example, abundant evidence from animal experiments, studies of accidental human exposures, and epidemiologic studies of humans shows that low-level exposures to certain organophosphorus compounds, including sarin nerve agents to which our troops may have been exposed, can cause delayed, chronic neurotoxic effects. This syndrome is characterized by clinical signs and symptoms manifested 4 to 21 days after exposure to organophosphate compounds. The symptoms of delayed neurotoxicity can take at least two forms: (1) a single large dose may cause nerve damage with paralysis and later spastic movement and (2) repetitive low doses may damage the brain, causing impaired concentration and memory, depression, fatigue, and irritability. These delayed symptoms may be permanent. As early as the 1950s, studies demonstrated that repeated oral and subcutaneous exposures to neurotoxic organophosphates produced delayed neurotoxic effects in rats and mice. In addition, German personnel who were exposed to nerve agents during World War II displayed signs and symptoms of neurological problems even 5 to 10 years after their last exposure. Long-term abnormal neurological and psychiatric symptoms as well as disturbed brain wave patterns have also been seen in workers exposed to sarin in sarin manufacturing plants. The same abnormal brain wave disturbances were produced experimentally in primates by exposing them to low doses of sarin. Delayed, chronic neurotoxic effects were also seen in animal experiments after the administration of organophosphates. These effects include difficulty in walking and paralysis. In recent experiments, animals given a low dosage of the nerve agent sarin for 10 days showed no signs of immediate illness but developed delayed chronic neurotoxicity after 2 weeks. It has been suggested that the ill-defined symptoms experienced by Gulf War veterans may be due in part to organophosphate-induced delayed neuropathy. This hypothesis was tested in a privately supported epidemiological study of Gulf War veterans. In addition to clarifying the patterns among veterans' symptoms by use of statistical factor analysis, this study concluded that vague symptoms of the ill veterans are associated with objective brain and nerve damage compatible with the known chronic effects of exposures to low levels of organophosphates. It further linked the veterans' illnesses to exposure to combinations of chemicals, including nerve agents, pesticides in flea collars; DEET and highly concentrated insect repellents; and pyridostigmine bromide tablets. Finally, research that we reviewed also indicates that agents like pyridostigmine bromide, which some Gulf War veterans took to protect themselves against the immediate, life-threatening effects of nerve agents, may alter the metabolism of organophosphates in ways that activate their delayed, chronic effects on the brain. Moreover, exposure to combinations of organophosphates and related chemicals like pyridostigmine or DEET has been shown in animal studies to be far more likely to cause morbidity and mortality than any of the chemicals acting alone. Despite the fact that in 1994, Congress directed DOD and VA to research treatments for ailing Gulf War veterans, such research has largely not taken place. While 61 of the 91 federally sponsored studies (67 percent) were classified as epidemiological by the PGVCB, only three of the studies had focused primarily on identification and improvement of treatments for these illnesses. Our review indicated that most of the epidemiological studies have been hampered by data problems and methodological limitations and consequently may not provide conclusive answers in response to their stated objectives, particularly in identifying risk factors or potential causes. The research program to answer basic questions about the illnesses that afflict Gulf War veterans has at least three major problems in linking exposures to observed illness or symptoms. First, it is extremely difficult to gather information about unplanned exposures (for example, oil-fire smoke and insects) that may have occurred in the Gulf. And DOD has acknowledged that records of planned or intentional exposures (for example, the use of vaccines and pyridostigmine bromide to protect against chemical/biological warfare agents) were inadequate. Second, the veterans were typically exposed to a wide array of agents with commonly accepted health effects, making it difficult to isolate and characterize the effects of individual factors or to study their combined effects. Third, the passage of time following these exposures has made it increasingly difficult to have confidence in any information gathered through retrospective questioning of veterans. In part, the latter difficulty was created by the delayed release of information about detection of chemical warfare agents during the war as well as the delayed collection of exposure data. Five years passed before DOD acknowledged that American soldiers may have been exposed to chemical warfare agents shortly after the war ended in 1991 (at the Khamisiyah site). Moreover, although chemical detections by Czech forces are regarded as valid by DOD, the origin of the detected chemical agents has not been identified by either DOD or the Central Intelligence Agency (CIA). In the face of denials by DOD officials, several researchers told us that they had considered it pointless to pursue hypotheses that the symptoms may have been associated with exposures to chemical weapons. When we asked investigators responsible for federally funded epidemiological research how they were collecting data on the various elements to which Gulf veterans may have been exposed, they indicated that they had no means other than self-reports for measuring most of these elements. This reliance on self-reports was not much less for elements such as vaccines, for which the opportunity for record keeping clearly existed. Two problems are associated with reliance on self-reports for exposure assessments. First, recalled information may be inaccurate or biased after such a long time period; that is, some veterans may not remember that they were exposed to particular factors, while others may not have been exposed but nonetheless inaccurately report that they were. Information also may be biased if, for example, veterans who became sick following the war recalled their exposures earlier, more often, or differently from veterans who had not become sick. Second, there is often no straightforward way to test the validity of self-reported exposure information, making it impossible to separate bias from actual differences in exposure frequency. Several investigators were also relying on a model developed by the U.S. Army Environmental Hygiene Agency for assessing exposures to components of oil-fire smoke through the combination of unit location data with information from models of the distribution of oil-fire smoke. However, this model requires the use of unit location as a proxy for exposure, and the validity of this approach is unknown. The Presidential Advisory Committee has noted, "DOD's Persian Gulf Registry of Unit Locations lacks the precision and detail necessary to be an effective tool for the investigation of exposure incidents." Another major hurdle to the development of a successful research agenda has been the difficulty in classifying symptoms into one or more distinct illnesses. Some veterans complain of gastrointestinal pain, others report musculoskeletal pain or weakness, and still others report emotional or neurological symptoms. As explained previously, development of one or more specific case definition is essential to conducting certain types of epidemiological studies. The VA collected some data on symptoms beginning in 1992 with the initiation of its registry. However, these efforts to collect information about symptoms and exposures from registry participants were limited and nonspecific. This constrained VA's potential use of the information for improving understanding of the patterns of veterans' complaints. These data limitations were unfortunate, as detailed information about symptoms and exposures might have yielded earlier, more reliable analyses of the nature and causes of veterans' complaints and could have also assisted in developing working case definitions. We also found that both the federally supported projects and the federal registry programs have generally failed to study the conjunction of multiple symptoms in individual veterans. Articles and briefing documents that we obtained from DOD and VA reported findings that addressed only the incidence of single symptoms and diagnoses. There were two exceptions. First, for an Air National Guard unit in Pennsylvania, the Center for Disease Control and Prevention developed an operational case definition, which was quite similar to the case definition of chronic fatigue syndrome. Second, the studies conducted by Haley et al. also focused on identifying symptom clusters. For those ongoing, epidemiological studies that were built on case-control designs, we asked about how a case was defined. The specificity of this definition is important because a vague case definition can lead to considering multiple kinds of illnesses together. When this is done, it is not surprising to find no commonality of experience among the cases. Moreover, the use of specific case definition is particularly critical to achieving meaningful results within this type of research design. At the same time, for the case definition to be relevant, it must fit the symptoms described by an important portion of the group being studied. Most of the investigators we interviewed took steps to estimate the size of the sample they would require to have a reasonable expectation of detecting the effects of exposures to hazardous substances. However, many other variables were involved in such calculations, for example, the prevalence of exposures, some of which were unknown at the time the studies were planned. Thus, they had to make estimates within somewhat broad parameters. Although steps were clearly taken to plan for an adequate sample size, some investigators reported difficulty in locating subjects due to factors beyond their control, such as the rate of referrals from VA examination centers or the rate of identification of subjects that fit highly specific case definitions. Moreover, other studies, such as those on specific birth defects, required extremely large samples. The ongoing epidemiological research cannot provide precise, accurate, and conclusive answers regarding the causes of veterans' illnesses because of researchers' methodological problems as well as the following: Researchers have found it extremely difficult to gather information about many key exposures. For example, medical records of the use of pyridostigmine bromide tablets and vaccinations to protect against chemical/biological warfare exposures were inadequate. Gulf War veterans were typically exposed to a wide array of agents, making it difficult to isolate and characterize the effects of individual agents or to study their combined effects. Most of the epidemiological studies on Gulf War veterans' illnesses have relied only on self-reports for measuring most of the agents to which veterans might have been exposed. The information gathered from Gulf War veterans years after the war may be inaccurate or biased. There is often no straightforward way to test the validity of self-reported exposure information, making it impossible to separate bias in recalled information from actual differences in the frequency of exposures. As a result, findings from these studies may be spurious or equivocal. Classifying Gulf War veterans' symptoms and identifying their illnesses have been difficult. From the outset, the symptoms reported have been varied and difficult to classify into one or more distinct groups. Moreover, several different diagnoses might provide plausible explanations for some of the specific health complaints. It has thus been difficult to develop one or more working case definitions to describe veterans undiagnosed complaints. Because of the numbers of veterans who have experienced illnesses that might be related to their service during the Gulf War, we recommended in our report that the Secretary of Defense, with the Secretary of Veterans Affairs, give greater priority to research on effective treatment for ill veterans and on low-level exposures to chemicals and other agents as well as their interactive effects and less priority to further epidemiological studies. Mr. Chairman, that concludes my prepared remarks. I will be happy to answer any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed its evaluation of the federal strategy to research Gulf War illnesses. GAO noted that: (1) the government was not proactive in researching Gulf War illnesses; (2) the government's early research emphasized stress as a cause for Gulf War veterans' illnesses and gave other hypotheses, such as multiple chemical sensitivity, little attention; (3) in contrast, the private sector pursued research on the health effects of low-level exposures to certain chemical warfare agents or industrial chemical compounds; (4) government research used an epidemiological approach, but little research on treatment was funded; and (5) most of the ongoing epidemiological research focusing on the prevalence or causes of Gulf War-related illnesses will not provide conclusive answers, particularly in identifying risk factors or potential causes due to formidable methodological and data problems.
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The Iraq Liberation Act of 1998 authorized U.S. assistance to support a transition to democracy in Iraq in key areas, including radio and television broadcasting. In 1999 President Clinton designated the Iraqi National Congress (INC) as eligible to receive assistance under the act. INC was formed in the early 1990s when the two main Kurdish militias--the Kurdistan Democratic Party and the Patriotic Union of Kurdistan-- participated in a June 1992 meeting of dozens of opposition groups in Vienna. INC subsequently developed into a broad-based coalition of political organizations opposed to Saddam Hussein. In 1999, INCSF was established as a foundation to provide support to INC and to provide an organizational structure for State's funding of INC. A seven-member board of directors (the INC Leadership Council) governed INCSF. INCSF was headquartered in London, England, until the end of the war, when its operations were relocated to Baghdad. During its cooperative agreements with State, INCSF also maintained field offices in Washington, D.C.; Damascus, Syria; and Tehran, Iran. In April and May 2003, INCSF began the process of relocating its offices to Baghdad. From the beginning of its relationship with State, INCSF's plans for broadcasting into Iraq represented one of its major initiatives, along with plans for resuming publication of a newspaper INC had established in 1992, participating in Department of Defense training programs, and establishing humanitarian and information collection programs. INCSF envisioned radio as a key medium for the dissemination of information to the Iraqi people. It planned to reestablish Radio Hurriah and have a signal receivable in Iraq by early 2001. To expand the area of coverage, INCSF also planned to purchase a high-power transmitter in Iraq. Radio broadcasting was to focus on news, current affairs, and programs dedicated to democracy and human rights. Based on its prior television experience (from August 1993 to August 1996, INC operated a television production and transmission facility in Iraqi Kurdistan), INCSF's plans for Liberty TV included setting up a studio in London and using satellite equipment to broadcast directly to Iraq. Planned programming included news, current affairs, and programs censored by the regime in Baghdad. Beginning in March 2000, State entered into a series of cooperative agreements with INCSF that included funding totaling nearly $33 million as of September 2003, but most of this funding came under agreements and amendments provided at irregular intervals, involved some retroactive funding, and were short-term and thus affected INCSF's ability to broadcast. Table 1 describes State's cooperative agreements with INCSF in further detail. Agreement 1 laid the groundwork for initial planning, and Agreement 2 described what INCSF hoped to achieve in the broadcasting area. These goals included (1) setting up a satellite television facility in London to broadcast directly into Iraq and (2) planning and preparing to resume broadcasting of Radio Hurriah from inside Iraq and via satellite and the Internet. From March 2000 through May 2002, State provided about $17 million to INCSF through the first two cooperative agreements and amendments and Agreement 3 (the 2-month "bridge grant" for April and May 2002). Of this $17 million, only limited funding was for Radio Hurriah, largely because an acceptable location for a transmitter could not be found. About $5 million was earmarked for Liberty TV broadcasting activities, which included hiring staff and establishing studio operations. Liberty TV broadcasting actually began in August 2001. However, upon becoming operational, Liberty TV encountered technical problems that forced it to broadcast from the United States based on a signal transfer from London. Liberty TV had goals of original broadcasting for 24 hours a day, but at the peak of its operations it only had original broadcasts of 4 hours. It went off the air on May 1, 2002, because of funding disputes between State and INCSF which, according to an INCSF representative, left the INCSF seriously short of funds to pay its bills. After the bridge grant expired on May 31, 2002, State and INCSF did not conclude a new agreement until November 2002. Funding in that new cooperative agreement (Agreement 4) and its amendments included about $4.67 million for (1) restarting Liberty TV and (2) "pre-award" costs incurred by INCSF for the period not under the agreement, including salaries for Liberty TV staff retained by INCSF. In the course of the relationship between the two parties, State several times offered INCSF longer-term agreements that INCSF would not accept. For example, for the period March 2000 through February 2001, State and INCSF had concluded the first two cooperative agreements totaling about $4.27 million. In April 2001, as an alternative to short-term amendments to Agreement 2, INCSF requested a new 5-month agreement totaling $29 million that included funding for 24-hours-a-day satellite television broadcasting, installation of a small transmitter in Iraq, and 24-hours-a-day radio broadcasting from inside Iraq. State rejected the proposal. Similarly, in September 2001, INCSF requested $23 million over 5 months. According to the proposal, Liberty TV operations would be expanded to 24 hours a day, and radio operations would be initiated via a transmitter inside Iraq. State rejected INCSF's proposal but in late September 2001 made a counteroffer of $8 million for a 5-month cooperative agreement. State renewed the same offer in early November 2001. While emphasizing that it was not prepared to fund INCSF activities inside Iraq, State did offer to fund a series of activities, including publication of the newspaper, satellite TV broadcasting, information collection analysis, and startup of radio broadcasting using a transmitter based in Iran. INCSF declined State's offer. Three main concerns affected State's funding decisions for INCSF and thwarted the parties' ability to negotiate and conclude long-term funding agreements: concerns over INCSF's financial management and accountability based largely on the results of audits of INCSF; the desire of INCSF to operate inside Iraq, which was inconsistent with U.S. policy; and State's increasing concerns about the appropriateness and merits of funding INCSF's information collection program. State officials acknowledged that the use of frequent short-term amendments to the cooperative agreements, plus the substantial period of time that an agreement was not in force in 2002, significantly complicated management of the program and made it difficult for INCSF to accomplish its objectives. However, State officials said that these arrangements were necessary in view of the financial management, policy, and operational issues that arose during the program. INCSF repeatedly claimed that the short-term nature of State's funding led to financial problems in the organization and disrupted Liberty TV's ability to pay its bills. In the very early stages of State's agreements with INCSF, State received strong indications that INCSF had inadequate controls over cash transfers. For example, in 2000, a CPA firm reviewed INCSF's controls as part of Agreement 1. The review identified concerns about INCSF's travel reimbursement procedures, use of non-U.S. flag-carriers, and its cash payment practices. Also that year, State notified INCSF that it needed to rectify certain compliance issues before it could draw down funds. These issues included INCSF's lack of proper documentation to support expenditures and the questionable use of cash payments. In early 2001, another CPA audit examined INCSF's operations as part of State's agreements and identified significant noncompliance and control issues affecting implementation of Agreement 2. According to a State document, the auditor "appear to confirm what we suspected--that the INCSF is not complying with the myriad of regulations that grantees are required to comply with." Concern grew in State that there were serious mishandling of money issues that needed to be examined in INCSF to avoid a potentially embarrassing situation for the administration and for State. In early 2001, some allegations about fraud within INCSF also circulated within State. State's concerns about accountability and the potential for misuse of funds led to an audit of INCSF by State's Office of the Inspector General (OIG) in mid- 2001. The OIG audit covered the initial $4.3 million in awards to INCSF under Agreements 1 and 2. The OIG found serious financial management and internal control weaknesses, particularly in the cash management aspects of INCSF's information collection program. The OIG also found that INCSF had an inadequate accounting and financial management structure, insufficient accounting staff, and inadequate banking procedures and that State had not created a total budget for the second cooperative agreement incorporating the funding that had been awarded to the INCSF up to that point. The OIG questioned approximately $2.2 million in INCSF costs. As a result, the OIG recommended that State withhold, or at least restrict, future funding to INCSF until it implemented adequate and transparent financial controls. The OIG also recommended that INCSF acquire expert financial management assistance to set up a standardized accounting system, hire a financial officer, establish cash management procedures, develop written accounting policies and procedures, and incorporate into its agreements with State a budget that accurately reflected approved costs. Although several accounting and internal control weaknesses were identified, OIG officials said that they found no evidence concerning the prior accusations of fraud. An INCSF representative acknowledged that it had financial management and accountability weaknesses in the early stages of the agreements. However, the representative believed that INCSF made significant improvements in late 2001 and early 2002 to correct the weaknesses and to respond to the OIG audit. OIG officials said that their audits of INCSF were done in accordance with generally accepted government audit standards and that their work was similar to other grant and cooperative agreement audits they had conducted. From the beginning of its relationship with INCSF, State had policy concerns that ultimately affected funding decisions and plans for several programs, including Radio Hurriah and Liberty TV. At the beginning of the cooperative agreements with INCSF, State officials said that the U.S. government had adopted a general policy of prohibiting INCSF operations inside Iraq. State officials said that the presence of U.S.-funded INCSF staff within Iraq could open the door to potentially disastrous diplomatic situations if INCSF operatives were caught and/or killed by Iraqi troops. INCSF resisted this policy. From INCSF's perspective, working inside Iraq was vital for the success of many of its programs. To begin radio broadcasting inside Iraq, INCSF wanted to purchase and install a suitable transmission tower within the country. The INCSF also wanted the existing information program to collect data on the Hussein government's military, political, and economic activities for input into its newspaper, Al Mutamar, and for Liberty TV broadcasts. In addition, INCSF believed that elements of that data could be used in its diplomatic activities to reinforce views of the international community that the Hussein government represented a danger to its neighbors. Further, INCSF saw the program as an effort to gather information on the government's alleged weapons of mass destruction programs and its ties with international terrorist groups. However, State maintained its position, refusing to fund radio activities inside Iraq and limiting its funding of information collection to areas outside and bordering Iraq. In commenting on a draft of this report, State noted that, as the grantor, it had entire discretion to determine whether a grant to the INCSF would further and be consistent with U.S. government policies, and to condition any such grant to ensure that it would. State further believed that as a grantee, INCSF was an instrument of U.S. government policy, and, as such, was not in a position to disagree with State on how State's funds could be used. In addition to concerns about operating inside Iraq, State's OIG had questioned the nature of INCSF's information program and its lack of controls over cash transactions, particularly those that were used as part of activities in the field. In State's view, the potential for fraud in an officially State-sponsored program posed a risk that State was not prepared to take. Finally, State officials doubted the value of the information obtained through the program, a claim that the INCSF vigorously disputed. As these financial management and policy issues were emerging, State and INCSF continued their efforts to conclude new long-term agreements, with little success. For example, in fall 2001, State offered INCSF an $8 million agreement for 5 months that would provide television and radio funding but did not fund operations in Iraq. INCSF did not accept State's proposal, largely because it held firm to the position that not letting INCSF operate inside Iraq would result in the disintegration of the organization. In February 2002, INCSF proposed another long-term agreement totaling $37.5 million covering March through December 2002. As part of that proposal, INCSF believed that several elements of INCSF's mission needed to be addressed by both parties, including the lack of a complete INCSF communications strategy without a radio program and the need for a higher-quality television operation. In addition, INCSF believed it was imperative that its information collection program be expanded to ensure timely and reliable intelligence on developments inside Iraq and provide critical information on Saddam's alleged weapons of mass destruction program and involvement in international terrorism. State determined around mid-March that the proposal was incomplete and, because INCSF indicated that it needed funds quickly, recommended that the overall proposal be considered in stages, with the first priority to get current operations in order, including Liberty TV. In late March 2002, State said it stood ready again to discuss a cooperative agreement for 9 months (April through December 2002), with an initial period funded at $3.6 million for 3 months to provide funding continuity until full accord on the elements of the agreement could be achieved. Concerning INCSF's continuing proposals for starting up radio operations, State said that INCSF's proposals were no longer a priority because (1) the Kurdish Democratic Party and the Patriotic Union of Kurdistan opposed the plans and (2) both of those groups operated radio stations in Iraq, and the United States funded its own Radio Free Iraq. INCSF believed that State's response to its proposal called into question State's commitment to a new relationship and its general commitment to the INCSF. Of significant concern to INCSF were State's demands for a short-term (3-month) funding period, as well as its continuing lack of support for a radio station. In lieu of a long-term agreement, State notified INCSF that it planned to award Agreement 3, referred to as the "bridge grant," for 2 months (April through May 2002). State viewed its proposal as an austerity budget that would enable INCSF to get its house in order, including Liberty TV, and notified INCSF that what State considered as cost overruns under the prior grant would be handled with one or more "mop-up" amendments. As discussed below, INCSF regarded its unpaid bills as resulting from a failure on State's part to meet its funding obligations. State's initial proposal for the bridge grant caused great concern in INCSF for several reasons. First, it called for "heightened federal stewardship," including on-site State participation in INCSF's budget management and approval of all costs. INCSF believed that such conditions were unjustified and unacceptable, stating that it had already taken a number of steps to improve financial management consistent with the OIG recommendations. According to INCSF, it had hired internal accounting staff and a management consultant and implemented new and consolidated accounting systems. It also said that new procedures for documenting cash transactions were being installed. According to OIG officials, in a follow-up audit in mid-2002, OIG found that INCSF had taken several steps to implement recommendations for improved financial management and controls but had not fully implemented them. According to OIG officials, limited funding by State contributed to INCSF's difficulties in improving its financial systems. INCSF said that such funding made it difficult for INCSF to pay for implementation of a new accounting system and contributed to delays in making reforms of the foundation's accounting systems. Discussions between the two parties concerning the bridge grant further illuminated the financial issues faced in the program. Specifically, at the end of April 2002, INCSF complained to State that it had been operating for a month without a funding agreement and had incurred a $2 million shortfall. According to INCSF, that shortfall occurred because State had erroneously estimated INCSF's monthly core operating costs at $850,000 to $900,000 during implementation of Agreement 2, whereas INCSF believed it was operating under a previously approved budget with estimated costs of $1.24 million. Implications for Liberty TV were particularly serious. Because of its financial shortcomings, INCSF had received notice that its service provider would terminate service for Liberty TV on April 30 because INCSF had not paid its bills. On May 1, 2002, Liberty TV stopped its broadcasting operations. State subsequently modified its proposal and signed the bridge grant agreement on May 17, awarding $2.4 million for the period April to May 2002 but deleting requirements for its on-site participation in budget management and approval of costs. Although the grant budget included funding for Liberty TV, broadcasting did not resume. INCSF operated without an agreement from June until November 2002, largely due to an impasse between the two parties over the information collection program. At a meeting of top INCSF and State officials in late May 2002, State officials said that the department would no longer fund the information collection program. However, State offered INCSF a new 7- month cooperative agreement totaling $8 million for the period June 10 through the end of 2002 that included about $4.2 million for Liberty TV and represented a substantial increase over the $400,000 per month funding levels previously supported. According to an INCSF representative, INCSF reacted negatively to the proposal for three reasons. First, INCSF negotiators received the proposal in the early morning of May 29, 2002, the day set for U.S./INCSF negotiations and 2 days before the bridge agreement was due to expire. Second, the proposal left INCSF with no funding for operations for the 10 days between the end of the bridge grant on May 31, 2002, and the effective date of the proposed new agreement on June 10, 2002. Third, and most important, INCSF was not willing to accept an agreement without funding for the information collection program. INCSF documents indicated that INCSF was in serious financial difficulty by October 2002, with staff being evicted and landlords threatening legal action. Several freelance employees of Liberty TV were released, but Liberty TV core staff were retained in the belief that State remained committed to Liberty TV broadcasting. In an attempt to successfully conclude a new agreement, INCSF sent a draft budget proposal to State that would cover costs from June through December 2002 and envisioned renewed Liberty TV broadcasting as soon as November 2002. State noted, however, that INCSF's proposed budget differed in significant ways from State's proposals and that modifications were needed for it to serve as a basis for a new agreement. State and INCSF were able to successfully conclude a new agreement in November 2002, in part because the Department of Defense agreed to take over funding of the information collection program. The new agreement included about $2 million in funding for Liberty TV costs incurred from June through the end of January 2003. However, Liberty TV did not become operational, primarily due to disagreements between State and INCSF over the amount of the funding provided and the time period of State's commitment. Specifically: INCSF expressed concern that the new agreement did not include an additional $1 million it requested for long-term investment costs for television operations. State attributed this decision to its unwillingness to fund long-term capital costs and the uncertainty of congressional approval of additional funding for INCSF beyond January 2003. State indicated that one possible option for INCSF might include reducing costs of other budgeted items to cover television costs for one additional month but noted that option did not provide the type of commitment that INCSF was seeking. According to INCSF documents and an INCSF representative, the continued negotiations and lack of agreement over costs and commitment time periods for funding Liberty TV delayed resumption of broadcasting. INCSF told State in November 2002 that it was not prepared to begin Liberty TV broadcasts only to go off the air in 3 months. According to an INCSF representative, Liberty TV technically could have renewed limited broadcasting at this time because INCSF had retained many of the professional television staff on its payroll. However, INCSF's representative said it was not willing to run an operation that, if taken off the air once again due to a shortage of funding, would further damage INCSF's credibility. INCSF continued planning for options to restart Liberty TV. INCSF proposed that Liberty TV rent fully operational facilities on a short-term basis rather than invest in its own facilities. Quotes for rental facilities were obtained, and one organization was tentatively selected. In February 2003, State extended the agreement to July 2003, and $7 million was also added to INCSF's funding, including about $2.67 million for television operations. INCSF notified State that it had signed two letters of intent with contractors that it hoped would get Liberty TV on the air: one for television and newspaper premises and another for television satellite capability. An INCSF official believed that Liberty TV could be operational 2 to 3 days after signing the satellite contract. According to an INCSF representative, these contracts were never signed because the drawdown of funds on the new February amendment was not received until March 12, just a few days before the war began. INCSF at this point developed yet another strategy: to open offices and install a television and radio station in northern Iraq for a 4-month period commencing upon the issuance of an Iraqi Sanctions Regulations License. According to an INCSF representative, this plan also fell through as the war began, and INCSF decided to move its operations to Baghdad. In early April 2003, State began working with INCSF to support its transition to Iraq, including the redirection of funding already committed to INCSF programs. According to State, those programs should include radio and television broadcasting at a time when it was critically important that Iraqis opposed to Saddam's regime take control of the airwaves. State funding of INCSF continued through September 2003 and funds were available for television operations. According to an INCSF representative, INCSF decided in May 2003 that it did not have a dependable offer from the Department of State to resume Liberty TV broadcasts. Echoing a similar decision in November 2002, INCSF wanted to avoid a second shutdown of Liberty TV due to a gap in State funding. INCSF instead decided to concentrate its energies on establishing offices and hiring support personnel in Baghdad. The Department of State and INCSF provided written comments on a draft of this report (see apps. I and II). State said that our draft report provided a generally accurate account of the complex and difficult relationship that existed between the Department of State and INCSF. State said its actions with respect to INCSF were responsible and fully in accordance with U.S. law and administration policy. State also said it believed our observation that State and INCSF, through their inability to work together to restart Liberty TV, missed a chance to reach the Iraqi people at critical times prior to and during the war in Iraq lay outside the scope of our review. We disagree and believe that it is important to lay out the potential consequences of not successfully restarting Liberty TV, particularly in view of the significance that both State and INCSF attributed to television broadcasting into Iraq. State also provided some technical comments and suggested wording changes, which we have incorporated into the report as appropriate. INCSF agreed that due to the inability of State and INCSF to work together to restart Liberty TV, important opportunities to broadcast to the Iraqi people were lost. INCSF also provided technical comments on some of the points raised in our draft report concerning financial management, negotiation with State, and Liberty TV funding. We incorporated those comments into our report as appropriate. To document the history of State's funding for INCSF programs and the issues affecting its funding decisions, we reviewed State's cooperative agreement files. We also reviewed documentation gathered by the OIG as part of its audits. We also obtained files and other documentation from INCSF's consultant. The documentation we reviewed included proposed and finalized cooperative agreements and amendments, letters of correspondence between State and INCSF, and e-mail traffic. We met with officials of State's Bureau of Near Eastern Affairs and Bureau of Administration and also officials in State's OIG who were responsible for audits of INCSF. In addition, we met with the consultant hired by INCSF to help improve the foundation's accounting and financial management systems, and we obtained information from INCSF's former controller and its manager of Liberty TV operations. The funding and related program data in this report were contained in State's cooperative agreement files, OIG audit files, and documentation provided by INCSF's consultant and its former controller and Liberty TV manager. Based on our examination of those data and discussions with State and INCSF's consultant, we concluded that the documents we were able to obtain were sufficiently reliable for purposes of this engagement. We conducted our review from September 2003 to April 2004 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies to the Secretary of State and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128. Janey Cohen, Richard Boudreau, John Brummet, and Lynn Moore made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as "Today's Reports," on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select "Subscribe to e-mail alerts" under the "Order GAO Products" heading.
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As part of the efforts by the United States to oust Saddam Hussein, a critical element of U.S. policy included funding the Iraqi National Congress as the lead Iraqi opposition coalition. In 1999, the Iraqi National Congress Support Foundation (INCSF) was established to provide an organizational structure for Department of State funding. From March 2000 until September 2003, the Department of State funded several INCSF programs, including television broadcasting. INCSF's broadcasting goals included broadcasts into Iraq focusing on providing the Iraqi people unbiased news and information and updating them on efforts to bring democracy to Iraq. GAO was asked to review (1) the history of the Department of State's funding of INCSF broadcasting activities and (2) the key issues affecting State's funding decisions. State's funding of INCSF programs totaled nearly $33 million for the period March 2000 through September 2003. This money was made available through 23 cooperative agreements and amendments that provided shortterm funding at irregular intervals. The funds were provided for several purposes, including establishing new satellite television capability (Liberty TV), newspaper publication, and information collection programs. About $10 million was earmarked for Liberty TV broadcasting activities, which included hiring staff, establishing studio operations, and actual broadcasting. There were several periods during which State did not have an agreement to fund INCSF's program, causing State to later fund INCSF activities retroactively. State's funding approach affected INCSF's ability to conduct television broadcast operations. Liberty TV broadcasted from August 2001 to May 2002, when funding shortages caused by funding and policy disputes between State and INCSF resulted in termination of broadcasting. Attempts to restart Liberty TV failed due to a combination of factors, including continued disagreements between INCSF and State over funding requirements for the broadcasts, the rapidly changing conditions associated with the war in Iraq, and INCSF's relocation of operations to Iraq in May 2003. INCSF repeatedly complained to State that the short-term nature of the funding agreements made it difficult to run an effective television broadcasting operation. State cited three reasons why it was unable to reach long-term funding agreements with INCSF: (1) State was concerned about INCSF's accountability for funds and operational costs, based largely on results of audits of INCSF, and remained concerned even after INCSF took steps to improve its accountability during late 2001 and 2002; (2) INCSF resisted U.S. government policy prohibiting INCSF operations inside Iraq; and (3) State questioned both the usefulness of INCSF's information collection program and whether it was appropriate for State to fund it. (In May 2002 State decided to drop its funding for the information collection program, effective August 2002.) Against this background and the sporadic funding arrangements that characterized the program, the process of proposal and counterproposal continued without producing agreements that could lead to restarting Liberty TV. Through their inability to work together to restart Liberty TV, State and INCSF missed a chance to reach the Iraqi people at critical times prior to and during the March 2003 war in Iraq.
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Under the Export Administration Act of 1979 as amended and the implementing Export Administration Regulations, Commerce is authorized to require firms to seek licenses for exports of dual-use technologies that pose national security or foreign policy concerns. Such technologies could be used by countries of concern to upgrade their military capabilities. The Commerce Control List identifies technologies that must be licensed before they can be exported to specific countries, including technologies associated with certain nuclear materials, facilities, and equipment; chemicals, "microorganisms" and toxins; materials processing; electronics; computers; telecommunications and information security; lasers and sensors; navigation and avionics; marine systems; and propulsion systems and space vehicles. Violators may face administrative or criminal penalties, including fines, denial of export privileges, and imprisonment. The act defines exports to include transfers of technology within the United States to (1) affiliates of controlled countries or (2) persons with the knowledge or intent to transfer the technology to unauthorized parties. According to Commerce regulations, a transfer of technology within the United States to a foreign national who is not a permanent resident of the United States is deemed to be an export. Such a "deemed export" may occur when a foreign national visits or works in the United States and accesses controlled dual-use technology. Access can include opportunities to review written materials or discussions about controlled technologies. In 2000, Commerce's Inspector General concluded that compliance with deemed export licensing regulations appeared lax. The Inspector General pointed out that the number of foreign workers authorized to enter the United States using certain specialty employment visas was far larger than the number of deemed export license applications received by Commerce in fiscal year 1999. Export Administration Regulations, part 734.2(b)(1). Part 772 of the Export Administration Regulations defines "technology" as specific information necessary for the "development," "production," or "use" of a product. Congress is currently considering legislation that would, among other things, (1) define an export to be the release of an item--i.e., any good, technology, or service--to a foreign national within or outside the United States and (2) require the Secretary of Commerce, in concurrence with the Secretaries of State and Defense to issue regulations governing such exports (H.R. 2581, section 2(9)(iii) and 601(c)(3)). To work with controlled dual-use technology in the United States, foreign nationals and the firms that employ or sponsor them must comply with U.S. export control and visa regulations. Commerce, in consultation with other departments, is responsible for issuing deemed export licenses to firms that employ or host foreign nationals. While the Department of State is responsible for issuing visas to foreign nationals outside the United States, INS is responsible for approving requests from foreign nationals in the United States seeking to change their immigration status. The review process for a deemed export license application parallels the review process for an application for a license to export commodities or technologies overseas. Under U.S. export control regulations, a firm is required to seek a deemed export license if the export of the technology to the foreign national's country of citizenship would require a license. If a license is required, the exporter must submit a license application to Commerce identifying the technology, the reason it is controlled, the proposed destination, and the intended end user. In the case of deemed export license applications, firms must also provide the foreign national's resume, visa type, and a list of his or her publications. An application for a deemed export license may list more than one foreign national. Under Executive Order 12981, the departments of State, Defense, and Energy have the authority to review license applications (unless they decline) to help Commerce determine whether a license would be in the best interests of the United States. Based on their review, an application may be rejected, approved, approved with conditions, or returned without action. Commerce officials stated that they consider evidence of the foreign national's intent to remain in the United States in assessing deemed export license applications. For example, they asserted that they consider the presence of family members in the United States or a stated intention to apply for permanent residency in the United States as a factor in granting a license. Deemed export licenses are generally valid for 2 years. Almost 10 percent of all export licenses approved by Commerce authorize deemed exports. The U.S. government requires foreign nationals from most countries to obtain visas before entering the country. Requirements for obtaining a visa vary, depending on the purpose of the trip and the nationality of the person seeking the visa. Typically, a foreign national begins the process by submitting a visa application to the Department of State, generally through a U.S. overseas post. The application requires, among other items, information regarding his or her nationality, education, employment history, purpose of visit, and if seeking employment, the sponsor. The Department of State is responsible for determining the applicant's eligibility and issuing the visa. State personnel at U.S. embassies and consulates overseas may interview applicants to determine their eligibility to enter the United States. According to the Department of State, in fiscal year 2001, it adjudicated 10.6 million nonimmigrant visa applications at 196 posts and issued 7.6 million visas. Many foreign nationals seeking to work in the United States apply for H-1B specialty employment visas. An H-1B visa allows a U.S. employer to temporarily fill specialty occupations (such as those requiring electrical or software engineers) with foreign workers. A foreign national overseas may obtain an H-1B visa from the Department of State, if INS determines that an employer may import the foreign national as a temporary worker (see fig. 1). A foreign national already in the United States may have his or her immigration status changed to H-1B by INS. For example, an employer seeking to hire a foreign student who has graduated from a U.S. college or university could petition INS to change the foreign national's immigration status from student to H-1B. INS is solely responsible for approving and issuing such changes in status. In fiscal year 2001, Commerce approved 822 deemed export license applications and rejected 3. Each license authorized one or more foreign nationals to access controlled dual-use technology. Our analysis of Commerce's licensing data found that most licenses approved in fiscal year 2001 involved countries of concern. As shown in figure 2, China accounted for 73 percent of licenses approved in fiscal year 2001. Seven other countries of concern--Russia, Iran, India, Syria, Israel, Iraq, and Pakistan--accounted for another 14 percent. The remaining 13 percent involved 29 other countries, including the United Kingdom, Germany, Bulgaria, Romania, and Ukraine. About 90 percent of the licenses approved in fiscal year 2001 authorized foreign nationals to work with advanced electronics, computer, or telecommunications and information security technologies (see fig. 3). Electronics technologies constituted the largest single share at 46 percent. Telecommunications and information security technologies accounted for another 24 percent. Computer technologies were included in 20 percent of the licenses approved. The most common country-technology combination for deemed export licenses involved China and electronics technologies. About 44 percent of all licenses approved in fiscal year 2001 authorized citizens of China to work with electronics technologies, including semiconductor technology. Not all domestic transfers of technology to foreign nationals require a deemed export license. For example, one exception allows technology and software controlled only for national security purposes to be accessed without a license by foreign nationals from countries of concern such as India, Pakistan, and Israel. Under this exception, a firm employing an Indian software engineer would not need a deemed export license to allow him or her access to controlled dual-use technology. The exception does not apply to technology and software that are also controlled for other reasons, such as antiterrorism or nuclear nonproliferation. Also, foreign nationals who engage in research that is or will be publicly available are exempted from export controls. For example, a U.S. university would not need a deemed export license to allow a Chinese graduate student to engage in technological research if the results of that research are to be published in a professional journal. A U.S. firm that hired the same Chinese national to engage in proprietary research to develop a new commercial product would not qualify for this exception. To better direct its efforts to detect possible unlicensed deemed exports, Commerce screens applications for H-1B and other types of visas submitted overseas and develops potential cases for enforcement staff in the field. However, it does not screen H-1B change-of-status applications submitted domestically to INS for foreign nationals already in the United States. Also, Commerce cannot readily track the disposition of potential cases referred to the field. To identify potential unlicensed deemed exports and opportunities to educate firms about deemed export licensing requirements, Commerce screens visa applications it receives from U.S. posts overseas. In fiscal year 2001, Commerce analysts reviewed about 54,000 such applications for various visa types. According to Commerce guidance, the analysts consulted Commerce's enforcement database, DOD comments on rejected license applications, and other sources of information to detect linkages between foreign entities of concern and visa applicants. Commerce does not screen data on foreign nationals already in the United States who change their immigration status to H-1B specialty employment. Commerce and INS officials stated that Commerce does not obtain information on foreign nationals who seek a change in immigration status. INS has data available on foreign nationals who change their status to H- 1B. Our analysis of INS's H-1B data indicates that during fiscal year 2001 at least 15,000 foreign nationals from countries of concern potentially subject to deemed export licensing requirements changed their immigration status to H-1B specialty employment. Our estimation of 15,000 individuals only includes foreign nationals who sought H-1B status for employment related to science and technology. It does not include other nonsensitive H-1B fields, such as fashion modeling, architecture, and accounting. In fiscal year 2001, Commerce analysts screened about 54,000 visa applications received from overseas posts. Their efforts resulted in the referral of 160 potential cases to Commerce's eight enforcement field offices. Commerce staff stated that field offices conduct some limited follow-up enforcement and outreach activities in response to such referrals. These activities include meetings with firms and individuals to determine if the firms should have applied for a deemed export license. Commerce enforcement officials could not provide us with complete information regarding the disposition of these 160 potential cases. Commerce does not have a mechanism for its field enforcement staff to report the results of their reviews of these cases back to headquarters. As a result, its analysts in headquarters cannot determine if their screening methods are effective in targeting potential deemed export cases. Commerce plans to install a new computerized database by the end of 2002 that would correct this problem by allowing headquarters staff to track the disposition of cases referred to field enforcement staff. Commerce does not determine whether firms comply with license conditions intended to limit transfers of controlled dual-use technology to foreign nationals. Commerce officials stated that ensuring such compliance is a low priority and that they cannot readily enforce conditions included in licenses. Almost all deemed export licenses include security conditions. According to DOD officials, these conditions are needed to mitigate the risk to U.S. national security posed by providing controlled dual-use technology to a foreign national. These officials stated that the conditions are crucial to DOD's willingness to agree to many deemed export license applications. Without these conditions, DOD would recommend that Commerce reject many deemed export license applications. Commerce uses several of these conditions to limit the level of technology to which foreign nationals may be exposed. For example, standard conditions bar foreign nationals from unmonitored use of high-performance computers, involvement in the design of computers that exceed a specified accessing technical data on advanced microprocessors or certain types of lithography equipment, or accessing classified data or munitions data licensed by the Department of State. The licensing conditions were first formulated in 1997 by an interagency group that included representatives of the departments of Commerce, Defense, State, and Energy. The departments of Commerce and Defense currently maintain updated lists of 12 standard conditions for deemed exports involving (1) semiconductors (electronics) and computers and (2) telecommunications. According to Commerce officials, the departments may add conditions or adjust the standard conditions to accommodate specific circumstances. A firm may also be required to monitor the immigration status of the foreign employee and to document whether the foreign national leaves the firm before becoming a permanent resident of the United States. The firm is also required to develop security procedures for ensuring compliance with conditions in the approved license and to provide copies of these procedures to Commerce. Other executive branch agencies rely on Commerce to ensure that firms comply with these conditions. DOD's copy of the standard license conditions specifies that Commerce "will monitor to ensure that the applicant's compliance is effective." Identical language is included in many deemed export licenses. Officials from the departments of Defense and State stated that they presumed that Commerce is acting to ensure compliance with the security conditions. Commerce does not have an effective monitoring system in place to ensure compliance with key deemed export license conditions, such as a program of regular visits to firms. Staff at the department's enforcement field offices stated that they rarely visit firms to ensure compliance with deemed export license conditions. In addition, officials at the private sector firms we visited confirmed that Commerce officials rarely conduct on-site verifications of their compliance with licensing conditions. Commerce officials agreed that they do not have an effective monitoring system in place and that their compliance efforts are limited to checking if firms have submitted their security procedures to the department. Commerce officials stated that they consider ensuring compliance with deemed licensing conditions to be a relatively low priority for their resources compared to other demands, including activities to combat terrorism. They stated that the export licensing system is based on the assumption that firms are honest. These officials also asserted that almost all of the foreign nationals covered by deemed export licenses have indicated that they plan to remain in the United States, although they could not provide us with data on repatriations to support this assertion. Commerce officials also stated that prosecutors are reluctant to pursue criminal cases based on technical violations of license conditions. However, they acknowledged that Commerce could use the results of on- site visits as the basis for imposing administrative sanctions and denying future license applications. Commerce officials also asserted that some conditions are not readily enforceable. They maintained that some involve highly technical matters that do not fall within the training provided to Commerce enforcement personnel. For example, Commerce officials stated that enforcement staff would be unable to determine whether the feature size of a semiconductor is smaller than the micron limit specified in one license condition. Similarly, Commerce officials asserted that enforcement personnel would be unable to verify compliance with conditions that proscribe intangible transfers of technology, such as conversations between foreign nationals and their coworkers. Commerce's deemed export licensing system does not provide adequate assurance that U.S. national security interests are properly protected. Key vulnerabilities in the licensing process could help countries of concern advance their military capabilities by obtaining sensitive dual-use technology. Because Commerce does not review all relevant visa and immigration data, it may overlook foreign nationals potentially subject to deemed export licensing requirements. Because Commerce rejects very few deemed export license applications, executive branch agencies must therefore rely on security conditions to help ensure that the licenses approved--more than 90 percent of which involve China and other countries of concern--do not allow foreign nationals unauthorized access to controlled technologies. However, Commerce does not have a monitoring process in place to ensure compliance, thus undermining the value of the conditions. These weaknesses call for a reexamination of the current approach to limiting foreign national access to controlled technology in the United States. We recommend that the Secretary of Commerce work with INS to use all existing U.S. government data in its efforts to identify all foreign nationals potentially subject to deemed export licensing requirements. We also recommend that the Secretary of Commerce--in consultation with the Secretaries of Defense, State, and Energy--establish a risk-based program to monitor compliance with deemed export license conditions. In doing so, the Secretary of Commerce should draw upon the full range of technical expertise available to him, including that within the department or elsewhere in the federal government. If the secretaries of these agencies conclude that certain security conditions are impractical to enforce, we recommend that they jointly develop enforceable conditions or alternative methods to ensure that deemed exports do not place U.S. national security interests at risk while promoting U.S. commercial interests. We provided a draft of this report to the Secretaries of Commerce, Defense, and State, and to the INS Commissioner for their review and comment. We received written comments from the departments of Commerce and Defense that are reprinted in appendixes II and III. DOD concurred with our recommendations, and Commerce said it would consult with other relevant departments on the practicality of implementing our recommendations. More specifically, Commerce stated that it would contact INS to discuss the possibility of establishing a procedure for referring to Commerce H-1B change-of-status applications involving employment that might result in access to sensitive technology. It also stated that it is in the process of developing a more extensive monitoring program for firms that have been issued deemed export licenses. Commerce said it is currently impossible to fully monitor all of the conditions placed on these licenses and agreed that more realistic conditions need to be developed. It also said that it has initiated an interagency dialogue to develop a new set of standard conditions for deemed export licenses. In response to a recommendation in the draft report, Commerce stated that its new Investigation Management System would establish a system for tracking referrals to its enforcement field offices once it becomes operational at the end of calendar year 2002. It subsequently provided us with documentation on the new tracking system. However, Commerce disagreed with our assessment that it lacks an effective monitoring process. It stated that Commerce staff monitor the submission of required internal control plans by firms and contact firms who fail to submit these documents. Commerce also stated that it would continue to visit select firms to monitor compliance with license conditions. In addition, it stated that the vast majority of individuals applying for H-1B visas would not be employed in jobs that would give them access to technology controlled under U.S. export control laws. Commerce stated that INS regulations permit the issuance of H-1B visas to foreign nationals seeking employment in such fields as fashion modeling, architecture, and accounting. It said that the likelihood of foreign nationals working in such fields requiring deemed export licenses is remote. Given Commerce's limited resources, and the large number of H-1B applications filed annually, it questioned whether it was feasible for Commerce analysts to perform a second comprehensive review (in addition to INS's own review) of each such INS file. We disagree with Commerce's assertions regarding the effectiveness of its monitoring process. As noted in our report, Commerce's monitoring process is essentially limited to administrative checks by headquarters staff to determine whether firms have submitted required paperwork. We found no evidence that it selects and visits certain firms to verify compliance with deemed export license conditions. As a result, our recommendation that Commerce develop a risk-based program to monitor compliance is still appropriate. We agree with Commerce's concern that it should not review immigration change-of-status applications of foreign nationals who are seeking employment in fields that are unlikely to involve controlled technology. Anticipating such concerns, we had specifically targeted technology- related occupations--and excluded nonsensitive fields, such as modeling, architecture, and accounting--in developing our estimate of 15,000 foreign nationals. We have included language in this report describing how we developed this estimate. We are sending copies of this report to appropriate congressional committees and to the Secretary of Commerce, the Secretary of Defense, the Secretary of State, and the Commissioner of the Immigration and Naturalization Service. Copies will be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8979. Another GAO contact and staff acknowledgments are listed in appendix IV. To describe the deemed export license process, we reviewed laws and procedures governing export controls; attended Department of Commerce export licensing workshops in Boise, Idaho and Los Angeles, California; and interviewed Commerce officials. To learn about the process for reviewing and approving visa applications overseas, we reviewed Department of State documents that describe the process for issuing visas and provide guidance for referring applications. We also interviewed State officials. To understand the specialty employment (H-1B) and change-of- status processes, we met with officials from the Immigration and Naturalization Service (INS). They described the process and procedures for obtaining an H-1B petition and for changing immigration status while in the United States. To determine the number and nature of deemed export license applications approved by Commerce, we obtained and analyzed information included in Commerce's licensing database for fiscal year 2001. The data were extracted based on the date of final action on each license. We analyzed the data to determine the number of applications that Commerce approved, rejected, or returned without action. We also determined which countries and technologies were included in the approved applications. All of our analyses were dependent on the reliability of Commerce's licensing database. We did not attempt to independently verify the accuracy of the database or the data that it contains. To review Commerce's efforts to detect unlicensed deemed exports, we relied on INS data on H-1B applications granted in fiscal year 2001. We developed this data by asking INS to determine the number of changes-of- status to H-1B that involved (1) occupational codes related to science and technology and (2) countries of concern. We did not independently confirm the accuracy of INS data. Although we recognize that foreign nationals with immigration classifications other than H-1B may be subject to the deemed export licensing requirements, we did not attempt to incorporate other classifications into our analysis. We also identified and interviewed 15 firms that employed foreign nationals but did not have a deemed export license. To better understand the Commerce program for detecting unlicensed deemed exports, we reviewed Commerce program guidance. We also interviewed Commerce officials associated with the review effort. To evaluate Commerce's efforts to ensure compliance with approved licenses, we obtained copies of the standard conditions from both Commerce and the Department of Defense (DOD) and reviewed license conditions as recorded in Commerce's licensing database. We also interviewed officials of 11 firms that have received deemed export licenses and met with Commerce licensing and enforcement officials. To obtain detailed information on enforcement activities, we interviewed special agents of all eight Commerce enforcement field offices. To better understand the rationale for the conditions, we spoke with officials at DOD and the Department of State, including analysts at the Defense Intelligence Agency and policy officials from the Defense Technology Security Agency. We conducted our review from November 2001 through August 2002 in accordance with generally accepted government auditing standards. The following are GAO's comments on the Department of Commerce's letter dated August 19, 2002. 1. We have modified our report to reflect Commerce's comment. Our draft report's statement that a deemed export license typically covers one to five individuals was based on an estimate provided to us by the head of Commerce's deemed export licensing unit. As noted in our draft report, Commerce could not readily determine the total number of individuals included in all deemed export licenses due to limitations in its automated database. 2. We agree that the countries depicted in the chart may represent different levels of concern from a foreign policy and national security standpoint. However, we used the Department of State's guidance for screening technology-related visa applications to develop a list of countries of concern. According to guidance sent to all diplomatic and consular posts, particular attention is given to cases involving nationals of countries designated as state sponsors of terrorism--Cuba, Libya, Iran, Iraq, North Korea, Sudan, and Syria--or a region subject to the Nonproliferation Export Control regulations--China, India, Israel, Pakistan, and Russia. We have added information in this report to note Commerce's observation that most deemed export licenses involve countries of concern, given that U.S. export controls focus on such countries. 3. We do not agree that Commerce has an effective process in place to monitor compliance with license conditions. We found Commerce's current process to be inadequate for two reasons: (1) it is essentially limited to administrative checks by headquarters staff to determine whether firms have submitted the required paperwork; and (2) it does not include a program for conducting on-site visits to confirm that firms are complying with license conditions. Accordingly, we have maintained our draft recommendation that Commerce develop a risk-based monitoring program. 4. Our estimate of 15,000 H-1B change-of-status applications only represents individuals seeking employment in technology-related occupations. It does not include nonsensitive fields, such as modeling, architecture, and accounting, as Commerce notes in its comments. We therefore targeted our analysis to applications involving employment that might result in access to sensitive technology that Commerce should control through its deemed export process. We have modified the language of our report to clarify how we developed this estimate. 5. In response to our recommendation in the draft report that Commerce establish a system for tracking visa cases referred to the field offices, Commerce provided us with documentation of the new case management system's capabilities. Based on our review of documents describing the case-tracking capability of the new system, we have not included this recommendation in our final report. In addition to the individual named above, Pierre Toureille, Lynn Cothern, Julie Hirshen, Richard Slade, and Jennifer Li Wong made key contributions to this report. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as "Today's Reports," on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select "Subscribe to daily E-mail alert for newly released products" under the GAO Reports heading.
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To protect its national security and foreign policy interests, the United States controls exports of civilian technologies that have military uses. U.S. firms may be required to obtain a license from the Department of Commerce before exporting these "dual-use" technologies from the United States to many other countries, including countries of concern. Since Commerce regulations also deem domestic transfers of controlled dual-use technologies to citizens of these countries to be exports, Commerce may require firms that employ foreign nationals working with these technologies in this country to obtain "deemed" export licenses. The firms should, in many cases, hold a deemed export license, and the foreign nationals should have an appropriate visa classification, such as an H-1B specialized employment classification. Commerce issues deemed export licenses to firms that employ or sponsor foreign nationals after consulting the Departments of Defense, State, and Energy. Deemed export licenses are generally valid for 2 years and comprise almost 10 percent of all export licenses approved by Commerce. In fiscal year 2001, Commerce approved 822 deemed export license applications and rejected 3. Most of the approved licenses allowed foreign nationals from countries of concern to work with advanced computer, electronic, or telecommunication and information security technologies in the United States. To better direct its efforts to detect possible unlicensed deemed exports, in fiscal year 2001 Commerce screened thousands of applications for H-1B and other types of visas submitted by foreign nationals overseas. From these applications, it developed 160 potential cases for follow-up by enforcement staff in the field. However, Commerce did not screen thousands of H-1B change-of-status applications submitted domestically to the Immigration and Naturalization Service for foreign nationals already in the United States. In addition, Commerce could not readily track the disposition of the 160 cases referred to field offices for follow-up because it lacks a system for doing so. Commerce attaches security conditions to almost all licenses to mitigate the risk of providing foreign nationals with controlled dual-use technologies. However, according to senior Commerce officials, Commerce staff do not regularly visit forms to determine whether these conditions are being implemented because of competing priorities, resource constraints, and inherent difficulties in enforcing several conditions.
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Congressional oversight of rulemaking using the CRA can be an important and useful tool for monitoring the regulatory process and balancing and accommodating the concerns of American citizens and businesses with the effects of federal agencies' rules. As we noted early in the implementation of CRA, it is important to assure that executive branch agencies are responsive to citizens and businesses about the reach, cost, and impact of regulations, without compromising the statutory mission given to those agencies. CRA seeks to accomplish this by giving Congress an opportunity to review most rules before they take effect and to disapprove those found to be too burdensome, excessive, inappropriate, duplicative, or otherwise objectionable. With certain exceptions, CRA applies to most rules issued by federal agencies, including the independent regulatory agencies. Under CRA, two types of rules, major and nonmajor, must be submitted to both Houses of Congress and GAO before they can take effect. CRA defines a "major" rule as one which results or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises in domestic and export markets. CRA specifies that the determination of what rules are major is to be made by the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB). Major rules cannot be effective until 60 days after publication in the Federal Register or submission to Congress and GAO, whichever is later. Nonmajor rules become effective when specified by the agency, but not before they are filed with Congress and GAO. CRA established a procedure by which members of Congress may disapprove agencies' rules by introducing a resolution of disapproval that, if adopted by both Houses of Congress and signed by the President, can nullify an agency's rule. If such a resolution becomes law, the rule then cannot take effect or continue in effect. In addition, CRA prohibits an agency from reissuing such a rule in substantially the same form, or a new rule that is substantially the same as the disapproved rule, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule. Members of Congress seldom have attempted to use this disapproval process. Over the past decade, 37 joint resolutions of disapproval have been introduced regarding 28 rules. Only once has Congress used this disapproval process to nullify a rule, when it disapproved the Department of Labor's rule on ergonomics in 2001. GAO's only stated role under CRA is to provide Congress with a report on each major rule concerning GAO's assessment of the promulgating federal agency's "compliance with the procedural steps" required by various acts and executive orders governing the regulatory process. These include preparation of a cost-benefit analysis, when required, and compliance with the Regulatory Flexibility Act, the Unfunded Mandates Reform Act of 1995 (UMRA), the Administrative Procedure Act (APA), the Paperwork Reduction Act, and Executive Order 12866. GAO's report must be sent to the congressional committees of jurisdiction within 15 calendar days of the publication of the rule or submission of the rule by the agency, whichever is later. While the CRA is silent with regard to GAO's role concerning nonmajor rules, we found that basic information about those rules also should be collected in a manner that can be of use to Congress and the public. To compile information on all the rules submitted to us under CRA, we established a database, available to the public on the Internet. Our database gathers basic information about the 15-20 major and nonmajor rules that we receive each day, including the title, the agency, the Regulation Identification Number, the type of rule, the proposed effective date, the date published in the Federal Register, the congressional review trigger date, and any joint resolutions of disapproval that may have been introduced. We created a standardized submission form available on the Internet, which is used by almost all the agencies, to allow more consistent information collection. Since CRA was enacted on March 29, 1996, we have received and submitted timely reports on 610 major rules and entered 41,218 nonmajor rules into the database. As noted earlier, before a rule can become effective, it must be filed in accordance with CRA. We conduct an annual review to determine whether all final rules covered by the Act and published in the Federal Register have been filed with the Congress and us. We perform the review to both verify the accuracy of our database and to ascertain the degree of agency compliance with CRA. We forward a list of unfiled rules to OIRA for their handling, and, in the past, they have disseminated the list to the agencies, most of which file the rules or offer an explanation of why they do not believe a rule is covered by CRA. Although we reported that agencies' compliance with CRA requirements was inconsistent during the first years after CRA's enactment, compliance improved over time. In general, we have found the degree of compliance to have remained fairly constant, with roughly 200 nonmajor rules per year not filed with our office. In the 10 years since CRA was enacted, all major rules have been filed in a timely fashion. In the past 10 years, we also have issued eight opinions regarding what constitutes a "rule" under CRA in response to requests from congressional committees and members concerning various agency pronouncements and memorandums. CRA contains a broad definition of the term "rule," including more than the usual notice and comment rulemakings published in the Federal Register under APA. Under CRA, "rule" means the whole or part of an agency statement of general applicability and future effect designed to implement, interpret, or prescribe law or policy. For example, in 1996 we concluded that a memorandum issued by the Secretary of Agriculture in connection with the Emergency Salvage Timber Sale Program constituted a rule under CRA and should have been submitted to Congress and GAO before it could become effective. Similarly, in 2001, we concluded that a Fish and Wildlife Service Record of Decision entitled "Trinity River Mainstem Fishery Restoration" was a rule covered by CRA. We believe these opinions have strengthened the reach of CRA by insuring compliance with the main thrust of the Act, which was to insure that agency actions, whether labeled a "rule" by the agency or not, are subject to congressional review. We have noted that certain congressional committees, such as the Joint Committee on Taxation, were taking an active role in overseeing agency compliance with CRA. As a result, for example, Internal Revenue Service procedures, rulings, regulations, notices, and announcements are forwarded as CRA submittals. The one major area of noncompliance with the requirements of the Act has been that agencies have not always delayed the effective date of major rules for 60 days as required by the Act. Agencies have filed 610 major rules with our office, and, for 71 of those rules, the agencies did not delay the effective date for the required 60 days. One reason for noncompliance with the 60-day delay is that the agencies have misapplied the "good cause" exception which waives the delay of the rule if it would be impracticable, unnecessary, or contrary to the public interest. Since the enactment of CRA, our office has consistently held that the "good cause" exception is only available if a notice of proposed rulemaking was not published and public comments were not received. Many agencies, following a notice of proposed rulemaking and receipt of comments, have stated in the preamble to the final major rule that "good cause" existed for not providing the 60-day delay. The other reason for noncompliance is that the statute that an agency is implementing by issuing the final major rule contains a date by which the Secretary or Administrator must issue the regulation, and the date, in many instances, does not permit the 60-day delay. However, the CRA states that it shall apply notwithstanding any other provision of law. Agencies and GAO have provided Congress a considerable amount of information about forthcoming rules in response to CRA. The limited number of CRA joint resolutions introduced might suggest that this information generates little additional oversight of rulemaking. However, as we found in our review of the information generated on federal mandates under UMRA, the benefits of compiling and making information available on potential federal actions should not be underestimated. Further, as we also found regarding UMRA, the availability of procedures for congressional disapproval may have some deterrent effect. The Congressional Research Service has reported that several rules have been affected by the presence of the review mechanism, suggesting that the CRA review scheme has had some influence. Still, as I noted in my testimony before this Subcommittee last November, efforts to enhance presidential oversight of agencies' rulemaking appear to have been more significant and widely employed in recent years than similar efforts to enhance congressional oversight. In particular, our reviews have noted the growing influence and authority of OIRA in the oversight of the regulatory process. Some of this increased activity reflects administration initiatives, but it also includes some new responsibilities assigned by Congress through statute, such as the requirement for OMB to issue governmentwide guidance to implement the Information Quality Act. In contrast, there does not appear to have been a similar expansion of direct congressional influence and authority over the regulatory process, although bills have been introduced over the years to enhance the mechanisms available for congressional oversight of agencies' rulemaking. Some recent legislative proposals have focused on expanding the information and analysis available to Congress on pending rules, while others focus on enhancing the mechanisms that Congress could employ for its own review--and potential disapproval--of agencies' rules. As the major example of the first category of proposals, Congress passed the Truth in Regulating Act (TIRA) in 2000 to provide a mechanism for it to obtain more information about certain rules. In contrast to the essentially procedural reviews that GAO now conducts under CRA, TIRA contemplated a 3-year pilot project during which GAO would perform independent evaluations of "economically significant" agency rules when requested by a chairman or ranking member of a committee of jurisdiction of either House of Congress. However, during the 3-year period contemplated for the pilot project, Congress did not enact any specific appropriation to cover TIRA evaluations, as called for in the Act, and the authority for the 3-year pilot project expired on January 15, 2004. Therefore, we have no information on the potential effectiveness of this mechanism. Congress has considered reauthorizing TIRA, and we have strongly urged that any reauthorization of TIRA continue to contain language requiring a specific annual appropriation for GAO before we are required to undertake independent evaluations of major rulemakings. Such an expansion of GAO's current lines of business without additional dedicated resources would pose a serious problem for us, especially in light of what will likely be increasing budgetary constraints in the years ahead. It would also likely serve to adversely affect our ability to provide the same level of service to the Congress in connection with our existing statutory authorities. We have also recommended that TIRA evaluations be conducted under a pilot project basis. Members of Congress have also introduced several bills over the past year that would provide additional mechanisms for direct review and approval (or disapproval) of agencies' rules. Some of these proposals would modify how Congress reviews information submitted under CRA and how the disapproval procedures would work. These bills could, for example, create a joint committee that would be tasked with reviewing all rules to determine whether a disapproval resolution under CRA should be introduced. We have conducted no work that would provide information on the potential effectiveness of such changes. Mr. Chairman, this concludes my prepared statement. Once again, I appreciate the opportunity to testify on these important issues. I would be pleased to address any questions you or other Members of the Subcommittee might have at this time. If additional information is needed regarding this testimony, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512-6806 or [email protected]. 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 year marks the 10th anniversary of the Congressional Review Act (CRA). Congressional oversight of rulemaking using the CRA can be an important and useful tool for monitoring the regulatory process and balancing and accommodating the concerns of American citizens and businesses with the effects of federal agencies' rules. This statement provides an overview of the purpose and provisions of CRA; GAO's role and activities in fulfilling its responsibilities under the Act; and trends on CRA within the broader context of developments in presidential and congressional oversight of federal agencies' rulemaking. CRA gives Congress an opportunity to review most rules before they take effect and to disapprove those found to be too burdensome, excessive, inappropriate, duplicative, or otherwise objectionable. Under CRA, two types of rules, major and nonmajor, must be submitted to both Houses of Congress and GAO before they can take effect. The Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget specifies which rules are designated as major rules based on criteria set out in the CRA. Major rules cannot be effective until 60 days after publication in the Federal Register or submission to Congress and GAO, whichever is later. Congress may disapprove agencies' rules by introducing a resolution of disapproval that, if adopted by both Houses of Congress and signed by the President, can nullify an agency's rule. Members of Congress seldom have attempted to use this process. GAO's role under CRA is to provide Congress with a report on each major rule concerning GAO's assessment of the promulgating federal agency's compliance with the procedural steps required by various acts and executive orders governing the regulatory process. GAO compiles information on the rules it receives under CRA in a database containing basic information about major and nonmajor rules. GAO also conducts an annual review to determine whether all final rules covered by the Act and published in the Federal Register have been filed with the Congress and GAO. Although we reported that agencies' compliance with CRA requirements was inconsistent during the first years after CRA's enactment, compliance improved over time. There have been a limited number of CRA joint resolutions, but the benefits of compiling and making information available on potential federal actions should not be underestimated. The procedures for congressional disapproval also may have some deterrent effect. Efforts to enhance presidential oversight of agencies' rulemaking appear to have been more significant and widely employed in recent years than similar efforts to enhance congressional oversight. Some recent legislative proposals have focused on expanding the information and analysis available to Congress on pending rules, while others focus on enhancing the mechanisms that Congress could employ for its own review--and potential disapproval--of agencies' rules.
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California moved to a deregulated electricity market in April 1998. For roughly 2 years, wholesale prices were fairly low on average. However, the state experienced periods of higher prices, especially during peak summer hours. Average prices rose dramatically in May 2000 and remained high. For example, average prices of electricity sold in the California Power Exchange during the months of May through December 2000 were between 2 and 13 times higher than in the same months of the previous year. In addition to higher prices, the frequency and duration of periods when the system is in danger of service disruptions have increased. Actual rolling blackouts occurred on 6 separate days in winter and spring 2001, for a total of 16 hours with shortfalls ranging from 400 to 1,000 MW. Blackouts adversely affected consumers and caused business and traffic disruptions. The California electricity market operates within a larger western system consisting roughly of 11 states, and while California relies on imports for about 20 percent of its supplies, it also exports power at times to other states. As a result of this interconnectedness, the price and availability of power in California influence markets in other western states and vice versa. Industry experts and academics generally agree that a tight power supply in California and other western states is one reason why prices increased and service reliability deteriorated starting in May 2000. The demand for electricity in California has grown rapidly since 1995, while very little new generating capacity has been added. For example, from 1995 through 2000, total electricity consumption grew by about 13 percent, compared with about 2-percent growth in electricity generating capacity in the state. In addition, last summer saw an increase in the price of natural gas--used to produce about 40 percent of California's electricity supply--and in the price of emissions permits that are required to operate certain generators in California. Lower levels of available hydroelectricity during summer 2000 in the Pacific Northwest reduced California's access to imports of hydroelectricity. Rapid demand growth in other states has also reduced California's ability to import electricity from those states. Finally, flaws in market design in California are widely believed to have contributed to California's problems. For example restrictions on the use of long-term contracts to purchase electricity increased the reliance of California's three investor-owned utilities on spot markets and left them substantially exposed to market risks. While these factors contributed to California's electricity problems, a number of state officials, economists, and industry experts now believe that the market design adopted by California has enabled individual electricity-generating companies to exercise market power by withholding capacity when supplies are tight in order to drive up prices. They argue that generating firms have withheld supplies of electricity by staging outages in order to drive up prices, and point to higher-than-normal levels of outages since summer 2000. FERC's study differed from the other two in its methodological approach and reached different conclusions. In addition, all three studies covered different time periods, so their results are not entirely comparable. FERC performed an audit of specific generating plants and companies that had experienced outages during December 2000. On the basis of these audits, FERC found that there was no evidence that the audited companies were incurring physical outages in an effort to drive up prices. The other two studies examined market prices and compared them with estimates of the costs of producing electricity to determine if prices were consistent with generating companies' exercising market power. Both of these studies, conducted during different time periods, concluded that there was evidence of market power used to increase electricity prices. FERC followed a case-study methodology, analyzing generating plant outages to determine if generating companies used them strategically to push up electricity prices or if they resulted from unavoidable or routine repairs or maintenance. FERC analysts conducted telephone interviews with generating companies to verify the reasons for outages. These telephone interviews covered about 60 percent of the reported outages. In addition, they visited the headquarters of two companies whose generating plants were down for maintenance or repairs to discuss in more detail the companies' repair policies, maintenance schedules, and operating practices. They also performed on-site inspections of generators at three plant sites and observed maintenance and repairs. In order to evaluate the legitimacy of the repairs or maintenance being performed, FERC employed private-sector consultants familiar with plant operations to accompany FERC analysts during the on-site visits. In addition to the audits, FERC examined market prices, levels of demand, and generator outages for the month of December 2000 to determine whether high levels of outages were correlated with higher prices of power. Based on the results of its audits, FERC found that there was no evidence that the audited generating companies were withholding power in an attempt to influence prices. On the contrary, in every case, FERC found that legitimate repairs or maintenance was performed on the downed generating plants. Moreover, it found that these plants were typically older--30 to 40 years old--and had been used more intensively than usual during the summer and fall of 2000. In addition, FERC found that prices in the month of December were not strongly correlated with levels of outages. In fact, it found that the highest prices occurred during periods with relatively lower levels of generator outages. The other two studies looked for evidence of the existence and exercise of market power in the entire market, rather than focusing on particular instances of generator outages. They employed a methodology that compared market prices with estimates of the marginal costs of producing additional electricity. Marginal cost is the additional cost incurred to produce one more unit of electricity. Prices close to the marginal cost are consistent with a competitive market. High prices, however, may suggest that the market is not competitive and that individual electricity- generating companies can manipulate prices. The first study we examined, by Borenstein, Bushnell, and Wolak, compared prices with estimated costs of producing electricity in the period from June 1998 through September 1999. The authors constructed the market supply of electricity by estimating the cost of generating each additional unit of electricity, starting with the lowest-cost generating plants and adding increasingly costly plants. They used statistical simulation methods to take account of random generator outages, which decrease the electricity supply as units go off-line for repairs or maintenance and increase it as generating plants come back on-line. By matching actual demand at any point in time with their simulated supply of electricity, the authors were able to estimate the competitive price of electricity--that is, the price equal to the marginal cost incurred to supply the last unit of electricity demand. Then they compared the estimated competitive price with the actual price. Based on their analysis, Borenstein, Bushnell, and Wolak concluded that there were periods of high prices and high demand from June1998 to September 1999, which they attribute to the exercise of market power. The authors found that on average, the prices during this period were 16 percent higher than they would have been had generators behaved competitively. In discussion with one of the authors, we were told that while their study provides strong evidence of market power, it does not suggest any illegal activity on the part of electricity-generating companies. On the contrary, he believes that individual companies are sometimes able to exercise unilateral market power to raise prices without violating antitrust laws. The authors did not examine outages to try to determine whether the level or pattern was consistent with companies' withholding power, nor did they seek to determine precisely how generating companies exercised market power. In discussions with one of the authors, we were told that it is not possible to tell the difference between an unavoidable outage and a strategic outage designed simply to drive up prices. Moreover, a generating company might exercise market power in other ways. For example, a company can simply submit selling bids that are so high that all of its power will not be purchased, thus effectively reducing the volume of electricity sold in the market and causing prices to rise. The second study, by Joskow and Kahn, examined electricity prices during summer 2000. The authors conducted a similar study to that of Borenstein, Bushnell, and Wolak, but their access to data was more limited. As a result, Joskow and Kahn relied on publicly available data for some key variables rather than the confidential and proprietary data used in the other study. Their study also differed from the first in that Joskow and Kahn analyzed outages during June 2000 to determine the extent to which withheld generating capacity was a factor in explaining high electricity prices. In doing so, they compared the volume of electricity generated at specific prices with their estimates of how much electricity could have been produced profitably at those prices, taking into account normal levels of unplanned outages and capacity held in reserve for system reliability reasons. Based on their analysis, Joskow and Kahn concluded that there was strong evidence that market power was exercised to raise prices in summer 2000. They found that higher prices of electricity were caused in part by higher natural gas prices, increased demand, reduced availability of imports and higher prices for air emissions permits. However, they also found that prices in summer 2000 were greater than they would have been had the market behaved competitively. In addition, they concluded that the level of outages experienced during June 2000 cannot be explained by reasonable expectations about repairs or maintenance requirements, or by the need to hold power in reserve for system reliability reasons. However, the authors acknowledge that data limitations make their analysis of withheld generating capacity somewhat rough. Specifically, they lacked data on generating units outside of but selling power in California and contractual arrangements by electricity power marketers doing business in the state. Therefore, they were unable to measure generator outages outside of California. FERC's study of electricity generator outages was not thorough enough to support its overall conclusion that the audited companies did not physically withhold electricity supplies to influence prices. FERC's study was largely focused on determining whether or not there were actual physical problems--such as leaks in cooling tubes--in generating units experiencing outages. Under this approach, if FERC found that there were physical problems with downed generating plants and that repairs or maintenance were performed, then it concluded that the outage was legitimate and not designed to simply reduce supply and push up prices. In fact, FERC determined that most of one company's generating plants were old and suffered from mechanical problems. In addition, FERC found that many of these plants had run at higher-than-usual rates in the summer and fall of 2000, prior to their shutting down for repairs or maintenance. These facts do suggest that a higher level of outages than normal should be expected. However, the industry experts we spoke with generally agree that it is practically impossible to accurately determine whether such outages are legitimate or not because plants frequently run with physical problems, and the timing of maintenance or repairs is often a judgment call on the part of plant owners or operators. Another weakness in the FERC study--or any study that seeks to determine whether specific outages are legitimate--is the lack of data for past outages to use as a benchmark with which to compare the number, type, and duration of outages during the study period. In discussions with FERC, officials told us that accurate outage data do not exist for the years prior to their study. Without a baseline comparison, it is not possible to conclude that observed outages are above normal in number, type, and duration. Finally, strategic use of plant outages is not the only way that a generating company could exercise market power, and FERC's methodology did not look at other ways. As FERC acknowledged in its report, the agency did not analyze whether companies were using other techniques to influence prices, such as not offering bids to sell some capacity, or bidding at prices high enough to practically ensure exclusion from the market. A thorough and conclusive study of market power in California since May 2000 would combine the market-wide approach of the other two studies, with a quantification of the extent to which outages or other supply disruptions were caused by factors other than companies' attempts to drive up prices. In its study, FERC pointed out two such factors that could lead to higher-than-normal levels of outages: (1) some plants had been run at above-normal rates prior to being shut down for repairs or maintenance, and (2) many plants that were shut down were older. A third factor, suggested by other industry sources, is that a number of companies were simply refusing to operate their generators at various times during 2000 because they had not been paid for electricity they had previously sold to California's utilities. None of the studies covered the entire period of high prices, nor did they evaluate all the factors that could have led to greater- than-normal levels of generator outages. Therefore, their results are inconclusive about the precise extent to which market power versus these other factors explains high electricity prices in California since May 2000. However, the authors of the two market power studies believe, based on their results and on results of other studies, that the case for the existence of market power has been conclusively made and that this is enough to warrant a policy response from FERC and the state of California. FERC officials acknowledge that simply looking at outages and maintenance records of generators is not sufficient to determine whether generating companies are exercising market power. Accordingly, they told us that FERC has recently implemented a more comprehensive plan for monitoring the exercise of market power. Under this plan, FERC will continue to look at outages and to determine if the number, type and duration of outages are warranted. In addition, FERC will monitor generators' bids to try to detect bidding behavior designed to exclude generating capacity from the market. FERC officials also said they have notified electricity generators that their ability to earn unregulated market prices for electricity will be in jeopardy if they are found to be withholding power in order to drive up prices. We did not evaluate FERC's current plan for monitoring generators' behavior. We provided the Chairman of FERC with a draft of this report for review and comment. We also discussed the findings in our report with authors of the other two studies. Generally, FERC and the academic authors agreed with the basic findings in the report. However, FERC took issue with our characterization of its conclusion, saying that FERC had only concluded the absence of evidence of withholding electric power, rather than the absence of withholding to influence prices. In addition, FERC pointed out that it is important to make a distinction between its study, which focused on engineering reasons for outages, and the other two studies, which focused on economic reasons for withholding electric power (see appendix II for a copy of the FERC's comments). In addition, two of the authors of the other studies added several clarifying points that we have incorporated into the report. In responding to FERC's first comment, we believe that our characterization of their overall conclusion is correct. In the conclusion section of its report, FERC made several statements. First of all, FERC stated that its "staff did not discover any evidence suggesting that the audited companies were scheduling maintenance or incurring outages in an effort to influence prices." On the contrary, FERC stated that "it appears that these companies accelerated maintenance and incurred additional expense to accommodate the ISO's [Independent System Operator] operating needs." FERC also pointed out the age and higher- than-normal usage of generating units as mitigating factors in explaining outages. Finally, FERC stated that its detailed site reviews are consistent with a finding that "prices are driven by demand, not the companies' maintenance practices." On the basis of these statements, we believe the report concludes that the companies they audited were not physically withholding electricity in an effort to influence prices. From a practical standpoint, a public statement, made shortly after the FERC's outage report was released indicates that others felt the FERC was reaching such conclusions. For example, an article in the Los Angeles Times on February 3, 2001 quoted a spokesman for one of the generating companies as saying that the FERC report affirms the company's operating procedures in the face of "incorrect and inflammatory allegations that we have somehow been withholding power from our four plants in California." The distinction between physical and economic withholding was pointed out by FERC in its second comment. We agree with FERC that the other two studies were wider in scope than its review of generator outages. As we pointed out in our report, a thorough and conclusive study of market power in California would combine the market wide approach of the other two studies, with a quantification of the extent to which outages or other supply disruptions were caused by factors other than companies' attempts to drive up prices. We have added clarifying language in the body of the report that makes the distinction between the FERC report on physical outages and the other two, which looked more broadly for evidence of market power. FERC's report comes on the heels of some of the most dramatic electricity price increases in history. These price increases caused consumers, other market participants, and members of Congress to question whether electricity-generating companies have been charging unfair prices and making very large profits at their expense. In short, the public and others were looking for clear answers as to whether sellers of electricity in California were withholding power in an effort to raise prices. In this environment, FERC's report--"focusing on whether unplanned maintenance or outages occurred to raise prices"--was important. In addition, as the federal government's market monitoring entity, FERC's views, opinions, and orders clearly send important signals to the marketplace, including the investment community, and influence public confidence. We believe that, as the federal government's market- monitoring entity, FERC has an important responsibility to fully investigate potential market power and clearly report its results. In light of changes in the electricity industry as it undergoes restructuring, and the changing role of FERC in overseeing this industry, we recognize that FERC's monitoring role is evolving and that its outage report was simply one part of its ongoing effort. To develop an understanding of the issues surrounding market power in the electricity industry, we interviewed numerous economists from Stanford University, the University of California, Berkeley, and the University of California, Irvine, and reviewed written studies of market power and related issues. We also interviewed officials from state and federal energy agencies, including the California Public Utilities Commission, the California Independent System Operator, and FERC. To compare the FERC outage study and the other two studies on market power, we reviewed the three studies, evaluating the methodologies used and the results. After our initial review, we discussed our findings with FERC officials and authors of the other studies. We also reviewed related studies of market power. To determine whether FERC's methodology was thorough enough to support its conclusion that generating capacity has not been withheld without legitimate reason, we evaluated their methodology and results. We also discussed our findings with state and federal energy officials and an economist at the University of California, at Irvine who was familiar with all three studies. We performed our work from May through June 2001 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of the report until 14 days after the date of the letter. At that time, we will send copies of this report to FERC and the authors of the two studies. We will also provide copies to others on request. If you or your staff have any questions about this report, please call me on (202) 512-3841 or Dan Haas on (202) 512-9828. Other key contributors to this report were Jon Ludwigson and Frank Rusco. "Report on Plant Outages in the State of California," prepared by the Office of the General Counsel, Market Oversight & Enforcement and the Office of Markets, Tariffs and Rates, Division of Energy Markets, Federal Energy Regulatory Commission, February 1, 2001. "Diagnosing Market Power in California's Restructured Wholesale Electricity Market," Severin Borenstein, James Bushnell, and Frank Wolak, August 2000 . Severin Borenstein is a professor of business economics in the Haas School of Business, University of California, and Director of the University of California Energy Institute. James Bushnell is a lecturer in the Haas School of Business, University of California, and a Research Associate at the University of California Energy Institute. Frank Wolak is a professor of economics at Stanford University and chairman of the Market Surveillance Committee of the California Independent System Operator. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," Paul Joskow and Edward Kahn, January 2001 . Paul Joskow is the Elizabeth and James Killian Professor of Economics and Management at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Energy and Environmental Policy Research. Edward Kahn is a principal at Analysis Group/Economics, a private consulting firm.
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Wholesale electricity prices in California rose sharply in May 2000 and have remained high. In addition, there were disruptions in service--blackouts--this winter and spring. The California Independent System Operator, the state agency in charge of balancing electricity supply with demand, expects high prices and service disruptions to continue and perhaps worsen this summer. In response to concerns about high prices and generator outages in California, the Federal Energy Regulatory Commission (FERC) undertook a study, released in February 2001, to determine whether outages were being used to withhold power and drive up prices of electricity in California. Other studies of the electricity market in California have been conducted by economists and industry experts. One study, conducted by three economists from Stanford University, the University of California at Berkeley, and the University of California Energy Institute examined whether market prices of electricity in California in 1998 and 1999 were higher than competitive levels. A second, similar study by two economists--one from the Massachusetts Institute of Technology and one from a private consulting firm--examined the California market during 2000. This report reviews the FERC study, as well as the two studies on the California electricity market to determine (1) how the methodologies and results of the three studies compare and (2) if FERC's study was thorough enough to support its conclusions that audited companies did not physically withhold electricity supplies to influence prices. GAO found that FERC's study used a very different methodological approach from the approach used by the other two studies and reached different conclusions. FERC's study performed an audit of specific generating plants and companies that experienced outages to determine if audited companies were incurring outages in an effort to drive up prices, while the other two studies compared market prices with estimates of the costs of producing electricity. GAO further found that FERC's study was not thorough enough to support its conclusion that audited companies were not withholding electricity supply to influence prices.
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Our tests of IT equipment inventory controls at four case study locations, including three VA medical centers and VA headquarters, identified a weak overall control environment and a pervasive lack of accountability for IT equipment items across the locations we tested. As summarized in table 1, our statistical tests of key IT inventory controls at our four case study locations found significant control failures. None of the case study locations had effective controls to safeguard IT equipment from loss, theft, and misappropriation. Our statistical tests identified a total of 123 lost and missing IT equipment items across the four case locations, including 53 IT equipment items that could have stored sensitive personal information. Such information could include names and Social Security numbers protected under the Privacy Act of 1974 and personal health information accorded additional protections from unauthorized release under the Health Information Portability and Accountability Act of 1996 (HIPAA) and implementing regulations. Although VA property management policy establishes guidelines for holding employees and supervisors pecuniarily (financially) liable for loss, damage, or destruction because of negligence and misuse of government property, except for a few isolated instances, none of the case study locations assigned user-level accountability for IT equipment. Instead, these locations relied on information about user organization and user location, which was often incorrect and incomplete. Under this lax control environment, missing IT equipment items were often not reported for several months and, in some cases several years, until the problem was identified during a physical inventory. Our statistical tests of IT equipment existence at the four case study locations identified a total of 123 missing IT equipment items. The 123 missing IT equipment items included 44 at the Washington, D.C., medical center; 9 at the Indianapolis medical center; 17 at the San Diego medical center; and 53 at VA headquarters. Our statistical tests of missing equipment found that none of the four test locations had effective controls. Missing IT equipment items pose not only a financial risk but also a security risk associated with compromising sensitive personal data maintained on computer hard drives. The 123 missing IT equipment items included 53 that could have stored sensitive personal information, including 19 from the Washington, D.C., medical center; 3 from the Indianapolis medical center; 8 from the San Diego medical center; and 23 from VA headquarters. Because of a lack of user-level accountability and the failure to consistently update inventory records for inventory status and user location changes, VA officials at our test locations could not determine the user or type of data stored on this equipment and therefore the risk posed by the loss of these items. VA management has not enforced VA property management policy and has generally left implementation decisions up to local organizations, creating a nonstandard, high-risk environment. Although VA property management policy establishes guidelines for user-level accountability, the three medical centers we tested assigned accountability for most IT equipment to their information resource management (IRM) or IT Services organizations, and VA headquarters organizations tracked IT equipment items through their IT inventory coordinators. However, because these personnel did not have possession (physical custody) of all IT equipment under their purview, they were not held accountable for IT equipment determined to be missing during physical inventories. Because of this weak overall control environment, we concluded that at the four case study locations essentially no one was accountable for IT equipment. Absent user-level accountability, accurate information on the using organization and location of IT equipment is critical to maintaining effective asset visibility and control over IT equipment items. However, as table 1 shows, we identified high failure rates in our tests for correct user organization and location of IT equipment. Because property management system inventory records were inaccurate, it is not possible to determine the timing or events associated with lost IT equipment as a basis for holding individual employees accountable. Although our Standards for Internal Control in the Federal Government requires timely recording of transactions as part of an effective internal control structure and safeguarding of sensitive assets, we found that VA's property management policy neither specified what transactions were to be recorded for various changes in inventory status nor provided criteria for timely recording. Further, IRM and IT Services personnel responsible for installation, removal, and disposal of IT equipment did not record or assure that transactions were recorded by property management officials when these events occurred. We found errors related to the accuracy of other information in IT equipment inventory records, including equipment status (e.g., in use, turned-in, disposal), serial numbers, model numbers, and item descriptions. As shown in table 1, estimated overall error rates for recordkeeping were lower than the error rates for the other control attributes we tested. Even so, the errors we identified affect management decision making and create waste and inefficiency in operations. Many of these errors should have been detected and corrected during annual physical inventories. To assess the effect of the lax control environment for IT equipment, we asked VA officials at the case study locations covered in both our current and previous audits to provide us with information on the results of their physical inventories performed after issuance of recommendations in our July 2004 report, including Reports of Survey information on identified losses of IT equipment. As of February 28, 2007, the four case study locations covered in our current audit reported over 2,400 missing IT equipment items with a combined original acquisition value of about $6.4 million as a result of inventories they performed during fiscal years 2005 and 2006. Based on information obtained through March 2, 2007, the five case study locations we previously audited had identified over 8,600 missing IT equipment items with a combined original acquisition value of over $13.2 million, $12.4 million of which was identified at the Los Angeles medical center. Because inventory records were not consistently updated as changes in user organization or location occurred and none of the locations we audited required accountability at the user level, it is not possible to determine whether the missing IT equipment items represent recordkeeping errors or the loss, theft, or misappropriation of IT equipment. Further, missing IT equipment items were often not reported for several months and, in some cases, several years. Although physical inventories should be performed over a finite period, at most of the case study locations, these inventories were not completed for several months or even several years while officials performed extensive searches in an attempt to locate missing items before preparing Reports of Survey to write them off. According to VA Police and security specialists, it is very difficult to conduct an investigation after significant amounts of time have passed because the details of the incidents cannot be determined. The timing and scope of the physical inventories performed by the case study locations varied. For example, the Indianapolis medical center had performed annual physical inventories in accordance with VA policy for several years. The Washington, D.C., medical center performed a wall-to- wall physical inventory in response to our July 2004 report. In this case, inventory results reflected several years of activity involving IT inventory records that had not been updated and lost and missing IT equipment items that had not previously been identified and reported. In addition, the San Diego and Houston medical centers had not followed VA policy for including sensitive items, such as IT equipment valued at less than $5,000, in their physical inventories. Our investigator's inspection of physical security at officially designated IT warehouses and storerooms at our four case study locations that held new and used IT equipment found that most of these storage facilities met the requirements in VA Handbook 0730/1, Security and Law Enforcement. However, not all of the formally designated storage locations at two medical centers had required motion detection alarm systems and special door locks. We also found numerous instances of informal IT storage areas at VA headquarters that did not meet VA physical security requirements. In addition, although VA requires that hard drives of IT equipment and medical equipment be sanitized prior to disposal to prevent unauthorized release of sensitive personal and medical information, we found weaknesses in the disposal process that pose a risk of data breach related to sensitive personal information residing on hard drives in the property disposal process that have not yet been sanitized. VA requires that hard drives of excess computers be sanitized prior to reuse or disposal because they can store sensitive personal and medical information used in VA programs and activities, which could be compromised and used for unauthorized purposes. For example, our limited tests of excess computer hard drives in the disposal process that had not yet been sanitized found hundreds of unique names and Social Security numbers on VA headquarters computers and detailed medical histories with Social Security numbers on computer hard drives at the San Diego medical center. Our limited tests of hard drives that were identified as having been subjected to data sanitization procedures did not find data remaining on these hard drives. However, our limited tests identified some problems that could pose a risk of data breach with regard to sensitive personal and medical information on hard drives in the disposal process that had not yet been sanitized. For example, our IT security specialist noted excessive delays--up to 6 years--in performing data sanitization once the computer systems had been identified for disposal, posing an unnecessary risk of losing the sensitive personal and medical information contained on those systems. VA Handbook 0730/1, Security and Law Enforcement, prescribes physical security requirements for storage of new and used IT equipment, requiring storerooms to have walls to ceiling height, overhead barricades that prevent "up and over" access from adjacent rooms, motion intrusion detection alarm systems, and special key control, meaning room door lock keys and day lock combinations that are not master keyed for use by others. Most of the designated IT equipment storage facilities at the four case study locations met VA IT physical security requirements; however, we identified deficiencies related to lack of intrusion detection systems at the Washington, D.C., and San Diego medical centers and inadequate door locks at the Washington, D.C., medical center. In response to our findings, these facilities initiated actions to correct these weaknesses. We also found numerous informal, undesignated IT equipment storage locations that did not meet VA physical security requirements. For example, at the VA headquarters building, our investigator found that the physical security specialist was unaware of the existence of IT equipment in some storerooms. Consequently, these storerooms had not been subjected to required physical security inspections. Further, during our statistical tests, we observed one IT equipment storeroom in the VA headquarters building IT Support Services area that had a separate wall, but no door. The wall opening into the storeroom had yellow tape labeled "CAUTION" above the doorway. The storeroom was within an IT work area that had dropped ceilings that could provide "up and over" access from adjacent rooms, and it did not meet VA's physical security requirements for motion intrusion detection and alarms and secure doors, locks, and special access keys. In another headquarters building, we observed excess IT equipment stacked in the corners of a large work area that had multiple doors and open access to numerous individuals. We also found that VA headquarters IT coordinators used storerooms and closets with office-type door locks and locked filing cabinets in open areas to store IT equipment that was not currently in use. The failure to provide adequate security leaves the information stored on these computers vulnerable to data breach. Mr. Chairman, although VA strengthened existing property management policy in response to recommendations in our July 2004 report, issued several new policies to establish guidance and controls for IT security, and reorganized and centralized the IT function within the department under the CIO, additional actions are needed to establish effective control in this area. For example, pursuant to recommendations made in our July 2004 report, VA updated its property management policy to clarify that IT equipment valued at under $5,000 is to be included in annual inventories. However, as noted in this testimony and described in more detail in our companion report, VA had not taken action to assure that these items were, in fact, subjected to physical inventory. In addition, the new CIO organization has no formal responsibility for medical equipment that stores or processes patient data and does not address roles or necessary coordination between IRM and property management personnel with regard to inventory control of IT equipment. The Assistant Secretary for Information and Technology, who serves as the CIO, told us that the new CIO organization structure will include a unit that will have responsibility for IT equipment asset management once it becomes operational. However, this unit has not yet been funded or staffed. To assure accountability and safeguarding of sensitive IT equipment, effective implementation will be key to the success of VA IT policy and organizational changes. Our companion report released today made 12 recommendations to VA to strengthen accountability of IT equipment and minimize the risk of theft, loss, misappropriation, and compromise of sensitive data. These included recommendations for revising policies related to recordkeeping requirements to document essential inventory events and transactions, ensuring that physical inventories are performed in accordance with VA policy, enforcing user-level accountability for IT equipment, and strengthening physical security of IT equipment storage locations. VA management agreed with our findings and concurred with all 12 recommendations. In VA's written comments provided to us, it noted actions planned or under way to address our recommendations. Poor accountability and a weak control environment have left the four VA case study organizations vulnerable to continuing theft, loss, and misappropriation of IT equipment and sensitive personal data. To provide a framework for accountability and security of IT equipment, the Secretary of Veterans Affairs needs to establish clear, sufficiently detailed mandatory agencywide policies rather than leaving the details of how policies will be implemented to the discretion of local VA organizations. Keys to safeguarding IT equipment are effective internal controls for the creation and maintenance of essential transaction records; a disciplined framework for specific, individual user-level accountability, whereby employees are held accountable for property assigned to them, including appropriate disciplinary action for any lost equipment; and maintaining adequate physical security over IT equipment items. Although VA management has taken some actions to improve inventory controls, strengthening the overall control environment and establishing and implementing specific IT equipment controls will require a renewed focus, oversight, and continuing commitment throughout the organization. We appreciate VA's positive response to our current recommendations and planned actions to address them. If effectively implemented, these actions will go a long way to assuring that the weaknesses identified in our last two audits of VA IT equipment will be effectively resolved in the near future. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact McCoy Williams 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 statement. Major contributors to this testimony include Gayle L. Fischer, Assistant Director; Andrew O'Connell, Assistant Director and Supervisory Special Agent; Abe Dymond, Assistant General Counsel; Monica Perez Anatalio; James D. Ashley; Francine DelVecchio; Lauren S. Fassler; Dennis Fauber; Jason Kelly; Steven M. Koons; Christopher D. Morehouse; Lori B. Tanaka; Chris J. Rodriguez; Special Agent Ramon J. Rodriguez; and Danietta S. Williams. In addition, technical expertise was provided by Keith A. Rhodes, Chief Technologist, and Harold Lewis, Assistant Director, Information Technology Security, Applied Research and Methods. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In July 2004, GAO reported that the six Department of Veterans Affairs (VA) medical centers it audited lacked a reliable property control database and had problems with implementation of VA inventory policies and procedures. Fewer than half the items GAO selected for testing could be located. Most of the missing items were information technology (IT) equipment. In light of these concerns and recent thefts of laptops and data breaches at VA, this testimony focuses on (1) the risk of theft, loss, or misappropriation of IT equipment at selected locations; (2) whether selected locations have adequate procedures in place to assure accountability and physical security of IT equipment in the excess property disposal process; and (3) what actions VA management has taken to address identified IT inventory control weaknesses. GAO statistically tested inventory controls at four case study locations. A weak overall control environment for VA IT equipment at the four locations GAO audited poses a significant security vulnerability to the nation's veterans with regard to sensitive data maintained on this equipment. GAO's Standards for Internal Control in the Federal Government requires agencies to establish physical controls to safeguard vulnerable assets, such as IT equipment, which might be vulnerable to risk of loss, and federal records management law requires federal agencies to record essential transactions. However, GAO found that current VA property management policy does not provide guidance for creating records of inventory transactions as changes occur. GAO also found that policies requiring annual inventories of sensitive items, such as IT equipment; adequate physical security; and immediate reporting of lost and missing items have not been enforced. GAO's statistical tests of physical inventory controls at four VA locations identified a total of 123 missing IT equipment items, including 53 computers that could have stored sensitive data. The lack of user-level accountability and inaccurate records on status, location, and item descriptions make it difficult to determine the extent to which actual theft, loss, or misappropriation may have occurred without detection. GAO also found that the four VA locations reported over 2,400 missing IT equipment items, valued at about $6.4 million, identified during physical inventories performed during fiscal years 2005 and 2006. Missing items were often not reported for several months and, in some cases, several years. It is very difficult to investigate these losses because information on specific events and circumstances at the time of the losses is not known. GAO's limited tests of computer hard drives in the excess property disposal process found hard drives at two of the four case study locations that contained personal information, including veterans' names and Social Security numbers. GAO's tests did not find any remaining data after sanitization procedures were performed. However, weaknesses in physical security at IT storage locations and delays in completing the data sanitization process heighten the risk of data breach. Although VA management has taken some actions to improve controls over IT equipment, including strengthening policies and procedures, improving the overall control environment for sensitive IT equipment will require a renewed focus, oversight, and continued commitment throughout the organization.
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DOL and VA oversee four employment and training programs targeted to veterans (see table 1). DOL administers its programs through state workforce agencies in each state. DOL oversees these programs through federal officials stationed in each region, including a Director of Veterans' Employment and Training located in each state. DOL's VETS administers three of the employment programs targeted to veterans. VETS also funds its portion of the TAP, which is a joint program with the Department of Defense and VA. VA funds the Vocational Rehabilitation & Employment Program. In December 2012, we examined the extent to which certain federal veterans' employment and training programs vary in terms of the services they deliver and the veterans who receive them. We reported that some federal veterans' programs provide similar services (e.g., job placement) but largely serve different populations. In addition to its programs administered by VETS, DOL offers employment and training services to the general population--including veterans. These programs include a national system of public employment services available to all individuals seeking employment. Those services include job search and labor market information and, as with its veterans programs, DOL administers its general programs through state workforce agencies that provide services at AJCs. Formerly known as One-Stop Career Centers, AJCs unify service locations for multiple federally-funded employment and training programs in a single system. AJCs serve two types of customers--job seekers and employers--and provide access to a full range of services pertaining to employment, training and education, employer assistance, and guidance for obtaining other assistance. Federal law requires these programs to give veterans priority over the general population, meaning that veterans can access services ahead of the general population or, if funds are limited, that veterans access services instead of the general population. From April 1, 2012, to March 30, 2013, AJCs served about 1.6 million veterans nationally through DOL's Employment and Training Administration. Most of DOL's employment service programs--both for veterans and the general public--report the same performance measures, known as common measures: Percentage of program exiters who have obtained employment (entered employment rate); percentage retaining employment for 6 months after exiting the program (employment retention rate); and 6-month average earnings of program exiters (average earnings). TAP was established over 20 years ago to meet the needs of separating servicemembers during their period of transition to civilian life by offering job-search assistance and related services (see fig. 1). TAP consists of several significant components provided by the Department of Defense, VA, DOL, and the Small Business Administration, among others. One of the components, DOL's TAP employment workshops, consists of comprehensive 3-day workshops at selected military installations nationwide. Workshop attendees learn about job searches, career decision-making, current occupational and labor market conditions, resume and cover letter preparation, and interviewing techniques. Participants also are provided with an evaluation of their employability relative to the job market. TAP workshops must have a minimum of 10 participants and a maximum of 50 participants, per DOL guidelines. The Department of Defense is generally required to mandate participation, with some exceptions. Under the VOW to Hire Heroes Act of 2011, DOL has been required to use a contractor to conduct these employment workshops since November 21, 2013. The funding level for the DOL-provided employment workshop component of TAP for fiscal year 2014 was about $14 million, according to DOL's 2015 Congressional Budget Justification. With these funds, VETS provided nearly 7,000 employment workshops that served over 207,000 participants, according to DOL. DOL reported that this was an 11 percent increase in participants, compared to fiscal year 2013. DOL attributed the increased demand for its employment workshops to the fact that TAP became mandatory for all transitioning servicemembers in fiscal year 2013. DOL requested $14 million for fiscal year 2015 in order to provide about 5,400 employment workshops with a planned average class size of 35 exiting servicemembers or spouses. This amount included the costs for conducting the pilot workshops outlined in the Dignified Burial Act. All of the content from TAP is also available online. The online or "virtual" curriculum was added to benefit servicemembers at geographically separated units, those with a short-notice separation and those contemplating retirement because some servicemembers may not have access to classrooms for transition instruction. Online TAP mirrors the traditional TAP offerings, and allows servicemembers, veterans, and spouses to access it from anywhere in the world. The Dignified Burial Act required DOL to provide TAP to veterans and their spouses at locations other than military installations for the purposes of assessing the feasibility and advisability of providing such a program. The act required the workshops to be piloted for 2 years starting in January 2013: in three to five states (at least two of which had to have high levels of veteran unemployment); at a sufficient number of locations to meet the needs of veterans and spouses within each pilot state; anywhere except military installations (could, however, include National Guard or reserve facilities not on active duty military installations); and, in a manner that generally follows the content of TAP. The Dignified Burial Act also required DOL to provide to Congress an annual report on the provision of the workshops for each year of the pilot. In response to the Dignified Burial Act, DOL provided the same employment workshops--including the same curriculum delivered by the same contractor--for the veterans' employment workshop pilot as it uses for active servicemembers as part of on-base TAP. DOL officials said the TAP workshops offered employment training elements that were relevant to veterans, such as information on the federal hiring process, resume writing, and job searching practices. DOL officials also said that its TAP workshops satisfied the Dignified Burial Act's requirement that the training should generally follow the content of the TAP.DOL has published two annual reports on the pilot. As required by the act, DOL provided the workshops to veterans in three states that volunteered to assist with the pilot--Georgia, Washington, and West Virginia--from November 2013 to December 2014. DOL officials said they selected the pilot states using a number of factors, including selecting two states with high veteran unemployment rates--Georgia and West Virginia--as DOL also considered states' veteran population, required by law. number of military installations, infrastructure, geographic dispersion, and capacity to administer the program.West Virginia because it also presented the opportunity to test the pilot in one rural state. Officials said that they selected DOL instructed each state to hold 5 workshops; West Virginia subsequently held 7 additional workshops and Washington canceled 1, bringing the three-state total to 21. DOL provided guidance to the pilot states about where to hold the workshops and other requirements and then asked the state workforce agencies to select individual workshop locations based on DOL officials' belief that state workforce agency officials would have a better idea of where the workshops were most needed. For example, DOL told pilot states the workshops could be held anywhere except military installations, as generally required by law, and that the classrooms needed to have internet access and be able to accommodate a large number of people. While each state held the workshops at locations other than military installations, the three state workforce agencies used different approaches in selecting locations for the workshops. Georgia, for instance, chose locations in part using veteran population data from VA's website, Washington chose several locations close to military installations, and West Virginia chose locations mostly near rural areas. While states used different methods to select the workshop locations, Georgia and Washington held most workshops at AJCs. West Virginia held workshops mainly at National Guard installations and community college campuses because the state's AJCs did not have classrooms that could accommodate large numbers of participants or the technology to present the course materials, according to state officials. DOL also instructed states to market the pilot to veterans and their spouses; each state developed its own marketing strategy. According to state workforce agency officials we interviewed, they worked with other organizations to inform veterans about the workshops. For example, officials from Washington's state workforce agency said they collaborated with federal, state, and non-profit organizations, such as the National Guard, Job Corps, and local VA offices, and also sent marketing e-mails to unemployed veterans they identified through the Department of Defense's Unemployment Compensation for Ex-servicemembers program. Similarly, in West Virginia, officials said they asked their partners, including veteran service organizations and community colleges, to inform their constituents about the workshops. West Virginia officials advertised the workshops through mass marketing efforts, such as television and the state workforce agency website. A Georgia official told us they also worked with state and local partners to inform veterans about the workshops and that they recruited participants through a homeless women's veterans center. Additionally, all three states developed flyers that they distributed through their various partners. Finally, DOL instructed pilot states to help DOL collect information on pilot participants by enrolling workshop participants in the AJC database to get basic demographic data on them and eventually track their employment outcomes. Officials said they are collecting outcome data for workshop participants using the same measures as other DOL employment programs, namely whether veterans found a job, if they retained the job, and their average wage earnings. Additionally, the department asked states to administer DOL surveys that asked participants about their satisfaction with the workshop, including whether it accomplished its objectives and how much participants valued the training. Workshops were conducted during weekday business hours due to AJCs not being open during evenings or weekends. on the veterans' employment workshops; officials said that developing a new survey would have been costly and time consuming because, for example, it would have required both departmental and Office of Management and Budget approval.customer satisfaction questions such as the extent to which participants felt the workshop was useful rather than why participants took the workshop. Officials noted that DOL implemented the pilot within its existing TAP budget and spent about $52,000 on costs for the pilot. Officials in all three pilot states reported that the workshops benefitted veterans by enhancing their job search capabilities, including helping them (1) write resumes, (2) build interviewing skills, and (3) translate their military experience into civilian job skills. For example, officials in West Virginia stated that one workshop helped a veteran translate experience as an infantryman and command sergeant major into core competencies of personnel management and logistics, noting the veteran could market his skills as a logistics expert and apply for management positions. The officials further noted that the workshop likely increased participants' confidence in their civilian lives, pointing specifically to one participant who had been so motivated by the workshop that he found work and shelter after being homeless. A National Guard representative in West Virginia told us that the workshops also helped veterans prepare for job fairs. Officials in Washington noted that some participants found the workshop useful because it incorporated all of DOL's individual employment services into a single 3-day session in a more intensive learning environment. On average, the 110 participants who completed the DOL satisfaction survey rated the workshop highly--respondents rated the course a 9 out of 10 overall, with 10 being "excellent"--and many echoed the specific benefits that officials noted. For example, 95 of 110 participants reported that they believed both that the training was relevant to their job search needs and that the training improved their skills. A little more than half of the participants (59 of 110) also wrote in--rather than checking a box--that they particularly valued the workshop's resume writing assistance. DOL's second annual report to Congress on the pilot noted that the satisfaction survey results across the three pilot states were similar. In addition, officials from two veteran service organizations told us that the workshops could enhance veterans' job search skills. One veteran service organization official also told us that the workshops could be more meaningful to veterans than the TAP workshops they took before they left the military because some separating servicemembers may not be able to anticipate what challenges they will face in civilian life and they may not realize how important the skills that are taught in TAP will be to them. Despite efforts noted earlier to market the pilot and recruit participants, states struggled to attract participants and meet DOL's targets for class participation. In 21 workshops across the three states, a total of 250 veterans participated in the pilot, according to DOL data. DOL instructed states to have a minimum of 10 participants enrolled in order to schedule a workshop and a maximum of 50 participants--the same guidelines as for DOL's TAP workshops--with a preferred class size of 30-35 participants. Although several state officials told us that most workshops had at least 10 veterans enrolled initially, fewer than half of the workshops had 10 or more veterans actually attend; dozens of enrolled veterans did not show up. Furthermore, only 2 workshops had more than 30 participants. The five largest workshops were all located in an area of West Virginia in which participants may have been Department of Defense civilian contract workers facing a reduction in force. As in Georgia and Washington, workshops in other areas of West Virginia averaged fewer than 10 participants (see fig. 2). State officials and others offered several potential reasons for the generally low participation in the pilot workshops. For example, a state official in Georgia explained that some veterans may not have registered for the workshops because they could not spare 3 consecutive business days if, for example, they were engaged in a job search. Similarly, an official from a veteran service organization noted some veterans might need the time to work at a part-time job. Likewise, DOL's second annual report indicated that states felt challenged by the 3-day format, which they believed precluded many individuals from participating and also resulted in a number of participants leaving at some point during the 3 days. Some state officials also said that some veterans who had registered for the workshops dropped out because of "life demands," such as not having child care, which kept them from participating. An official in Georgia noted that an ice storm forced them to postpone four of the workshops and might have decreased participation in the rescheduled workshops. One DOL official said that participation might have been low in some locations because some veterans used services from similar programs such as job search services through AJCs. After noticing that registrants were dropping out, officials in West Virginia started calling registrants before workshops to remind them. West Virginia officials also worked with a hotel chain to offer free lodging during workshops to try to increase participation. However, a West Virginia official said that these efforts did not seem to have a significant effect on participation. Several state and veteran service organization officials suggested ideas for increasing participation for any future iteration of the workshops, including (1) holding shorter workshops; (2) providing options for participants to attend only certain portions, such as resume writing; (3) offering workshops at night or on weekends; and (4) having DOL help with marketing. DOL's second annual report noted that states found the lack of funding for marketing the pilot a challenge, saying that they could have engaged in a more comprehensive recruiting effort to ensure greater commitment from participants if funding had been available. DOL has published information about the veterans' employment workshop pilot in two annual reports required by the Dignified Burial Act. The 2014 pilot report provided an interim picture of workshop attendance and plans for data collection, and the 2015 report provided final attendance numbers--250 participants in three states--and certain participant demographics. The second annual report noted that a majority of participants were male and between the ages of 25 and 44. We conducted some further analyses of the data DOL collected, breaking down age ranges, employment status, and education levels (see sidebar). For example, the majority of participants for whom DOL collected demographic data were employed. DOL also collected data through a participant satisfaction survey; as we mentioned earlier, many survey respondents believed the workshop had increased their job search skills. Additionally, DOL interviewed state workforce agencies on best practices and challenges states faced. For example, DOL identified as a best practice West Virginia's formation of a diverse working group that included the West Virginia National Guard, local workforce investment boards, community colleges, and local veteran service organizations. Regarding challenges, states noted a lack of funding for state marketing as significant, according to DOL's 2015 report. States also indicated that the 3 consecutive day format excluded veterans who were unable to commit to attending for that period of time and resulted in a number of participants leaving at some point during the workshop. Lastly, the 2015 report also noted DOL plans to collect employment outcome data for workshop participants, which will not be available until October 2016. The Dignified Burial Act tasked us with reporting to Congress on the pilot, including the feasibility and advisability of providing veterans' employment workshops nationally. However, DOL's pilot design left unanswered at least three key questions that sound design practices suggest should be considered. Reponses to these questions could provide important information regarding the feasibility and advisability of expanding veterans' employment workshops nationally. 1. What is the need for the program overall and for any specific, targeted groups of veterans? 2. What is the pilot's role amid existing federal employment and training programs? 3. Relative to any needs it identifies, against what goals and objectives can DOL assess the pilot or an expanded version of it? Sound pilot design practices call for a needs assessment to better identify the population best served by the program or services being piloted as well as those populations that might not need the services. DOL officials said that they intended the pilot to serve the general veteran population and their spouses, the eligible beneficiaries identified in the Dignified Burial Act. Furthermore, DOL officials noted that because the law had defined a population of eligible beneficiaries, it would have been duplicative to conduct a needs assessment. As DOL noted in its second annual report, however, the general veteran population has widely varied employment experience, dates of separation, and disability status; this suggests different levels of need for the workshops. Had DOL more closely followed sound design practices by conducting a needs assessment, it could have tested this assumption and determined where the greatest need, if any, lay. For example, DOL could have determined whether to target the program to all veterans, regardless of their experiences or, instead, to certain targeted groups that may, because of their situations, be more likely to need and benefit from the workshops. DOL officials also said that there was not enough time and financial resources to conduct a needs assessment, pointing, as noted earlier, to the fact that DOL received no additional funding for this pilot and had to complete it within 2 years.information without expending significant time or resources. For example, DOL could have consulted with significant external stakeholders, such as the VA and veteran service organizations, to seek input on questions about veterans' needs. Sound design practices indicate the importance of having relevant and timely communications with all stakeholders throughout the design and delivery of the program to fully engage all parties and obtain information in order to achieve all of the pilot's objectives. DOL officials did not reach out to these stakeholders with expertise in veterans' issues because, as they designed it, the pilot did not include information on benefits and services offered through the VA, and thus they viewed collaboration with them as unnecessary. As a result, DOL missed opportunities to gather potentially valuable input to inform the pilot's design, such as better determining the needs of the veteran population, what their participation rates might be, and how to most effectively use limited resources to market the workshops to veterans. For example, officials from two veteran service organizations said they would have helped DOL market the workshops in an effort to increase attendance. However, DOL could have gathered some Without specific guidance from DOL about the needs the pilot should address, states determined their own target populations. For example, West Virginia targeted individuals in rural areas, while Georgia focused on veterans who were not required to take TAP prior to leaving the military, according to state workforce agency officials. lacks the benefit of knowing for which veterans the program was most useful and thus whether its approach likely helped those most in need of the resources it devoted to the program. As previously noted, federal law mandates that the Department of Defense require transitioning servicemembers to participate in an employment workshop, with some exceptions. In addition, because the design did not include a needs assessment, DOL did not know how many workshops would be required to meet the potential demand and the extent to which its existing resources would allow it to meet the identified need. DOL officials said they determined that existing resources would cover only 15 workshops across the three states. Officials could not point to any formal analysis conducted to determine this number, despite the Dignified Burial Act requiring DOL to offer the workshops at a sufficient number of locations within each state to meet the needs of eligible individuals. Officials from West Virginia's state workforce agency asked DOL to authorize additional workshops because they said that five was insufficient to reach all of the veterans they believed would likely benefit from attending.the additional workshops would help make them more geographically accessible across the state. The overall low attendance levels for the pilot workshops raise questions about the extent to which existing workshops met the demand for them. If DOL had determined the number of workshops needed in each state as part of a needs assessment, it could have been better positioned to learn what additional demand--if any-- there might be for the workshops and what the costs could be of meeting that demand. According to sound design practices, agencies should determine the extent to which a pilot might fill gaps in federal services or enhance existing programs while avoiding inappropriate overlap or duplication with those programs. DOL followed this design practice somewhat, but could have gone further. DOL officials said, prior to the enactment of the Dignified Burial Act and in interviews during our review, that the pilot duplicated existing employment and training programs already available to veterans. However, DOL did not conduct a formal assessment of the extent to which similar programs not only exist, but are also serving veterans (and their spouses). By more closely following sound design practices, DOL could have used the 2-year pilot to better understand the population the program should target. For example, in addition to consulting with stakeholders as previously noted, DOL could have used data underlying a DOL-funded study of how AJCs serve veterans to learn the numbers of veterans served by AJCs in the pilot states. By not building into its design an assessment of the extent to which existing programs serve the identified needs of all veterans (or targeted groups), it is difficult to draw well-informed conclusions about the advisability of expanding the pilot while being mindful of DOL's resources and the need to avoid unnecessary overlap and duplication of services veterans may already be receiving. Officials in one pilot state told us they thought the workshops filled a gap by providing higher quality and more updated information on how to write resumes and prepare for interviews than anything the state could deliver to veterans. Officials from two veteran service organizations also suggested the workshops could enhance DOL's employment programs. Officials from one veteran service organization told us that veterans could receive basic employment information through the workshops and then focus on specific training needs when they access other DOL services. In contrast, a DOL official told us that he had attended a workshop and thought DOL's other employment and training programs covered all of the topics in the workshop. Conducting a formal assessment of the extent to which the pilot could either fill a service gap or enhance current programs could have better positioned DOL to serve individuals whom existing programs overlook or could serve in the future. Sound design principles indicate that goals and objectives can help an agency define a pilot's need and scope, as well as help uncover any differences in expectations and concerns program stakeholders have with implementing the pilot. DOL officials told us that the goal of the pilot was to test its feasibility. However, DOL did not create clear, measurable goals--as well as objectives that link to those goals--that would define what testing the pilot's feasibility meant. States, in turn, administered the pilot based on their perception of the pilot's goals. For instance, West Virginia officials said the purpose of the pilot was to help veterans get "job-ready." Washington and Georgia officials said the purpose was to serve individuals who did not take TAP. The lack of clearly and consistently defined goals and objectives limits DOL's ability to measure the pilot's performance related to any expected outcome or better inform decisions about its future. DOL's annual report provides information on participant demographics, survey data, and upcoming employment outcomes, but DOL cannot determine how well the pilot performed against specific goals and objectives. Therefore, the department missed an opportunity to better establish the value of the pilot, which could have assisted stakeholders such as the Congress in making sound decisions about its future. The federal government has created a number of programs that assist veterans and servicemembers transitioning to civilian life, including the employment workshop pilot for veterans and their spouses. In embarking on this effort, DOL's approach--asking states to volunteer to participate and making no modifications to the existing TAP workshop--allowed it to implement the pilot within 2 years and without additional funding. While this approach was understandable given the time and resource constraints DOL cited, the pilot design did not fully embrace certain sound practices that would have enabled it to better inform congressional decision-making about the advisability of expanding the pilot. Specifically, questions about the need for offering the workshops to veterans and their spouses, the program's role amid other existing federal programs, and specific goals and objectives against which program performance could be measured remain unanswered. The pilot has ended, but these questions raise the issue of how to leverage the federal investment that was made in the pilot as well as the efforts the states put into delivering the workshops. In light of the low attendance levels of veterans in the pilot workshop, information on the fundamental issue of whether such a workshop could fill a niche for veterans that is not currently met by existing programs is important. Collaboration with stakeholders such as VA and veteran service organizations could provide useful perspective in developing this information. Such information could assist Congress in making sound decisions on any potential future iterations of the veterans' employment workshop. To inform decisions on any potential future iterations of the veterans' employment workshop, we recommend that the Secretary of Labor assess and report to Congress the extent to which further delivery of employment workshops to veterans and their spouses could fill a niche not fully served by existing federal programs. Such an assessment could involve collaboration with VA and other stakeholder organizations. We provided a draft copy of this report to DOL for review and comment. DOL concurred with our recommendation and noted that it will conduct a deliberate assessment of (1) the need for the services offered under the pilot; (2) which services are most useful for veterans and their spouses; and (3) what overlap exists with programs providing similar services to this population. DOL added that the assessment should compare the services the AJC system provides to veterans and their spouses with the information contained in DOL's veterans' employment workshops and online curriculum. DOL also stated that the assessment should identify if specific services provided within the AJC system require revision or redesign to better meet the employment needs of veterans and their spouses. DOL's comments are reproduced in appendix II. We also provided relevant portions of the draft to VA, which had no comments. We are sending copies of this report to relevant congressional committees, the Secretary of Labor, and other interested parties. In addition, this report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staffs 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 VI. The objectives of this report were to examine (1) how the Department of Labor (DOL) implemented the veterans' employment workshop pilot program, (2) what state officials reported regarding the benefits and challenges of the workshops in the pilots, and (3) how the pilot informs decisions about its possible expansion. To provide information on how DOL designed the pilot, how it planned to evaluate it, and the extent to which DOL collaborated with other organizations during the pilot's design, we reviewed relevant federal laws and regulations and e-mail correspondence between DOL officials on the steps they took to design the pilot and documents describing DOL's plan for collecting data to determine the pilot performance. We also interviewed officials from DOL's Veterans' and Employment Training Service (VETS) about how they selected the states to test the pilot, what steps were taken to set up the infrastructure of the workshops, such as classroom requirements and training materials, and the extent to which they collaborated with other federal and non-federal entities. We also asked VETS officials about the types of performance data they planned to collect and how they planned to report the results of the pilot. We interviewed Department of Veterans Affairs and veteran service organization officials about the extent to which DOL collaborated with them during the design of the pilot and the extent to which DOL collaborated with them in developing and implementing the pilot. To provide information on how the pilot was implemented and what state officials reported regarding the benefits and challenges of the workshops in the pilots, we conducted telephonic interviews with DOL and state workforce agency officials in each of the pilot states: Georgia, Washington, and West Virginia. During our interviews we asked these officials what their roles and responsibilities were, how workshop locations were selected, what marketing efforts states employed to publicize the workshops, and the extent to which they collaborated with other federal and non-federal entities. We also asked about the benefits the veterans' employment workshops offered participants as they searched for employment, the extent to which the workshops provided information on veterans' benefits not offered by DOL, and any challenges the states faced in delivering the workshops. We reviewed DOL participant data, the results of DOL's survey of workshop participants, and DOL's two annual reports on the pilot, including verifying the reports' workshop attendance figures with DOL and pilot states. To determine the reliability of the data, we interviewed agency officials knowledgeable of DOL's data collection and reporting systems and reviewed agency documentation. We concluded the participant data were sufficiently reliable to describe certain demographic characteristics of the population that took the workshops and were enrolled in DOL's American Job Centers (AJC). To determine the reliability of the survey data, we interviewed agency officials who developed the survey, reviewed agency documentation, and consulted with GAO subject matter experts in survey design. We determined that DOL's survey data were sufficiently reliable for presenting qualitative response information. To identify how the pilot informs decisions about its possible expansion, we reviewed how practices in pilot design can affect what an agency learns in its evaluation of a pilot. We reviewed guidance from federal agencies on program design and evaluation found during the course of our research and guidance identified by subject matter experts. We reviewed design and evaluation guidance from the Centers for Disease Control and Prevention because officials from DOL's Chief Evaluation Office said they use that guidance for their evaluation practices. We reviewed design guidance recommended by GAO subject matter experts on program design and evaluation. We also reviewed GAO's Standards for Internal Control, which identifies elements of effective internal controls including management responsibility for defining objectives in specific and measurable terms, communicating necessary information to achieve objectives, and establishing and operating monitoring activities. Moreover, we conducted an independent search for guidance to further support the standards for program design noted in this report. We found, for example, guidance supporting the standard of establishing and maintaining clear communication channels with relevant stakeholders from the Department of Health and Human Services' Agency for Healthcare Research and Quality and the National Institutes of Health. We found additional support for conducting a needs assessment identifying whether a new program is needed from the Department of Education and the Department of Transportation. GAO subject matter experts in program design and evaluation verified the leading practices and the extent to which the practices were relevant to our review of the veterans' employment workshop pilot by comparing the criteria with steps of evaluation design listed in our guide on program evaluations. See table 2 for the list of leading practices we identified in pilot design and pilot implementation. Andrew Sherrill, (202) 512-7215 or [email protected]. In addition to the contact named above, Bill MacBlane (Assistant Director), Drew Nelson (Analyst in Charge), David Chrisinger, David Forgosh, Alex Galuten, Monika Gomez, Stephanie Shipman, and Walter Vance made key contributions to this report. Also contributing to this report were Juli Cutts, Laura Hoffrey, Kathy Leslie, Mimi Nguyen, Ronni Schwartz, and James Whitcomb.
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The federal government has long offered programs that assist veterans with finding employment. In 2013, the Dignified Burial and Other Veterans' Benefits Improvement Act of 2012 was enacted, which required DOL to provide employment workshops to veterans and their spouses at locations other than military facilities through a 2-year pilot that ended in January 2015. The act also included a provision for GAO to report on the training and possible expansion of the pilot. This report addresses: (1) how DOL implemented the pilot, (2) what state officials reported regarding the benefits and challenges of the pilot, and (3) how the pilot informs decisions about its possible expansion. GAO reviewed relevant federal laws and regulations; identified leading practices on pilot design from federal agencies, subject matter experts, and GAO's standards for internal control; and interviewed officials from DOL, the Department of Veterans Affairs, state workforce agencies in each of the three pilot states, and veteran service organizations. GAO also obtained information on the pilot from DOL data and a DOL survey of workshop participants. The Department of Labor (DOL) was required by law to provide employment workshops to veterans and their spouses in a pilot program. In response, DOL used the same 3-day employment workshops for the pilot that it provides to servicemembers on military bases as part of the Transition Assistance Program (TAP) in order to implement the pilot within time and resource constraints, according to DOL officials. DOL selected three states for the pilot--Georgia, Washington, and West Virginia--based on a number of factors, including two states with a high veteran unemployment rate, as required by law. DOL instructed each of the states to conduct five workshops--West Virginia held an additional seven and Washington canceled one--and delegated the responsibility for choosing locations and marketing the pilot to state workforce agencies. States held the workshops at locations other than military facilities and employed different marketing approaches to publicize the workshops, including flyers and e-mail. DOL officials said that time and resource constraints, such as implementing the pilot within its existing TAP budget, influenced the department's pilot implementation, including its decision to use the same TAP workshops, conducted over 3 consecutive days, and to offer five workshops per state. Officials in all three pilot states reported that the workshops benefitted veterans by enhancing their job search capabilities--including resume writing and interviewing--but states had difficulty attracting participants. The workshops generally fell short of DOL's attendance goals: a minimum of 10 participants and a preferred class size of 30-35 participants. A total of 250 participants attended the workshops and fewer than half of the workshops had 10 or more participants. Several state officials noted that it was difficult for veterans to schedule 3 consecutive business days to attend the workshop, and some suggested that shortening the course or offering night or weekend alternatives could have increased attendance. DOL's design of the pilot limits the ability to inform Congress about the feasibility and advisability of expanding the pilot. DOL's two annual reports to Congress on the pilot provided information on topics such as workshop attendance, participant demographics and satisfaction with the workshop, and noteworthy state practices and challenges. While such information is useful, DOL's pilot design leaves unanswered key questions about the need for the program, the pilot's role amid other federal programs, and the goals and objectives for measuring its progress. For example, sound pilot design practices call for agencies to conduct a needs assessment, which could have helped DOL identify the population best targeted by the pilot, given veterans' varied employment experience and limited federal resources. DOL officials said that they did not have the time and resources to do such an assessment. Additionally, DOL did not assess the extent to which such a program might fill gaps in existing federal employment programs available to veterans, as sound pilot practices suggest. As a result, it remains unclear whether, as DOL officials contend, this pilot unnecessarily duplicates other programs. Moreover, this type of information could assist congressional deliberation about the need for future employment workshops and leverage the federal investment that has already been made in implementing the now-completed pilot program. GAO recommends that DOL assess and report to Congress the extent to which further delivery of the employment workshop to veterans and their spouses can fill a niche not fully served by existing federal programs. DOL agreed with GAO's recommendation and noted several actions it plans to take to address the recommendation.
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The effort to develop the Airborne Laser is based on over 25 years of scientific development in the Departments of Defense and Energy. It evolved primarily from Airborne Laser laboratory research to develop applications for high-energy lasers. This research culminated in a demonstration that showed that a low-power, short-range laser was capable of destroying a short-range air-to-air missile. Although this demonstration was considered militarily insignificant because of the laser's low power and short range, it did succeed in identifying technologies that were necessary for the development of an operational Airborne Laser system. The research showed that an operational system would need optics that could compensate for the atmospheric turbulence that weakens and scatters a laser beam, optical devices that could withstand the heat produced by a high-energy laser without the added weight of water-cooling devices, and a new chemical laser with higher energy levels that would produce a stronger laser beam. In 1996, the Air Force launched the Airborne Laser program to develop a defensive system that could destroy enemy missiles from a distance of several hundred kilometers. Engineers determined that if they were to meet this requirement, the system would need a 14-module oxygen iodine laser. They also determined that the system would need a beam control/fire control assembly that could (1) safely move the laser beam through the aircraft, (2) shape the beam so that it was not scattered or weakened by the atmosphere, and (3) hold the beam on target, despite the movement of the aircraft. In addition, engineers determined that the system would need a battle management and control system capable of planning and executing an engagement. The Air Force planned to have the science and technology community develop extensive knowledge about the laser and beam control/fire control technologies before it launched an Airborne Laser acquisition program. However, according to the retired manager of the science and technology project, the budgets for technology efforts were limited, and the science and technology community could not fund the technology maturation effort. The Air Force knew that a program office was more likely to command the large budget needed to fully mature technologies, so it launched an acquisition program and assigned the program manager responsibility for both technology and product development. The program manager planned to demonstrate critical Airborne Laser technologies by first building a six-module version of the oxygen iodine laser, installing it along with other system components aboard a Boeing 747 aircraft (see fig. 1), and testing the capability of this scaled system in system-level flight tests. The tests would conclude in 2003 with an attempt to shoot down a short-range ballistic missile target at a distance of 100 kilometers. If this final test were successful, the Airborne Laser would have moved into product development. The Air Force launched the Airborne Laser acquisition program and identified cost and schedule goals before officials had the knowledge to make realistic projections. In 1996, when the program was launched, Department of Defense regulation 5000.2 required, and still requires today, that when a military service initiates a major acquisition program, it must establish cost and schedule goals. However, the Air Force could not make realistic estimates when it began the program because it had no way of knowing how much engineering effort would be needed to complete the development of technology critical to the system. Even today, some critical technologies that the system's design depends upon remain immature, making it very difficult for analysts to determine how long it will take and how much it will cost to develop and produce the system. At the time the Airborne Laser program was launched, the laser and beam control/fire control technologies needed to develop the Airborne Laser system was immature. The Department of Defense's science and technology community was actively researching and developing the laser and had produced a weak beam in a laboratory setting--but this major component had not reached the level of maturity needed to proceed into product development. The technology necessary to develop the beam control/fire control was even less advanced. Most of the scientists' work was limited to analytical studies, wherein a few tests of laboratory hardware were linked together to work somewhat like the intended component. Because technology development is a process of discovery, the Air Force soon learned that there were too many unknowns regarding the development of Airborne Laser technology to make good cost and schedule estimates. As the technology development progressed, unanticipated technical challenges affected the program's cost and schedule. Department of Defense analysts reported that the Airborne Laser program experienced cost and schedule growth because the program and its contractors underestimated the complexity of (1) designing laser components, (2) the system's engineering analysis and design effort, and (3) engineering the system to fit on board the aircraft. As system development progressed and the Air Force gained a better understanding of the technical complexity of the system, the Air Force increased its cost and schedule estimates. The Air Force has made some progress in developing the Airborne Laser's critical technologies, but many remain immature. We asked the Airborne Laser program office to determine the technologies most critical to the Airborne Laser system and to use technology readiness levels to assess the maturity of each. The officials determined that if the Airborne Laser is to meet the requirements established by the war fighters, then engineers must mature technologies in six areas, all of which are needed to successfully design the system. These technologies are devices that stabilize the laser system aboard the aircraft so that the beam can be maintained firmly on the target, optics--mirrors and windows--that focus and control the laser beam and allow it to pass safely through the aircraft, optical coatings that enhance the optics' ability to pass laser energy through the system and to reflect the laser energy, hardware that works in tandem with computer software to actively track devices that measure atmospheric turbulence and compensate for it so that it does not scatter or weaken the laser beam, and safety systems that automatically shut down the high energy laser in the event of an emergency. At our request, the program office also assessed the maturity of the oxygen iodine laser. As figure 2 shows, program officials assessed the optical coatings at level five and the safety systems, atmospheric compensation, and target- tracking components at level six. At technology readiness level five, the technology being tested is incorporated into hardware whose form and fit are coming closer to that needed for an operational component and integrated with reasonable realistic supporting elements so that the technology can be tested in a simulated environment. At level six, the technology is incorporated into a prototype and tested in a high-fidelity laboratory environment or in a simulated operational environment. The program officials identified the optics and stabilizing devices as the least mature--at level four. At this level, engineers have shown that a technology is technically feasible but have not shown whether the technology will have the form, fit, or function required in the operational system. We agreed with all but one of the program officials' assessments for these technologies. Our one disagreement centered on the maturity of the laser component of the system. While the program office assessed it at a technology readiness level of six, we consider the laser technology to be at level four because tests have been conducted only for a one-module laser in a controlled laboratory environment using surrogate components. For example, the tests used a stable laser resonator, rather than the unstable resonator that will be used in system-level flight tests. We also found that during tests of the one-module laser, the resonator was operating in multimode rather than single-mode. The resonator in the operational system will operate in single mode. Furthermore, the chemical storage and delivery subcomponents used in these tests were not representative of those that will be incorporated into the system's design. According to program office officials, conducting a more realistic test would have cost time and money that were not available. Documents summarizing the tests of the one-module laser stated that the tests were successful in reducing the technical risks associated with the one-module system but that a new set of technical risks linked with developing a multimodule system must still be addressed during testing of the six-module system. In our opinion, the program office will demonstrate the laser technology in a relative environment (technology readiness level six) when the six-module system is integrated and successfully tested at full power within the high-fidelity laboratory environment of the Airborne Laser Systems Integration Laboratory, currently under construction at Edwards Air Force Base, California. According to the program office, this type of demonstration will not occur until February 2003. The Missile Defense Agency's new strategy for developing the Airborne Laser incorporates some of the knowledge-based practices that characterize successful programs, but the agency would benefit from adopting another that would add greater discipline to its acquisition process. The new strategy allows more flexibility in setting requirements, makes time and facilities available to mature and test the critical technologies, and collects information needed to match the war fighters' requirements to demonstrated technology. However, the agency has not established decision points with associated knowledge-based criteria for moving forward from (1) technology development to system integration, (2) system integration to system demonstration, and (3) system demonstration to production. At each of these points, the agency would stop to assess its knowledge and decide whether investment in the program's next phase is warranted. The first new practice allows the Missile Defense Agency to refine requirements on the basis of the results of system engineering. The Department of Defense ordinarily faces significant hurdles in matching requirements to resources. The fundamental problem is twofold. First, under the department's traditional process, requirements must be set before a program can be approved and a program must be approved before the product developer conducts systems engineering. Second, the competition for funding encourages requirements that will make the desired weapon system stand out from others. Consequently, many of the department's product development programs include unrealistic requirements set by the user before the product developer has conducted the system engineering necessary to identify the time, technology, and money necessary to develop a product capable of meeting requirements. A second practice that is likely to improve the Airborne Laser's development is making the time and facilities available to mature and test critical technologies. To implement this practice, the agency increased the time available to test the six-module laser system and is building a new test facility. Instead of following the Air Force's plan to complete system- level flight tests of the six-module system in the last quarter of fiscal year 2003, the agency has delayed the demonstration to the first quarter of fiscal year 2005. This delay will allow additional time to learn from and correct problems discovered during system-level tests that are scheduled to begin in the last quarter of fiscal year 2003 and end with the fiscal year 2005 demonstration. In addition, the agency plans to increase the Airborne Laser's ground-testing capability by awarding a contract in 2003 for what the agency is calling an "iron bird," which is essentially an aircraft hull with installed laser equipment. The "iron bird" is expected to allow testing of a fully integrated Airborne Laser system on the ground so that technologies for future blocks can be evaluated before being installed in an aircraft. The information gained from testing informs the requirements process. Because testing allows developers to gauge the progress being made in translating an idea into a weapon system, it enables the developer to make a more informed decision as to whether a technology is ready to be incorporated into a system's design. With this knowledge, the developer can determine whether the technology is so important to the system's design that additional time and money should be spent to mature the technology or whether the system's initial performance requirements should be reduced. A third practice that the agency plans to adopt is matching requirements to available technology. According to the Missile Defense Agency's Technical Director, the agency defines the war fighters' requirement as a system that has the capability to destroy some threat ballistic missiles during their boost phase at a range representative of an operational scenario. The Technical Director told us that the agency will attain the knowledge to determine if it has the technology in-hand to meet this requirement by examining each block's capabilities during simulated and system-level flight test and comparing those capabilities with data derived from intelligence sources on the likely launch points and types of missiles that the system could encounter. Our previous work with successful development programs shows that once the technology is in-hand to meet the customer's requirements, the developer can make more accurate initial estimates of the cost and time needed to develop and produce an operational system. Successful developers have instilled discipline in their acquisition processes by requiring that certain criteria for attaining knowledge are met as an acquisition program moves forward. (See fig. 3.) They recognize that the focus and cost of activities change over time and that less rework is required if all activities with the same focus are completed before beginning other activities. In successful development programs, decisions are made when the knowledge is available to support those decisions. The first decision point, or knowledge point, occurs when the focus of a developer's activities changes from technology development to system integration--the first phase of product development. The criterion for deciding to move forward is having the knowledge to match requirements and available resources (time, technology, and funds). The second knowledge point occurs between system integration and system demonstration when the developer has successfully integrated subsystems and components into a stable design that not only meets the customer's performance requirements but also is optimized for reproducibility, maintainability, and reliability. The decision criterion used here is usually having completed about 90 percent of the engineering drawings. The third knowledge point separates system demonstration from production. The decision to invest in production is generally based on a determination that the product performs as required during testing and that the manufacturing processes will produce a product within cost, schedule, and quality targets. The cost of a program's activities increases as it moves closer to production. In commercial acquisitions, product development is typically much more costly than technology development. During technology development, small teams of technologists work to perfect the application of scientific knowledge to a practical problem. As product development begins, developers begin to make larger investments in human capital, bringing on a large engineering force to design and manufacture the product. In addition, product development requires significant investments in facilities and materials. These investments increase continuously as the product approaches the point of manufacture. In fact, industry experts estimate that identifying and resolving a problem during product development can cost 10 times more than correcting that problem during technology development and that correcting the problem during manufacturing is even more costly. We examined the Airborne Laser's acquisition strategy and determined that it does not include decision points at which officials would use knowledge-based criteria to determine if the program is ready to move from technology development to system integration, system integration to system demonstration, and system demonstration to production. We found that the agency's process has three phases: development, transition, and production. Development includes all developmental activities and system-level demonstrations of military utility. Transition will involve preparation of the operational requirements document by the appropriate armed service and conducting operational testing. Production will involve producing and fielding the final weapon system. The agency's strategy also calls for developing the Airborne Laser incrementally, rather than trying to initially develop a system with all desired capabilities. In the near term, the agency plans to complete the six- module laser system aircraft, now known as block 2004, and use it to demonstrate critical Airborne Laser technologies. Beginning in March 2003, the agency intends to begin developing another demonstration aircraft, known as block 2008, which will incorporate new capabilities and technologies. The Airborne Laser program manager told us that blocks 2004 and 2008 are primarily test assets for the purpose of technology demonstration. While some of the block 2008 activities are focused on improving subsystems and components, such as reducing the weight of laser components and improving optics, other activities are focused on the integration of these pieces into a block 2008 design. The agency expects to develop subsequent blocks, or system configurations to introduce additional capabilities. If system-level tests show that any one of these configurations performs at a level that merits fielding, the Air Force will prepare a requirements document based on the configuration's demonstrated capabilities and make plans for operational testing and production. This "baseline" capability would be improved in subsequent blocks as more advanced technology becomes available and as the threat warrants. We did not find that the agency's strategy includes a disciplined process that separates technology development, system integration, system demonstration, and production with decision points supported by knowledge-based criteria. Instead, the agency has put in place a decision point for moving from the development to the transition phase. According to the agency's strategy, when the agency determines that it has the technology in-hand to produce a system that merits fielding, it will begin to transition the system over to the appropriate military service. Also, at the end of the transition phase, a system would enter the formal Department of Defense acquisition process at Milestone C--the point at which the decision is made to enter low rate initial production. We did not find, however, an established set of decision points with associated criteria that would enable the agency to make a knowledge-based decision on whether to invest in system integration and, subsequently, system demonstration and production. That is, even though the agency might know that it has the technology in-hand to develop a useful military capability, it has not established a first decision point where it would determine the cost and time needed to move the program forward and whether the program should proceed into a system integration phase during which the design would be matured and optimized for reproducibility, maintainability, and reliability. Neither does the agency's strategy include a second decision point that would allow agency officials to use the knowledge they have attained regarding the design's maturity to determine whether to invest further to demonstrate that the system meets requirements and that manufacturing processes are in place to repeatedly produce a quality product. Only after the agency successfully moves the program through all of these decision points and successfully demonstrates the system's capabilities and manufacturing processes would the agency's production decision be fully knowledge based. Without this disciplined process, the agency would be accepting greater cost and schedule risks and is much less likely to realize the full potential benefits of its new approach to developing missile defense systems. The revolutionary nature of missile defense weapon systems demands cutting-edge technology. Although there is no one approach that ensures that a developer can deal successfully with the unknowns inherent in developing a product from such technology, the knowledge-based process has proven to yield good results within cost and schedule estimates. The Missile Defense Agency has implemented practices that are part of the knowledge-based approach, and these practices are likely to improve the agency's ability to gather the knowledge it needs to develop an Airborne Laser capability acceptable to the war fighter. However, the agency has the opportunity to make its acquisition process more disciplined. By establishing knowledge-based decision points at key junctures, the agency would be in a better position to decide whether to move from one development phase to the next. Also, the agency would be better able to hold system developers accountable for planning all of the activities required to develop a quality product, approaching those activities in a systematic manner so that no important steps are skipped and problems are resolved sooner rather than later, and making cost and schedule projections when they have the knowledge to make realistic estimates. With this disciplined process in place, the agency is much more likely to achieve a needed capability for the war fighter within established cost and schedule goals. To make its acquisition process more disciplined and provide better information for decision makers as additional investments in the Airborne Laser are considered, we recommend that the Secretary of Defense direct the Director of the Missile Defense Agency to establish decision points separating technology development from system integration, system integration from system demonstration, and system demonstration from production. For each decision point, we recommend that the Secretary instruct the Director to establish knowledge-based criteria and use those criteria to determine where additional investments should be made in the program. In commenting on a draft of this report, the Department of Defense partially concurred with our recommendations (see appendix II). The department stated that Secretary of Defense direction is not needed to implement our recommendations, the Missile Defense Agency's acquisition process for ballistic missile defense already uses tailored versions of the knowledge-based practices recommended by us, and the agency intends to expand the use of knowledge-based criteria in the future. The Department of Defense has not fully implemented the knowledge- based process recommended in our reports. Effective product development depends on gaining sufficient knowledge about technology, design, and manufacturing processes at key points in a system's development. At those points, using metrics--such as technology readiness levels to measure the maturity of technology--that are commonly understood allow informed trade-offs to be made between resources, including cost and time, and performance. We have found that product development activities, such as building engineering prototypes of an integrated system and then demonstrating that the system can be manufactured to acceptable cost and quality standards, are ineffective unless the technologies needed to meet the product's intended capabilities are fully matured and ready for system integration. Virtually every world- class product developer we have spoken with agrees with this. The Airborne Laser program does not appear to have established this type of decision-making process. The Missile Defense Agency appears to have set up a development phase that combines maturing technologies with establishing a stable design. It does not include any visible decision points or standards to clearly indicate when technology development is concluded and system integration work to establish a design begins. Thus, it appears to us that this acquisition process forces the agency to manage significant risk from immature technologies simultaneously with trying to build a stable product design during this phase. Further, separating system integration from system demonstration and system demonstration from production and using common metrics in deciding to move forward will enhance the future likelihood that decisions on the Airborne Laser will be cost-effective. Such a process will also enhance decision-makers' ability across the range of missile defense elements by facilitating comparisons across elements. Therefore, we have retained our recommendations. To address our objectives, we reviewed the contractor's monthly cost performance reports, Defense Contract Management Agency analyses of those reports, and Defense Acquisition Executive Summaries and Selected Acquisition Reports prepared by the Airborne Laser program office. We also discussed cost and schedule problems with Airborne Laser program officials, Kirtland Air Force Base, New Mexico; and contractor officials at the Boeing Company, Seattle, Washington; Lockheed Martin, Sunnyvale, California; and TRW, Los Angeles, California. In addition, we obtained a technology readiness level analysis of the system's critical technologies from the Airborne Laser program office. We compared this analysis with information obtained during our prior review to determine if progress had been made in maturing the critical technologies to higher technology readiness levels. We obtained detailed briefings from program office personnel and Missile Defense Agency officials, Arlington, Virginia; and from the contractors about the status of critical technologies and the problems associated with maturing the technologies required for the laser, the beam control/fire control system, and the required aircraft modifications. We also obtained detailed briefings from program office and Missile Defense Agency officials regarding the new Missile Defense Agency acquisition process and the implementation of this process within the Airborne Laser program. We conducted our review from July 2001 through May 2002 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 until 30 days from the report date. At that time, we will send copies of this report to the congressional defense committees; the Secretary of Defense; the Director, Missile Defense Agency, the Secretary of the Air Force; and the Director, Office of Management and Budget. We will also make copies available to other interested parties upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Key contributors to this report are identified in appendix III. Description Lowest level of technology readiness. Scientific research begins to be translated into applied research and development. Examples might include paper studies of a technology's basic properties. Invention begins. Once basic principles are observed, practical applications can be invented. The application is speculative, and there is no proof or detailed analysis to support the assumption. Examples are still limited to paper studies. Active research and development is initiated. This includes analytical studies and laboratory studies to physically validate analytical predictions of separate elements of the technology. Examples include components that are not yet integrated or representative Basic technological components are integrated to establish that the pieces will work together. This is relatively "low fidelity" compared with the eventual system. Examples include integration of "ad hoc" hardware in a laboratory. Fidelity of breadboard technology increases significantly. The basic technological components are integrated with reasonably realistic supporting elements so that the technology can be tested in a simulated environment. Examples include "high fidelity" laboratory integration of components. Representative model or prototype system, which is well beyond the breadboard tested for technology readiness level five, is tested in a relevant environment. Represents a major step up in a technology's demonstrated readiness. Examples include testing a prototype in a high-fidelity laboratory environment or in simulated operational environment. Prototype near or at planned operational system. Represents a major step up from technology readiness level six, requiring the demonstration of an actual system prototype in an operational environment, such as in an aircraft, vehicle, or space. Examples include testing the prototype in a test bed aircraft. Technology has been proven to work in its final form and under expected conditions. In almost all cases, this technology readiness level represents the end of true system development. Examples include developmental test and evaluation of the system in its intended weapon system to determine if it meets design specifications. Actual application of the technology in its final form and under mission conditions, such as those encountered in operational test and evaluation. In almost all cases, this is the end of the last "bug fixing" aspects of true system development. Examples include using the system under operational mission conditions. In addition to the contact named above, Christina Chaplain, Marcus Ferguson, Tom Gordon, Subrata Ghoshroy, Barbara Haynes, Matt Lea, Hai Tran, Adam Vodraska, and John Warren made key contributions to this report.
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The Air Force launched an acquisition program to develop and produce a revolutionary laser weapon system, known as the Airborne Laser, in 1996. Being developed for installation in a modified Boeing 747 aircraft, it is intended to destroy enemy ballistic missiles almost immediately after their launch. The Air Force originally estimated development costs at $2.5 billion and projected fielding of the system in 2006. However, by August 2001, the Air Force determined that the development cost estimate rose 50 percent to $3.7 billion, and the fielding date slipped to 2010. The Department of Defense transferred responsibility for the Airborne Laser in October 2001 to the Ballistic Missile Defense Organization. Subsequently, the Defense Secretary designated the Ballistic Missile Defense Organization as the Missile Defense Agency and granted the agency expanded responsibility and authority. The Air Force was unable to meet the Airborne Laser's original cost and schedule goals because it did not fully understand the level of effort that would be required to develop the critical system technology needed to meet the user's requirements. The Missile Defense Agency's new strategy for developing the Airborne Laser incorporates some knowledge-based practices that characterize successful programs. However, the agency has not established knowledge-based decision points and associated criteria for moving forward from technology development to product development and on to production. Without decision points and criteria, the agency risks beginning new and more costly activities before it has the knowledge to determine the money and time required to complete them and whether additional investment in those activities is warranted.
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Universal service traditionally has meant providing residential customers with affordable, nationwide access to basic telephone service. The Telecommunications Act of 1996, however, extended universal service support to eligible schools and libraries. The new program (often referred to as the "e-rate" program) is designed to improve schools' and libraries' access to modern telecommunications services. Generally, educational institutions that meet the definition of "schools" laid out in the Elementary and Secondary Education Act of 1965 are eligible to participate, as are libraries that can receive assistance from a state's library administrative agency under the Library Services and Technology Act. Schools and libraries do not receive direct funding from the program. Instead, support comes in the form of discounts on the costs of telecommunications services. FCC's orders provided for discounts ranging from 20 to 90 percent on all commercially available telecommunications services, Internet access, and internal connections. The act specifies that every telecommunications carrier providing interstate telecommunications services must contribute to a universal service fund, unless exempted by FCC. This fund is used to reimburse vendors for the discounted services that they provide to program participants. The act did not prescribe a structure for administering the program. However, in 1997, FCC directed the establishment of the Schools and Libraries Corporation to carry out this function. The Corporation works within the framework of the FCC's orders and rules to administer certain program functions. The Corporation, with a 14-member staff based in Washington, D.C., contracted out most of its application-processing, client support, and review functions to the National Exchange Carrier Association (NECA), located in New Jersey. NECA's key responsibilities include reviewing applications to ensure compliance with the program's requirements and processing invoices from telecommunications vendors to reimburse them for the cost of discounts they provide. NECA, in turn, has subcontracted with two other organizations to help answer applicants' questions, process and enter applications into the Corporation's database, and establish and maintain the Corporation's public web site, which contains important information about program operations and application procedures. FCC changed this administrative structure in November 1998 in response to the Congress's directive that a single entity administer universal service support for schools and libraries and rural health care providers. FCC appointed the Universal Service Administrative Company (USAC) as the permanent administrator of the universal service fund and directed the Corporation to merge with USAC by January 1, 1999. Under this merger, the Corporation's staff will become part of USAC's Schools and Libraries Division, carrying out essentially the same functions as before. Since our review ended prior to the reorganization, we continue to refer to "the Corporation" in this report. In order to receive universal service support, each applicant completes a two-stage application process. During the first stage, the applicant submits a form that lists the services for which discounts are being requested. These forms are posted on the Corporation's web site so that vendors can provide applicants with competitive bids on requested services. The second stage begins after the applicant accepts a bid and enters into a contract with a vendor. The applicant submits a second form that details the types and costs of the services being contracted for and the amount of the discount being requested. The Corporation checks these forms using its application review procedures, which are designed to ensure that support goes only to eligible entities, for eligible services, at appropriate discount levels. It then issues commitment letters to successful applicants informing them of the amount of discount they can expect to receive. We found that the Corporation has taken actions to implement the key recommendations we believed should be completed before issuing any funding commitment letters to applicants. Specifically, the Corporation has sampled applications that were already processed to identify and correct any systemic weaknesses in its program integrity review procedures; finalized the program's procedures, automated systems, and internal controls; and obtained a report from its independent accountants that the Corporation had suitably designed its internal controls to prevent or detect material departures from program objectives, as of November 4, 1998, in conformity with criteria set forth by the Corporation in its "Management's Statement of Universal Service Discount Mechanism Program Objectives and Internal Control Objectives." In addition, the Corporation is following our recommendation to complete its special reviews of high-risk applications before issuing funding commitment letters to these applicants. One recommendation, however, still needs to be implemented: FCC needs to develop adequate goals, performance targets, and measures for the program. One of the Corporation's primary responsibilities is to ensure that funding goes only to eligible applicants, for eligible services, at the appropriate levels of discount--as specified by FCC orders. During our initial review in June and July 1998, we found several areas of potential weakness in the Corporation's program integrity procedures that could result in funding being directed to applicants for ineligible services or at inappropriately high levels of discount. FCC's Chairman accepted our recommendation to delay issuing funding commitment letters until the Corporation randomly selected applications to assess how well its review procedures were actually working. One of the Corporation's automated tests is designed to determine whether an applicant is eligible for support under the program. A computer program compares the name of the applying school or library against a database of eligible schools and libraries. Although we did not identify a weakness with this test approach during our initial review, we recommended that the Corporation verify the approach's effectiveness as part of its review of a random sample of processed applications. The verification showed that only one application in a sample of 100 was from an ineligible applicant. This application, however, had already been flagged by the Corporation's automated test for eligible applicants. This result indicates that the Corporation's procedures for preventing ineligible schools and libraries from participating in the program appear to be working effectively. As noted earlier, FCC provides discounts for telecommunications services, Internet access, and internal connections. Checking on the eligibility of requested services is not easy, however, because of the variety and technical nature of many of these services--especially those related to internal connections. The Corporation's review procedures for eligible services use both manual inspections and an automated system for flagging problem applications. An important internal control document in this review process is a checklist of ineligible items, which is used during the initial screening of applications. If a clerical staff member using this checklist finds an ineligible item on an application, the application is flagged in the application processing system for a second, more detailed review by a professional staff member who checks the eligibility of each requested service. We found, however, that as the Corporation processed applications and gained experience in the types of services being requested, it added items to its checklist of ineligible services. As a result, different criteria were applied to applications, depending on when they were first screened. In our early discussions with Corporation officials, we learned that they did not intend to recheck applications that had been processed before the checklist was updated. This raised our concern that some early applications may have cleared the screening process that should have been flagged for detailed review. The results of the Corporation's review of a random sample showed that weaknesses indeed existed in its procedures for ensuring that only eligible services receive funding. At least 19 of the 100 applications in the sample contained requests for ineligible items as defined by FCC orders, totaling approximately $106,000 in inappropriately requested funding. Of these 19 applications, 7 had been classified as "clean" (that is, containing no ineligible items) by the Corporation's earlier review and contained approximately $6,000 in inappropriately requested funding. The Corporation's independent accountants, PricewaterhouseCoopers, subsequently requested the Corporation to conduct a further sample of 300 applications that had been classified as "clean." This review found that 4.6 percent, or approximately $314,000, of the discount funding requested in these applications would have gone to ineligible items. Given the error level revealed by these two samples, Corporation officials concluded that their test had to be strengthened. Accordingly, they changed their review procedures to require staff to perform a complete manual review of every requested service item in all 32,000 applications, regardless of whether these applications had been flagged during the initial screening. To implement these new procedures in a timely manner, the Corporation's contractor augmented its permanent staff with temporary staff to perform the reviews. Training and supervising new staff is, of course, important in ensuring that the new review procedures are carried out effectively. FCC orders state that the level of discount that each school or library can receive should be determined by the applicant's economic need and location. Discounts range from 20 to 90 percent of the costs of the services to the applicants, with higher discounts going to those in low-income and rural areas. Applicants calculate the discount level to which they are entitled by following instructions and criteria on the application form and certify that their discount calculations are correct. When the Corporation processes an application, it uses an automated test to check the requested discount level. This test compares the applicant's requested discount with a discount level calculated from data on schools in the Corporation's database. If the applicant is requesting a higher discount than indicated by the Corporation's database, the test can flag the application for special review. As part of this review, a program official contacts the applicant and gathers information to determine whether the requested discount level is in fact correct. It is possible for the automated system to flag every application that shows a variance from the Corporation's own calculation. However, the Corporation decided that such a stringent approach was not warranted because of limitations in the database it uses to make its calculations. For example, the database contains the number of students actually participating in the National School Lunch Program, rather than the number eligible to participate, which is the measure adopted by FCC. Moreover, the data are about a year old. Mindful of these limitations, the Corporation decided to establish some latitude in its review procedures for eligible discounts. Thus, the Corporation allows applications to pass unchallenged through its automated discount review if the requested discount level does not exceed a certain threshold of variance from the Corporation's own calculation. Applications that cross this threshold are flagged for manual review by a program official. Corporation officials stated that adopting this procedure was a reasonable business decision because the cost of manually reviewing all applications that showed any variance from the Corporation's own calculations would exceed the benefits gained. We found in our initial review, however, that the Corporation had not performed a sound benefit-cost analysis to justify this business decision. We were concerned about this situation not only because of the need to enforce program rules for the sake of equity but also because the total amount of funding available during the program's first year was not enough to cover all of the applicants' requests for support. Providing funding for ineligible services or allowing inappropriate discount levels could result in some applicants' proper requests for support being denied. The Corporation's review of a sample of 100 processed applications showed that 57 of them requested discount levels that varied from the Corporation's own calculation. After obtaining additional information for these 57 applications, the Corporation determined that at least 9 could not support their requested level of discounts. The dollar amount of these inappropriate discount requests totaled about $14,000 out of the approximately $4.5 million in requested funding. At the request of its independent accountants, the Corporation conducted a review of an additional sample. The Corporation selected 50 applications that requested $100,000 or more in support. In this second sample, 39 of the 50 processed applications contained discount levels that varied from the Corporation's own calculation. The Corporation found that 6 of the 39 applications requested discounts that could not be validated. The funding that would have been awarded for these inappropriate discount levels totaled about $35,000 out of approximately $28.5 million in requested funding. Having considered these results, Corporation officials decided that they did not need to change their procedures for reviewing requested discount rates for the first funding year. As before, they maintained that the amount of inappropriate funding in question was not large enough to warrant the time and cost of performing follow-ups on every application that showed any variation from the discount level calculated by the Corporation's automated check. We remain concerned, however, that the amount of inappropriate discounts passing unchallenged through the review process, though relatively low now, could grow larger in subsequent funding years. We therefore believe that the Corporation needs to explore methods for mitigating this risk in a cost-beneficial manner. Aware of our continuing concern, the FCC Chairman directed the Corporation in November 1998 to work with FCC staff "to establish a method for improving the procedures for ensuring that discounts are provided in accordance with the discount levels set forth in the Commission's rules." At the time of our initial review in June and July 1998, the Corporation had not yet finalized all the procedures, automated systems, and internal controls needed to make funding commitments and approve vendors' compensation for the discounted services provided to applicants. Nevertheless, the Corporation was planning to issue funding commitment letters before the remaining procedures were finalized. We maintained, however, that this approach would have put the Corporation at risk of being unable to process nearly $2 billion in vendors' invoices in a timely manner. Corporation officials themselves estimated that in cases where services were already being provided to applicants, invoices for payment could be sent in by vendors as soon as 15 days after commitment letters were sent out, thereby triggering the reimbursement process. Therefore, we recommended in our July 1998 testimony that the Corporation make no funding commitments until it had finalized all of its operating procedures and automated systems. FCC and the Corporation accepted this recommendation. The Corporation needed until early November 1998 to finalize its operating procedures, complete the testing of the automated systems supporting these procedures, and secure the Office of Management and Budget's approval of the applicant and vendor forms needed for the reimbursement process. This delay occurred in part because on June 22, 1998, FCC released a reconsideration order that significantly altered the program. Specifically, the program's funding year was changed from a calendar year cycle to a fiscal year cycle, and the period for the first round of funding was changed from 12 months to 18 months. The order also adjusted the maximum amounts that could be collected and spent during 1998 and the first 6 months of 1999, directing the Corporation to commit no more than $1.925 billion for the schools and libraries program during this time frame. Because this amount was not expected to cover all of the applicants' requests, FCC directed the Corporation to give funding priority to applicants' requests for telecommunications services and Internet access. Once these requests are satisfied, the remaining funds are to be used for internal connections, with priority given to applicants eligible for higher discounts. To implement these new priority rules, the Corporation had to significantly revise its funding award process and automated support systems. In addition, the Corporation found that some established procedures needed to be modified as it learned lessons from reviewing the first round of applications. For example, the Corporation initially cautioned schools and libraries that they would not receive discounts on any items in their funding requests that had included ineligible services mixed with eligible services. However, when the Corporation began reviewing applications, it found some cases in which applicants included an ineligible service that accounted for only a small percentage of the total cost of the service item being requested. As a result, the Corporation, with FCC's concurrence, modified its procedures so as to provide funding for items that were substantially correct even though they contained some ineligible services. Specifically, if the ineligible services accounted for less than 50 percent of the total dollar amount of the item requested, the Corporation would separate out the cost of the ineligible services and provide discount funding for the remaining eligible services. In December 1997, FCC's Chairman directed the Corporation to contract with an independent accounting firm to assess--before any program disbursements were made--whether the program's processes and procedures provided the controls needed to mitigate against fraud, waste, and abuse. In December 1997, with the approval of the Corporation's Board of Directors, the Corporation engaged the services of Coopers & Lybrand, LLP (which became PricewaterhouseCoopers, LLP, on July 1, 1998). The independent accountants were to examine the Corporation's assertions that internal controls over the processing of funding requests from applicants were suitably designed to detect material departures from the Program Objectives set forth in the Corporation's document, "Management's Statement of Universal Service Discount Mechanism Program Objectives and Internal Control Objectives." At the time of our initial review during June and July 1998, the Corporation planned to issue funding commitment letters to applicants before the independent accountants had completed their review but not disburse any funds until the review was complete. We were concerned, however, that setting the funding commitment process in motion before the underlying control design has been fully reviewed would undercut the purpose and value of the independent review. Therefore, we recommended that the Corporation refrain from making funding commitments until it had obtained a report from its independent accountants stating that an appropriate set of internal controls was in place. Both FCC and the Corporation accepted this recommendation. On November 4, 1998, the independent accountants' report was issued stating that the Corporation had suitably designed internal controls to prevent or detect material departures from its Program Objectives as of November 4, 1998. The Corporation engaged the independent accountants to determine whether the internal controls over its processing of funding requests from applicants were in accordance with these six Program Objectives: All applications are processed in accordance with FCC's priority rules. Only eligible schools and libraries receive discounts. Only eligible services as defined by FCC's orders are funded. Discount percentages are approved in accordance with the criteria specified under FCC's orders and rules. Payments to vendors are authorized in a timely manner. Funding commitments do not exceed the program's funding limits. The independent accountants' work included reviewing the Corporation's procedures and documentation related to its control environment, application controls, computer controls, and monitoring controls. In addition, the independent accountants discussed control issues with the Corporation's management and closed them out, as appropriate, when satisfied with the documentation and the suitability of the design. Before issuing a final report, the independent accountants briefed the Corporation's Board of Directors, the FCC's Common Carrier Bureau, and the FCC Chairman. Because the Corporation was in a start-up phase during 1998, the independent accountants were not engaged to examine and report on the actual operating effectiveness of these internal controls. During the course of its review, the independent accountants became concerned, as we were, about the efficacy of the Corporation's review procedures for ensuring that only eligible services receive support at the appropriate level of discount. The weakness in the service review procedures, discussed earlier, was addressed to the independent accountants' satisfaction when the Corporation changed them to require a complete review of all requested services on all applications before committing funds. The independent accountants' concern with the discount review focused on the Corporation's decision to allow some applications to go through the review process unchallenged even though they were requesting a higher discount than calculated by the Corporation in its review process. Near the end of the independent accountants' review in November 1998, the Corporation modified its written program objective for discounts to reflect its practice of accepting and approving discounts that are higher than its own discount calculation, provided that they are within a certain threshold of variance. The Corporation cited limitations in its verification sources, discussed earlier, as the reason for adopting this procedure. With this modification, the independent accountants concluded that the Corporation's internal controls were suitably designed to prevent or detect material departures from the Program Objectives, as amended by management. As an extra quality control step, the Corporation planned to conduct special reviews of applications that it considered to be high risk. The Corporation designates applications as high risk on the basis of several criteria, including the size of the request, evidence from external sources of possible program compliance issues, and indications that a school has an endowment of more than $50 million. The Corporation estimated that about 1,600 of the approximately 32,600 applications were high risk. These represent about $1.2 billion of the $2 billion requested by all applicants for the program's first year. As part of its high-risk reviews, the Corporation plans to require these applicants to submit additional material to support their funding requests. This material is then to be reviewed by program staff to check for conformity to program rules. Because these high-risk reviews are an important internal control, we were concerned about their timing. The Corporation originally planned to wait until after the applicants had received their funding commitment letters before doing their high-risk reviews. Under this scenario, if the Corporation found a problem with a high-risk application during its special review, it might have to reduce or withdraw the funding commitment that it had already made. In such cases, applicants who decided to begin receiving contracted services on the basis of their funding commitment letters could find themselves responsible for paying more than they had planned. Accordingly, in our July 1998 testimony, we recommended that the Corporation complete these special reviews before sending funding commitment letters to high-risk applicants. The Corporation agreed to change its procedures and in October 1998 began conducting its first special reviews of the high-risk applications. In October 1998, Corporation officials stated that none of these approximately 1,600 applications would receive funding commitment letters until their selective reviews were completed. Performance measurement is critical for determining a program's progress in meeting its intended outcomes. During our initial review, we noted that FCC's combined "Strategic Plan for Fiscal Years 1997-2002 and Annual Performance Plan for Fiscal Year 1999" provided no specific strategic goals, performance measures, or target levels of performance for the program. Without clear goals and measures, the Congress, FCC, and the Corporation would have a difficult time assessing the effectiveness of the program and determining whether operational changes are needed. Accordingly, we recommended that the FCC Chairman direct responsible FCC staff to develop goals and measures for the program before the end of fiscal year 1998 so that the Congress and others would be able to assess the results of the program's first year of operations. This recommendation still needs to be implemented. FCC's February 1999 "Annual Performance Plan for Fiscal Year 2000" still fails to provide well-defined goals, performance targets, and measures. For example, it is unclear whether FCC intends to use "schools" or "classrooms" as the unit of measurement in tracking access to advanced telecommunications services--a point of major significance. In our subsequent discussions with FCC and Corporation officials, we found that FCC did not coordinate with program officials when developing its revised plan. As we noted in our previous testimony, we have issued guidance on developing effective strategic plans. One of the key practices in developing these plans is to involve stakeholders--such as school and library officials--in the goal-setting process. The involvement of the Congress is also indispensable to defining goals, as are the agency's customers--in this case, the schools and libraries themselves. Corporation officials have already identified a number of data sources that could be used to develop baseline data and measure trends in areas such as Internet connections. They are also posting the results of their funding decisions on the Corporation's web site, broken down by states, types of services funded, and the percentage of funding going to rural/low-income areas. In addition, Corporation officials are currently exploring ways to measure the efficiency of their work processes. While these efforts are useful, it is important that FCC take the lead as part of its policy-making and oversight responsibilities to define specific goals and measures for the program, particularly as they relate to the outcomes being achieved by the expenditure of funds. When we completed our audit in early December 1998, the Corporation was finishing its review of applications and starting to make funding decisions, a process that was going much more slowely than expected. As a result, our review did not include certain key activities that the Corporation had not yet completed or begun. These include implementing the newly revised review procedures, especially for high-risk applications; setting priorities for funding commitments in accordance with FCC's orders dealing with applicants' appeals on commitment decisions, including establishing a funding reserve to cover those that are successful; and reviewing and authorizing vendors' requests for reimbursement. These are challenging activities in themselves and will be even more challenging because they can overlap in time. For example, the reimbursement activity will involve processing tens of thousands of forms submitted by successful applicants and their vendors. While this activity is occurring, applications for the second funding cycle will be coming in. This application period began on December 1, 1998, and was originally scheduled to close in mid-February. However, the Corporation extended the deadline to mid-March 1999 because of the delay in getting out the first year's commitment letters. The closing date was extended again, to April 6, 1999, because commitment letters were still going out in February 1999. This extension, together with the added workload of vendor reimbursements, raises the question of whether the program staff and contractors will have enough time to carefully review and process all the new applications by July 1999--the start of the next funding period. Given these issues, FCC's role in overseeing the program will be more important than ever. In many ways, the Corporation is still in a start-up mode and continues to need help in resolving operational problems. FCC's oversight will also be important to ensure that the program's transition from the Schools and Libraries Corporation to USAC goes smoothly and that USAC management is appropriately engaged in maintaining and improving the overall integrity of the program's operations. To track the progress being made in implementing our recommendations, we held ongoing discussions with FCC and Corporation officials. We reviewed draft and final operational procedures, documentation for the automated systems, and other material related to internal controls. We also visited with the Corporation's contractor in New Jersey, which has major responsibilities for developing and implementing program procedures and automated information systems. In addition, we met with PricewaterhouseCoopers to discuss the scope and results of its independent review of the suitability of the design of the Corporation's internal controls. We performed our review from June 1998 through December 1998 in accordance with generally accepted government auditing standards. We provided a draft of this report to the Federal Communications Commission, the Schools and Libraries Corporation (now the Schools and Libraries Division of the Universal Service Administrative Company), and PricewaterhouseCoopers for their review and comment. We subsequently met with officials from the Schools and Libraries Division, the Common Carrier Bureau of the Federal Communications Commission, and PricewaterhouseCoopers. All three concurred with our findings and provided several points of clarification, which we incorporated into our final report. Appendix I contains the Schools and Libraries Division's letter commenting on our draft report. The President of the Division stated that our report captures fairly the work undertaken to provide for effective internal controls. She added that using the experience gained in processing the first year's applications, the Division will implement new and tighter procedures for evaluating discounts in response to direction from the Chairman of the Federal Communications Commission. Regarding the need to establish adequate performance goals and measures for the program, Federal Communications Commission officials told us that they recognize the importance of the recommendation in our July 1998 testimony and intend to address it, but they did not indicate a time frame for doing so. We are sending copies of this report to interested congressional committees, the Chairman and Commissioners of the Federal Communications Commission, the Chief Executive Officer of the Universal Service Administrative Company, and the President of the Schools and Libraries Division of the Universal Service Administrative Company. Copies of this report will also be made available to others upon request. If you have any questions about this report, please call me at (202) 512-7631. Major contributors to this report are listed in appendix II. John P. Finedore Teresa R. Russell James R. Sweetman, Jr. Michael R. Volpe Mindi Weisenbloom The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Schools and Libraries Corporation's progress in implementing GAO's July 16, 1998, recommendations for improving its procedures and internal controls. GAO noted that: (1) the Corporation has taken actions to implement the key recommendations that GAO believed needed to be completed prior to issuing any funding commitment letters to applicants; (2) these included: (a) sampling processed applications to identify and correct any systemic weaknesses in program integrity review procedures; (b) finalizing the program's procedures, automated systems, and internal controls; and (c) obtaining a report from its independent accountants on the suitability of the Corporation's internal controls to prevent or detect material departures from its program objectives; (3) the Corporation is taking action on GAO's recommendation to complete special reviews of high-risk applicants before issuing commitment letters to these applicants; (4) the Federal Communications Commission (FCC) has not yet implemented GAO's recommendation to develop adequate goals, performance targets, and measures for the program; (5) with GAO's key operational recommendations implemented, the Corporation began issuing its funding commitments for the first year to applicants in late November 1998; (6) the program still faces major challenges as it moves into new operational areas, such as reviewing and authorizing reimbursements to vendors; and (7) given the fact that the program is still essentially in a start-up mode, close oversight by FCC will be especially important in helping to identify and resolve operational problems.
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Dramatic growth in the volume and speed of international travel and trade in recent years have increased opportunities for diseases to spread across international boundaries with the potential for significant health and economic implications. International disease control efforts are further complicated by, for instance, the emergence of previously unknown zoonotic diseases, such as Ebola hemorrhagic fever and avian influenza. Surveillance provides essential information for action against infectious disease threats. Basic surveillance involves four functions: (1) detection, (2) interpretation, (3) response, and (4) prevention. (See fig. 1.) Global efforts to improve disease surveillance have historically focused on specific diseases or groups of diseases. For example, as we reported in 2001, the international community has set up surveillance systems for smallpox, polio, influenza, HIV/AIDS, tuberculosis, and malaria, among others, with the goal of eradicating (in the case of smallpox and polio) or controlling these diseases. In 2006, the United States adopted a national strategy to prepare for pandemic influenza outbreaks both domestically and internationally, which included planned funding by U.S. agencies to support influenza surveillance and detection. Such disease-specific efforts can build capacity for surveillance of additional diseases as well. The United States acknowledged the need to improve global surveillance and response for emerging infectious diseases in 1996, when the President determined that the national and international system of infectious disease surveillance, prevention, and response was inadequate to protect the health of U.S. citizens. Addressing these shortcomings, the 1996 Presidential Decision Directive NSTC-7 enumerated the roles of U.S. agencies--including CDC, USAID, and DOD--in contributing to global infectious disease surveillance, prevention, and response. Enhancing capacity for detecting and responding to emerging infectious disease outbreaks is also a key focus of the revised International Health Regulations (IHR). For many years, the IHR required reporting of three diseases--cholera, plague, and yellow fever--and delineated measures that countries could take to protect themselves against outbreaks of these diseases. In May 2005, the members of WHO revised the IHR, committing themselves to developing core capacities for detecting, investigating, and responding to other diseases of international importance, including outbreaks that have the potential to spread. The regulations entered into force in June 2007; member states are required to assess their national capacities by 2009 and comply with the revised IHR by 2012. U.S. agencies operate or support four key programs aimed at building overseas surveillance capacity for infectious diseases: Global Disease Detection (GDD), operated by CDC; Field Epidemiology Training Programs (FETP), supported by CDC and USAID; Integrated Disease Surveillance and Response (IDSR), supported by CDC and USAID; and Global Emerging Infections Surveillance and Response System (GEIS), operated by DOD. USAID also supports additional capacity-building projects. In 2004-2006, the U.S. government obligated about $84 million for these four programs (see table 1). Funding for these programs is obligated to support the ability of laboratories to confirm diagnosis of disease as well as the training of public health professionals who will work in their countries to improve capacity to detect, confirm, and respond to the outbreak of infectious diseases. Collectively, these four programs operate in 26 developing countries. (See fig. 2.) To limit duplication and leverage resources in countries where some or all of the capacity-building programs operate, CDC, DOD, and USAID coordinate their efforts by colocating activities, detailing staff to each other's programs, participating in working groups, and communicating by phone. GDD is CDC's primary effort to build public health capacity to detect and respond to existing and emerging infectious diseases in developing countries, according to CDC officials. In 2004-2006, CDC obligated about $31 million to support GDD capacity-building efforts. GDD's goals are to enhance surveillance, conduct research, respond to outbreaks, facilitate networking, and train epidemiologists and laboratorians. Established in 2004, GDD aims to set up a total of 18 international centers that would collaborate with partner countries, surrounding regions, and WHO to support epidemiology training programs and national laboratories and conduct research and outbreak response around the world. Two GDD centers were established in Kenya and Thailand in 2004, and three centers are currently under development in Egypt, China, and Guatemala. In addition, CDC established a GDD Operations Center in Atlanta to coordinate information related to potential outbreaks. According to CDC officials, GDD capacity-building activities consist of strengthening laboratories, providing epidemiology training, and conducting surveillance activities. CDC aims to establish laboratories with advanced diagnostic capacity--for example, in Kenya, CDC established several laboratories with biosafety levels 2 and 3. GDD centers conduct formal, 2-year training programs in analyzing epidemiological data, responding to outbreaks, and working on research projects. The centers also conduct short-term training--for example, in 2006, GDD centers trained more than 230 participants from 32 countries to respond to pandemics. In addition, the centers provide opportunities for public health personnel in host countries to work with CDC to evaluate existing surveillance systems, develop new systems, write and revise peer- reviewed publications, and use surveillance data to inform policy decisions. Assisted by USAID and WHO, and at the request of national governments, CDC has helped countries establish their own FETPs to strengthen their public health systems by training epidemiologists and laboratorians in infectious disease surveillance. CDC and USAID obligated approximately $19 million to support these programs in 2004-2006. Each FETP is customized in collaboration with country health officials to meet the country's specific needs, emphasizing applied epidemiology and evidence-based decision making for public effective communication with the public, public health professionals, and the community; and health program design, management, and evaluation. CDC and USAID collaborate with host-country ministries of health in Brazil, Central America, Central Asia, China, Egypt, Ghana, India, Jordan, Kenya, Pakistan, South Africa, Sudan, Thailand, Uganda, and Zimbabwe to build surveillance capacity through the FETPs. In addition to receiving formal classroom training in university settings, FETP students and graduates participate in surveillance and outbreak response activities, such as analyzing surveillance data and performing economic analysis, and publish articles in peer-reviewed bulletins and scientific journals. At the end of the 2-year program, participants receive a postgraduate diploma or certificate. According to CDC, these programs graduated 351 epidemiologists and laboratorians in 2004-2006. As of February 2007, according to CDC, six programs established between 1999 and 2004 tracked their graduates and found that approximately 92 percent continued to work in the public health arena after the training. For example, in Jordan, 21 of 23 graduates of its FETP are working as epidemiologists at the central and governorate levels. USAID has supported CDC in (1) designing and implementing IDSR, with WHO/AFRO, in 46 African countries and (2) providing technical assistance to 8 of these countries. In 2004-2006, USAID obligated approximately $12 million to support IDSR, transferring about one-quarter of this amount to CDC through interagency agreements and participating agency service agreements. IDSR's goal is to use limited public health resources effectively by integrating the multiple disease-specific surveillance and response systems that exist in these countries and linking surveillance, laboratory confirmation, and other data to public health actions. CDC has collaborated with WHO/AFRO in developing tools and guidelines, which are widely disseminated in the region to improve surveillance and response systems. CDC's assistance has included developing an assessment tool to determine the status of surveillance developing technical guidelines for implementing IDSR, working to strengthen the national public health surveillance conducting evaluations of the cost to implement IDSR in several African countries. In addition, CDC is providing technical assistance to eight countries in Africa, which CDC and USAID selected as likely to become early adopters of surveillance best practices and therefore to be models for other countries in the region. With funding from USAID, CDC has undertaken activities in these countries such as evaluating the quality of national public health laboratories in conjunction with WHO, developing a district-level training guide (published in English and French) for analyzing surveillance data, and developing job aids for laboratories to train personnel in specimen-collection methods. DOD established GEIS in response to the 1996 Presidential Decision Directive NSTC-7 on emerging infectious diseases, which called on DOD to support global surveillance, training, research, and response to infectious disease threats. In 2005-2006, DOD obligated approximately $8 million through GEIS to build capacity for infectious disease surveillance. GEIS, as part of its mission, provides funding to DOD research laboratories in Egypt, Indonesia, Kenya, Peru, and Thailand as well as to other military research units for surveillance projects located in 36 countries, according to DOD officials,. GEIS conducts many projects jointly with host-country nationals, providing opportunities to build capacity through their participation in disease surveillance projects. GEIS officials noted that they view its primary goal as providing surveillance to protect the health of U.S. military forces and consider capacity building a secondary goal that occurs as a result of surveillance efforts. GEIS funded more than 60 capacity-building projects in 2005 and 2006, supporting activities such as establishing laboratories in host countries, training host-country staff in surveillance techniques, and providing advanced diagnostic equipment. For example, in Nepal, GEIS funded surveillance of febrile illnesses, such as dengue fever, and through this project provided a field laboratory with training and equipment to conduct advanced diagnostic techniques. GEIS has also funded more direct training; for example, the laboratory in Peru conducted an outbreak- investigation training course for public health officials from Peru, Argentina, Chile, and Suriname in 2006 with GEIS funding. Funding provided by USAID's Bureau for Global Health and USAID missions has supported additional activities to build basic epidemiological skills in developing country health personnel. In 2004-2006, USAID obligated about $14 million for these activities. For example, USAID funded a WHO effort to assist the government of India in improving disease surveillance, including strengthening laboratories, developing tools for monitoring and evaluating surveillance efforts, and creating operational manuals for disease surveillance. The U.S. agencies operating or supporting the disease surveillance capacity building programs collect data to monitor the programs' activities. CDC and USAID also recently began systematic efforts to evaluate program impact, but it is too early to assess whether the evaluations will demonstrate progress in building surveillance capacity. GDD. Since 2006, CDC has monitored the number of outbreaks that GDD has investigated, the numbers of participants in GDD long-term and short-term training, and examples of collaboration among GDD country programs. In addition, in 2006, CDC developed a framework for evaluating progress toward GDD's five goals and collected data for 8 of 14 indicators. (Fig. 3 shows the GDD evaluation framework.) However, as of July 2007, the agency had not collected data on the two surveillance indicators to evaluate the program's contribution to improved surveillance. FETP. CDC has collected data such as the numbers of FETP trainees and graduates, the numbers of FETP graduates hired by public health ministries, the number of outbreak investigations conducted, and the number of surveillance evaluations conducted. In 2006, CDC developed a framework for monitoring and evaluating FETPs' impact on countries' health systems, with 13 indicators related to FETP activities (see fig. 4 for the FETP indicators). CDC hopes to implement the framework fully by 2009, but because FETPs are collaborations between CDC and the host countries, the framework's implementation depends on country cooperation. IDSR. Since 2000, CDC has collected data on activities completed under its IDSR assistance program, including the number of job aids developed, the training materials adopted, and the number of training courses completed, and it reports on these activities annually to USAID. In 2003, WHO/AFRO adopted 11 indicators, developed with input from CDC and USAID, to monitor and evaluate progress in implementing IDSR in Africa (see fig. 5 for the IDSR indicators). According to WHO/AFRO, 19 of 46 African countries reported data in 2006 for at least some of these indicators, showing some success in IDSR implementation; however, U.S. agencies cannot require the collection of data in the remaining countries that did not report on the indicators, because IDSR is a country-owned program. Separately, in 2005, CDC completed an evaluation of IDSR implementation in 4 of the 8 countries where it assists with IDSR--Ghana, Tanzania, Uganda, and Zimbabwe--and, using a set of 40 indicators based on WHO guidance, found that these countries had implemented most of the elements of IDSR. GEIS. Since 2005, DOD has monitored GEIS capacity-building activities through individual project reports that detail each activity completed, such as training for staff involved in surveillance studies and development of laboratory diagnostic capabilities. According to GEIS officials, DOD does not plan to develop a framework to monitor and evaluate the impact of GEIS on countries' surveillance capacity, because capacity building in host countries is not GEIS's primary purpose. Rather, GEIS's goal is to establish effective infectious disease surveillance and detection systems with the ultimate aim of ensuring the health of U.S. forces abroad. However, GEIS has reviewed some of its surveillance projects, and GEIS officials stated that the program's activities in the host nations have led to improved surveillance capacity for infectious diseases. Mr. Chairman, this concludes my 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 David Gootnick at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Audrey Solis, Julie Hirshen, Reid Lowe, Diahanna Post, Elizabeth Singer, and Celia Thomas made key contributions to this testimony and the report on which it was based. David Dornisch, Etana Finkler, Grace Lui, Susan Ragland, and Eddie Uyekawa provided technical assistance. 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 rapid spread of severe acute respiratory syndrome (SARS) in 2003 showed that disease outbreaks pose a threat beyond the borders of the country where they originate. The United States has initiated a broad effort to ensure that countries can detect outbreaks that may constitute a public health emergency of international concern. Three U.S. agencies--the Centers for Disease Control and Prevention (CDC), the U.S. Agency for International Development (USAID), and the Department of Defense (DOD)--support programs aimed at building this broader capacity to detect a variety of infectious diseases. This testimony describes (1) the obligations, goals, and activities of these programs and (2) the U.S. agencies' monitoring of the programs' progress. To address these objectives, GAO reviewed budgets and other funding documents, examined strategic plans and program monitoring and progress reports, and interviewed U.S. agency officials. GAO did not review capacity-building efforts in programs that focus on specific diseases, namely polio, tuberculosis, malaria, avian influenza, or HIV/AIDS. This testimony is based on a report (GAO-07-1186), which is being released with this testimoy. GAO did not make recommendations. The agencies whose programs we describe reviewed our report and generally concurred with our findings. We incorporated their technical comments as appropriate. The U.S. government operates or supports four key programs aimed at building overseas surveillance capacity for infectious diseases. In fiscal years 2004-2006, U.S. agencies obligated approximately $84 million for these programs, which operate in developing countries around the world. Global Disease Detection is CDC's main effort to help build capacity for infectious disease surveillance in developing countries. The Field Epidemiology Training Programs, which CDC and USAID support, are another tool used to help build infectious disease surveillance capacity worldwide. Additionally, USAID supports CDC and the World Health Organization's Regional Office for Africa in designing and implementing Integrated Disease Surveillance and Response in 46 countries in Africa, with additional technical assistance to 8 African countries. DOD's Global Emerging Infections Surveillance and Response System also contributes to capacity building through projects undertaken at DOD overseas research laboratories. USAID supports additional capacity-building projects in various developing countries. For each of the four key surveillance capacity-building programs, the U.S. agencies monitor activities such as the number of epidemiologists trained, the number of outbreak investigations conducted, and types of laboratory training completed. In addition, CDC and USAID recently began systematic efforts to evaluate the impact of their programs; however, because no evaluations had been completed as of July 2007, it is too early to assess whether these evaluation efforts will demonstrate progress in building surveillance capacity.
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The Army plans to develop and acquire FCS in at least two increments but, according to program officials, only the first one has been defined at this point. The first increment is an information network linking a new generation of 18 manned and unmanned ground vehicles, air vehicles, sensors, and munitions. The manned ground vehicles are to be a fraction of the weight of current weapons such as the Abrams tank and Bradley Fighting Vehicle, yet are to be as lethal and survivable. At a fundamental level, the FCS concept is replacing mass with superior information; that is, to see and hit the enemy first, rather than to rely on heavy armor to withstand attack. The ability to make this leap depends on (1) the ability of the network to collect, process, and deliver vast amounts of information such as imagery and communications and (2) the performance of the individual systems themselves. The concept has a number of progressive features. For example, it provides an architecture within which individual systems will be designed--an improvement over designing systems independently and making them interoperable after the fact. A decade after the cold war ended, the Army recognized that its combat force was not well suited to perform the operations it faces today and is likely to face in the future. The Army's heavy forces had the necessary firepower but required extensive support and too much time to deploy. Its light forces could deploy rapidly but lacked firepower. To address this mismatch, the Army decided to radically transform itself into a new "Future Force." The Army expects the Future Force to be organized, manned, equipped, and trained for prompt and sustained land combat, requiring a responsive, technologically advanced, and versatile force. These qualities are intended to ensure the Future Force's long-term dominance over evolving, sophisticated threats. The Future Force will be offensively oriented and will employ revolutionary operational concepts, enabled by new technology. This force will fight very differently than the Army has in the past, using easily transportable lightweight vehicles, rather than traditional heavily armored vehicles. A key characteristic of this force is agility. Agile forces would possess the ability to seamlessly and quickly transition among various types of operations from support operations to warfighting and back again. They would adapt faster than the enemy, thereby denying it the initiative. In an agile force, commanders of small units may not have the time to wait on higher command levels; they must have the authority and high quality information at their level to act quickly to respond to dynamic situations. Thus, to be successful, the transformation must include more than new weapons. The transformation is extensive, encompassing tactics and doctrine, as well as the very culture and organization of the Army. Against that backdrop, today, I will focus primarily on the equipment element of the transformation, represented by FCS. FCS will provide the majority of weapons and sensor platforms that comprise the new brigade-like modular units of the Future Force known as Units of Action. Each unit is to be a rapidly deployable fighting organization about the size of a current Army brigade but with the combat power and lethality of a current (larger) division. The Army also expects FCS-equipped Units of Action to provide significant war-fighting capabilities to the Joint Force. The first FCS increment will ultimately be comprised of an information network and 18 various systems--which can be characterized as manned ground systems, unmanned ground systems, and unmanned air vehicles. While some systems will play a larger role in the network than others, the network will reside in all 18 systems, providing information to them as well as taking information from them. Figure 1 shows FCS Increment 1. The Joint Tactical Radio System and the Warfighter Information Network-Tactical are two programs outside of FCS that integrate all the various systems and soldiers together. As such, their development is crucial to the FCS network. The communications backbone of the Unit of Action will be a multi-layered mobile network centered on the Joint Tactical Radio System. According to program officials, all soldiers and FCS vehicles, including the unmanned vehicles, will employ these radios. Beyond being the primary communications component within the unit, the Joint Tactical Radio System also will assist with communications beyond the unit, to assets at higher echelons. Communications with those echelons will be enabled through the Warfighter Information Network-Tactical, which provides the overarching network background for the FCS network and is expected to conform to DOD's interoperability and network architecture directives. Increment 1 began system development and demonstration in May 2003. Currently, only the network and 14 systems are funded. The remaining 4 systems will be introduced as funding becomes available. Current estimates are for the acquisition of Increment 1 to cost $92 billion (then- year dollars) and to achieve an initial operational capability by the end of 2010. Although the Under Secretary of Defense approved the Army's request to begin the system development and demonstration phase, he directed the Army to prepare for a full program review in November 2004. Increment 1 is expected to replace roughly one-third of the active force through about 2020, when the first 15 Units of Action are fielded. According to program officials, the Army has not yet defined future FCS increments. However, it is important to note that the Army expects to eventually replace most of its current forces with the FCS. Much of the current Army heavy force is expected to remain in the inventory--needing to be maintained and upgraded--through at least 2020. We recently reported that costs of maintaining legacy systems would be significant, but funding is likely to be extremely limited, particularly given competition for funds from transformation efforts. We concluded that maintaining legacy equipment will likely be a major challenge, necessitating funding priorities to be more clearly linked to needed capability and to long-range program strategies. The Army intends to employ a single Lead Systems Integrator throughout the completion of Increment 1. The Lead System Integrator will be the single accountable, responsible contractor to integrate FCS on time and within budget. It will act on behalf of the Army throughout the life of the program to optimize the FCS capability, maximize competition, ensure interoperability, and maintain commonality in order to reduce life-cycle cost. In order to quickly transition into system development and demonstration and to manage the multitude of tasks associated with FCS acquisition, the Army chose the Lead System Integrator approach to capitalize on industry's flexibility. The Army wants the FCS-equipped Unit of Action to have a number of features. These can be described in four characteristics: lethality, survivability, responsiveness, and sustainability. The Unit of Action is to be as lethal as the current heavy force. It must have the capability to address the combat situation, set conditions, maneuver to positions of advantage, and close with and destroy enemy formations at longer ranges and greater precision than the current force. To provide this level of lethality and reduce the risk of detection, FCS must provide high single-shot effectiveness. To be as survivable as the current heavy force, the Unit of Action is primarily dependent upon the ability to kill the enemy before being detected. This depends on unit's ability to see first, understand first, act first, and finish decisively. The individual FCS systems will also rely on a layered system of protection involving several technologies that lowers the chances of a vehicle or other system being seen by the enemy; if seen, lowers the chances of being acquired; if acquired, lowers the chances of being hit; if hit, lowers the chances of being penetrated; and finally, if penetrated, increases the chances of surviving. To be responsive, Units of Action must be able to rapidly deploy anywhere in the world, be rapidly transportable via various transport modes, and be ready to fight upon arrival. To facilitate rapid transportability, FCS vehicles are being designed to match the weight and size constraints of the C-130 aircraft. The Unit of Action is to be capable of sustaining itself for periods of 3 to 7 days depending on the level of conflict. This sustainability requires subsystems with high reliability and low maintenance, reduced demand for fuel and water, highly effective offensive weapons, and a fuel-efficient engine. Meeting all these requirements will be a difficult challenge because the solution to meet one requirement may work against another requirement. For example, the FCS vehicles' small size and lighter weight are factors that improve agility, responsiveness, and deployability. However, their lighter weight precludes the use of the traditional means to achieve survivability--heavy armor. Instead, the FCS program must use cutting-edge technology to develop systems, such as an active protection system, to achieve survivability. Yet such technology cannot be adopted if it impairs the new systems' reliability and maintainability. Weight, survivability, and reliability will have to be kept in balance. The essence of the FCS concept itself--to provide the lethality and survivability of the current heavy force with the sustainability and deployability of a force that weighs a fraction as much--has the intrinsic attraction of doing more with less. The concept has a number of merits, which demonstrate the Army's desire to be proactive in its approach to preparing for potential future conflicts and its willingness to break with tradition in developing an appropriate response to the changing scope of modern warfare. If successful, the architecture the program is developing will leverage individual capabilities of weapons and platforms and will facilitate interoperability and open systems. This architecture is a significant improvement over the traditional approach of building superior individual weapons that must be netted together after the fact. Also, the system of systems network and weapons could give acquisition managers the flexibility to make best value trade-offs across traditional program lines. This transformation of the Army, both in terms of operations and in equipment, is underway with the full cooperation of the Army warfighter community. In fact, the development and acquisition of FCS are being done using a collaborative relationship between the developer (program manager), the contractor, and the warfighter community. For example, the developer and the warfighter are using a disciplined approach to decompose the Unit of Action Organizational and Operational Plan and the FCS Operational Requirements Document into detailed specifications. This work is defining in detail the requirements for a Unit of Action to operate in a network-centric environment. This approach is in line with best practices to ensure that specific technical issues are understood before significant design work is done. The Army has established sustainability as a design characteristic equal to lethality and survivability. This is an improvement over past programs, such as the Apache helicopter and the Abrams tank. These programs did not emphasize sustainability, to less than desirable results, including costly maintenance problems and low readiness rates, which persisted even after the systems were fielded. FCS' approach of emphasizing sustainability from the outset should allow operating and support costs and readiness to be evaluated early in development, when there is a greater chance to affect those costs positively. This approach is also in line with best practices. The FCS program has yet to--and will not--demonstrate high levels of knowledge at key decision points. It thus carries significant risks for execution. At conflict are the program's technical challenges and limited time frame. The Army began system development and demonstration in May 2003 and plans to make its initial FCS production decision in November 2008--a schedule of about 5 1/2 years. Seventy-five percent of the technologies were immature at the start of system development and demonstration and some will not be proven mature until after the scheduled initial production decision. First prototypes for all 14 funded systems and the network will not be demonstrated together until after the production decision and will serve both as technology demonstrators and system prototypes. They will represent the highest level of FCS demonstration before production units are delivered, as no production- representative prototypes are planned. Even this level of demonstration assumes complete success in maturing the technologies, developing the software, and integrating the systems--as well as the delivery and integration of the complementary systems outside of FCS. While the Army is embarking on an impressive array of modeling, simulation, emulation, and other demonstration techniques, actual demonstration of end items is the real proof, particularly for a revolutionary advance, such as FCS. If the lessons learned from best practices and the experiences of past programs have any bearing, the FCS strategy is susceptible to "late cycle churn," a phrase used by private industry to describe the discovery of significant problems late in development and the attendant search for fixes when costs are high and time is short. FCS is susceptible to this kind of experience as the demonstration of multiple technologies, individual systems, the network, and the system of systems will all culminate late in development and early production. In the Army's own words, FCS is "the greatest technology and integration challenge the Army has ever undertaken." It intends to develop a complex, family of systems-an extensive information network and 14 major weapon systems--in less time than is typically taken to develop, demonstrate, and field a single system. The FCS Acquisition Strategy Report describes this scenario as a "dramatically reduced program schedule (which) introduces an unprecedented level of concurrency." Underscoring that assessment is the sheer scope of the technological leap required for the FCS. For example: A first-of-a-kind network will have to be developed. The 14 major weapon systems or platforms have to be designed and integrated simultaneously and within strict size and weight limitations. At least 53 technologies that are considered critical to achieving critical performance capabilities will need to be matured and integrated into the system of systems. The development, demonstration, and production of as many as 157 complementary systems will need to be synchronized with FCS content and schedule. This will also involve developing about 100 network interfaces so the FCS can be interoperable with other Army and joint forces. An estimated 34 million lines of software code will need to be generated (5 times that of the Joint Strike Fighter, which had been the largest defense undertaking in terms of software to be developed). Some of these technical challenges are discussed below. The overall FCS capabilities are heavily dependent on a high quality of service--good information, delivered fast and reliable--from the network. However, the Army is proceeding with development of the entire FCS system of systems before demonstrating that the network will deliver as expected. Many developmental efforts will need to be successful for the network to perform as expected. For each effort, a product--whether software or hardware--must first be delivered and then demonstrated individually and collectively. The success of these efforts is essential to the high quality of service the network must provide to each Unit of Action. In some cases, an individual technology may be a linchpin--that is, if it does not work, the network's performance may be unacceptable. In other cases, lower than expected performance across a number of individual technologies could collectively degrade network performance below acceptable levels. Some key challenges are highlighted below: System of Systems Common Operating Environment is a software layer that enables interoperability with external systems and manages the distribution of information and software applications across the distributed network of FCS systems. According to program officials, the System of Systems Common Operating Environment is on the critical path for most FCS software development efforts. The Joint Tactical Radio System and the Warfighter Information Network-Tactical, and several new wideband waveforms--all in development--are essential to the operation of the FCS network. It is vital that these complementary developments be available in a timely manner for the currently planned demonstrations of the network. The information-centric nature of FCS operations will require a great deal of bandwidth to allow large amounts of information to be transmitted across the wireless network. However, the radio frequency spectrum is a finite resource, and there is a great deal of competition and demand for it. An internal study revealed that FCS bandwidth demand was 10 times greater than what was actually available. As a result, the program initiated a series of trade studies to examine and reassess bandwidth requirements of various FCS assets. The results of these studies may have a dramatic effect on the FCS network. The Army has already made a number of changes to the network design to use available bandwidth more efficiently and to reduce bandwidth demand. After determining that Unmanned Aerial Vehicle (UAV) sensor missions would constitute the largest consumption of network bandwidth, the Army started a new wideband waveform development effort, using the higher frequency bands. This effort will also require new updated Joint Tactical Radio System hardware and new antennas in addition to a new waveform. Sophisticated attackers could compromise the security of the FCS network, which is critical to the success of the system of systems concept. Such an attack could degrade the systems' war-fighting ability and jeopardize the security of Army soldiers. The Army is developing specialized protection techniques as there is only limited commercial or government software currently available that will adequately protect a mobile network like the one proposed for FCS. FCS Increment 1 includes four classes of UAVs that cover increasing areas of responsibility. According to program officials, two of the UAV classes are currently unfunded and are currently not being developed. The Army plans to develop, produce and field them if funding becomes available. Within the FCS concept, UAV roles include reconnaissance, target acquisition and designation, mine detection, and wide-band communications relay. The required UAVs will need to be designed, developed, and demonstrated within the 5 1/2-year period prior to the initial FCS production decision. As we recently testified, DOD's experiences show that it is very difficult to field UAVs. Over the last 5 years, only three systems have matured to the point that they were able to use procurement funding. FCS Increment 1 includes eight manned ground systems, however, one-- the maintenance and recovery vehicle--is unfunded. The Army plans to use the Heavy Expanded Mobility Tactical Truck-Wrecker in its place in the Unit of Action. The remaining seven manned ground systems require critical individual and common technologies to meet required capabilities. For example, the Mounted Combat System will require, among other new technologies, a newly developed lightweight weapon for lethality; a hybrid electric drive system and a high-density engine for mobility; advanced armors, an active protection system, and advanced signature management systems for survivability; a Joint Tactical Radio System with the wideband waveform for communications and network connection; a computer-generated force system for training; and a water generation system for sustainability. Under other circumstances, each of the seven manned ground systems would be a major acquisition program on par with the Army's past major ground systems such as the Abrams tank, the Bradley Fighting Vehicle, and the Crusader Artillery System. As such, each requires a major effort to develop, design, and demonstrate the individual vehicles. Recognizing that a number of subsystems will be common among the vehicles, meeting the Army's schedule will be a challenge as this effort must take place within the 5 1/2-year period prior to the initial FCS production decision. We have found for a program to deliver a successful product within identified resources, managers should build high levels of demonstrated knowledge before significant commitments are made. Figure 2 depicts the key elements for building knowledge. This knowledge build, which takes place over the course of a program, can be broken down into three knowledge points to be attained at key junctures in the program: At knowledge point 1, the customer's needs should match the developer's available resources--mature technologies, time, and funding. This is indicated by the demonstrated maturity of the technologies needed to meet customer needs. At knowledge point 2, the product's design is stable and has demonstrated that it is capable of meeting performance requirements. This is indicated by the number of engineering drawings that are releasable to manufacturing. At knowledge point 3, the product must be producible within cost, schedule, and quality targets and have demonstrated its reliability. It is also the point at which the design must demonstrate that it performs as needed. Indicators include the number of production processes in statistical control. The three knowledge points are related, in that a delay in attaining one delays those that follow. Thus, if the technologies needed to meet requirements are not mature, design and production maturity will be delayed. For this reason, the first knowledge point is the most important. DOD's acquisition policy has adopted the knowledge-based approach to acquisitions. Translating this approach to DOD's acquisition policy, a weapon system following best practices would achieve knowledge point 1 by the start of system development and demonstration, knowledge point 2 at critical design review (about halfway through development), and knowledge point 3 by the start of production. For the most part, all three knowledge points are eventually attained on a completed product. The difference between highly successful product developments--those that deliver superior products within cost and schedule projections--and problematic product developments is how this knowledge is built and how early in the development cycle each knowledge point is attained. If a program is attaining the desired levels of knowledge, it has less risk--but not zero risk--of future problems. Likewise, if a program shows a gap between demonstrated knowledge and best practices, it indicates an increased risk--not a guarantee--of future problems. Typically, these problems cost more money than has been identified and take more time than has been planned. DOD programs that have not attained these levels of knowledge have experienced cost increases and schedule delays. We have recently reported on such experiences with the F/A-22, the Advanced SEAL Delivery System, the Airborne Laser, and the Space Based Infrared System High. For example, the technology and design matured late in the F/A-22 program and have contributed to numerous problems. Avionics have experienced major development problems and have driven large cost increases and caused testing delays. The FCS program started system development and demonstration with significantly less knowledge than called for by best practices. This knowledge deficit is likely to delay the demonstration of subsequent design and production knowledge at later junctures and puts the program at risk of cost growth, schedule delays, and performance shortfalls. Two factors contributed to not having a match between resources and requirements at the start of system development and demonstration: 75 percent of critical technologies were not mature and requirements were not well defined. Later in the program, when the initial production decision is made, a knowledge gap will still exist even if the program proceeds on schedule. For example, prototypes of all 14 funded systems, the network, and the software version needed for initial operational capability will not be brought together and tested for the first time until after the production decision. Further, as production-representative prototypes will not be built, it does not appear that much demonstration of production process maturity can occur before the production decision. Using best practices, at the start of system development and demonstration, a program's critical technologies should be demonstrated to a technology readiness level of 7. This means the technology should be in the form, fit, and function needed for the intended product and should be demonstrated in a realistic environment, such as on a surrogate platform. While DOD's policy states a preference for a technology readiness level of 7, it accepts a minimum of a level 6. According to program officials, technologies were accepted for FCS if they were at level 6 or if the Army determined that the technologies would reach a readiness level of 6 before the July 2006 critical design review. To put this discussion of technology maturity in perspective, the difficulties the F/A-22 fighter are currently experiencing with its avionics system are, in essence, the consequence of not demonstrating a technology readiness level of 7 until late in the program. Consequently, the Army started FCS system development and demonstration phase with about 75 percent of its critical technologies below level 7, with many at level 5 and several at levels 3 and 4. Since then, progress has been made, but the Army expects that, by the full program review in November 2004, only 58 percent of the program's critical technologies would be matured to a technology readiness level of 6 or higher. The Army estimates that 95 percent of the technologies will reach level 6 by the critical design review. The program does not expect all FCS critical technologies to be demonstrated to level 7 until mid-2009, after the initial production decision and about 6 years after the start of system development and demonstration. The second factor keeping the Army from matching resources with customer's needs before starting the system development and demonstration phase was that it did not have an adequate definition of the FCS requirements. The program continues to work on defining the requirements for the FCS system of systems and the individual systems. System requirements may not be completely defined until at least the preliminary design review in April 2005 and, perhaps, as late as the critical design review in July 2006. The program still has a number of key design decisions to be made that will have major impacts on the FCS requirements and the conceptual design of FCS Increment 1. Currently, the program has 129 trade studies underway including 5 studies that are critical and due to be completed soon. For example, a critical study with great potential impact is determining the upper weight limit of the individual FCS manned platforms. This determination could affect the FCS transportability, lethality, survivability, sustainability, and responsiveness capabilities. These and other open questions on the FCS requirements will need to be answered in order for the detailed design work to proceed and ultimately to be stabilized at the critical design review. To go from system development and demonstration to production in 5 1/2 years, the FCS program depends on a highly concurrent approach to developing technology, as well as to designing, building, testing, and producing systems. This level of concurrency resulted from the Army's establishment of 2010 as its target for initial operating capability for the first FCS Unit of Action. Army officials acknowledge that this is an ambitious date and that the program was not really ready for system development and demonstration when it was approved. However, the officials believe it was necessary to create "irreversible momentum" for the program. Army leaders viewed such momentum as necessary to change Army culture. The result is an accelerated schedule-driven program, as depicted in figure 3, rather than an event-driven program. Even if the program successfully completes this schedule, it will yield lower levels of demonstrated knowledge than suggested by best practices and DOD's acquisition policy. Significant commitments will thus be made to FCS production before requisite knowledge is available. For example: Technology development is expected to continue through the production decision. At the design readiness review (critical design review) in July 2006, technology development will still be ongoing, putting at risk the stability of ongoing system integration work. In December 2007, while technology development and system integration are continuing and first prototypes are being delivered, the Army plans to begin long lead item procurement and to begin funding for the production facilities. In November 2008, the initial production decision is expected to be made. However, program officials said that some technologies will not have reached level 7 by that time, and the system of systems demonstration will remain to be done. In early 2010, as production deliveries have started, the Army plans to finish Integrated System Development and Demonstration Test Phase 5.1, the first full demonstration of all FCS components as an integrated system. Testing and demonstration will continue until the full rate production decision in mid-2013. The initial operational capability is planned for December 2010. With the FCS concurrent strategy, much demonstration of knowledge will occur late in development and early in production, as technologies mature, prototypes are delivered, and the network and systems are brought together as a system of systems. This makes the program susceptible to "late cycle churn," a condition that we reported on in 2000. Late cycle churn is a phrase private industry has used to describe the efforts to fix a significant problem that is discovered late in a product's development. Often, it is a test that reveals the problem. The churn refers to the additional--and unanticipated--time, money, and effort that must be invested to overcome the problem. Problems are most devastating when they delay product delivery, increase product cost, or "escape" to the customer. The discovery of problems in testing conducted late in development is a fairly common occurrence on DOD programs, as is the attendant late cycle churn. Often, tests of a full system, such as launching a missile or flying an aircraft, become the vehicles for discovering problems that could have been found earlier and corrected less expensively. When significant problems are revealed late in a weapon system's development, the reaction--or churn--can take several forms: extending schedules to increase the investment in more prototypes and testing, terminating the program, or redesigning and modifying weapons that have already made it to the field. Over the years, we have reported numerous instances in which weapon system problems were discovered late in the development cycle. The Army has embarked on an impressive plan to mitigate risk using modeling, simulation, emulation, hardware in the loop, and system integration laboratories throughout FCS development. This is a laudable approach designed to reduce the dependence on late testing to gain valuable information about design progress. However, on a first-of-a-kind system like FCS that represents a radical departure from current systems, actual testing of all the components integrated together is the final proof that the system works both as predicted and as needed. If the FCS strategy does not deliver the system of systems as planned, the Army is still prepared to go forward with production and fielding. The Army's Acquisition Strategy Report states that at the Initial Production Decision, all elements of the FCS may not be ready for initial production and will require a continuation of system development and demonstration efforts to complete integration and testing in accordance with the program-tailoring plan. For those that need more time, FCS program manager will present to the Milestone Decision Authority a path forward, with supporting analysis. In addition, the Army will accept existing systems in lieu of actual FCS systems to reach initial operational capability. We have reported on options that warrant consideration as alternatives for developing FCS capabilities with less risk. Alternatives are still viable and worth considering, particularly before major funding and programmatic commitments are made. If the FCS program proceeds as planned and does experience problems later in development, it may pose a real dilemma for decision makers. Typically, performance, schedule, and cost problems on weapon system programs are accommodated by lowering requirements and increasing funding. If the FCS program proceeds on its current path until problems occur in demonstration, traditional solutions may not be available because of the significant role it must fulfill and its financial magnitude. While there is a significant amount of potential flexibility among the various FCS systems and technologies, collectively the system of systems has to meet a very high standard. It has to be as lethal and survivable as the current force and its combat vehicles have to be a fraction of the weight of current vehicles to be air transportable on the C-130 aircraft. These "must haves" constrain the flexibility in relaxing requirements for the FCS system of systems. The opportunity for increasing funds to cover cost increases poses a challenge because FCS already dominates the Army's investment budget. It might be difficult to find enough other programs to cut or defer to offset FCS increases. Assuming the Army's acquisition cost estimates are accurate and the program will succeed according to plan, the FCS investment for even the first increment is huge--$92 billion (in then-year dollars). These assumptions are optimistic as risks make problems likely, the cost estimate was based on an immature program, and budget forecasts have already forced deferral of four FCS systems. As estimated, FCS will command a significant share of the Army's acquisition budget, particularly that of ground combat vehicles, for the foreseeable future. In fiscal year 2005, the FCS budget request of $3.2 billion accounts for 52 percent of the Army's proposed research, development, test and evaluation spending on programs in system development and demonstration and 31 percent of that expected for all Army research, development, test, and evaluation activities. See figure 4 for FCS costs through 2016. The ramp up in FCS research and development funding is very steep, going from $157 million in fiscal 2003 to $1.7 billion in fiscal 2004 to a projected $3.2 billion in fiscal years 2005 and topping out at about $4.3 billion in fiscal 2006. FCS procurement funding is projected to start in fiscal 2007 at $750 million and ramp up to an average of about $3.2 billion in fiscal years 2008 and 2009. In late development (2008-2009) the total FCS costs will run about $5 billion per year. After 2008, FCS will command nearly 100 percent of the funding for procurement of Army ground combat vehicles. After 2011, FCS costs will run nearly $9 billion annually to procure enough FCS equipment for two Units of Action per year. According to Army officials, it is not yet clear that the Army can afford this level of annual procurement funding for FCS. The consequences of even modest cost increases and schedule delays for FCS would be dramatic. For example, we believe that a 1-year delay late in FCS development, not an uncommon occurrence for other DOD programs, could cost $4 billion to $5 billion. A modest 10 percent increase in production cost would amount to over $7 billion. In a broader context, any discussion of DOD's sizeable investment that remains in the FCS program must also be viewed within the context of the fiscal imbalance facing the nation within the next 10 years. There are important competing priorities, both within and external to DOD's budget, that require a sound and sustainable business case for DOD's acquisition programs based on clear priorities, comprehensive needs assessments, and a thorough analysis of available resources. Funding specific program or activities will undoubtedly create shortfalls in others. Alternatives to developing FCS capabilities that do not follow a concurrent strategy are feasible, if acted upon early enough. Alternatives should have the common elements of building more knowledge before making program commitments; preserving the advantages of the FCS concept, such as defining an architecture before individual systems are developed; and spinning off mature technologies to systems already fielded. Alternatives that would allow for building such knowledge include: Adding more time to the FCS program with its scope intact to reduce concurrency would lower risk. However, until technologies are mature and more is known about whether the FCS concept will work, there still would not be a sound basis for estimating how much time will be needed to build the knowledge needed to complete system development and demonstration. Focus on the development and demonstration of its most critical capabilities first, such as the network. This could be done by conducting one or more advanced technology demonstrations to reduce technical and integration risks in critical areas, then proceed with an acquisition program. This would take more time than if the current FCS schedule were successfully carried out. Focus on maturing the most critical technologies first, then bundle them in demonstrations of capabilities, such as Advanced Concept Technology Demonstrations, then proceed with an acquisition program that would attain sufficient knowledge at the right acquisition junctures. This would also take more time than if the current FCS schedule were successfully carried out. To develop the information on whether the FCS program was following a knowledge-based acquisition strategy and the current status of that strategy, we contacted, interviewed, and obtained documents from officials of the Offices of the Under Secretary of Defense (Acquisition, Technology, and Logistics); the Secretary of Defense Cost Analysis Improvement Group; the Assistant Secretary of the Army (Acquisition, Logistics, and Technology); the Program Executive Officer for Ground Combat Systems; the Program Manager for Future Combat Systems; and the Future Combat Systems Lead Systems Integrator. We reviewed, among other documents, the Objective Force Operational and Organizational Plan for Maneuver Unit of Action and the Future Combat Systems' Operational Requirements Document; the Acquisition Strategy Report, the Baseline Cost Report, the Critical Technology Assessment and Technology Risk Mitigation Plans, and the Integrated Master Schedule. We attended the FCS Business Management Quarterly Meetings, Management Quarterly Review Meetings, and Directors Quarterly Review Meetings. In our assessment of the FCS, we used the knowledge-based acquisition practices drawn from our large body of past work, as well as DOD's acquisition policy and the experiences of other programs. We discussed the issues presented in this statement with officials from the Army and the Secretary of Defense, and made several changes as a result. We performed our review from July 2003 to March 2004 in accordance with generally accepted auditing standards. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or members of the subcommittee may have. For future questions about this statement, please contact me at (202) 512-4841. Individuals making key contributions to this statement include Lily J. Chin, Marcus C. Ferguson, Lawrence Gaston, Jr., William R. Graveline, W. Stan Lipscomb, John P. Swain, and Carrie R. Wilson. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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To become a more responsive and dominant combat force, the U.S. Army is changing its strategy from bigger and stronger weapons to faster and more agile ones. The Future Combat Systems (FCS)--which the Army calls the "greatest technology and integration challenge ever undertaken"--is expected to meet the Army's transformational objectives. Forming FCS' backbone is an information network that links 18 systems. Not only is FCS to play a pivotal role in the Army's military operations, FCS and its future iterations are expected to eventually replace all Army forces. For FCS' first developmental increment, the Army has set aside a 5 1/2-year timetable from program start (May 2003) until the initial production decision (November 2008). GAO was asked to testify about FCS' key features, whether the program carries any risks, and, if so, whether there are alternatives for developing FCS capabilities with fewer risks. The FCS concept is a new generation of manned and unmanned ground vehicles, air vehicles, and munitions, each of which taps into a secure network of superior combat information. These weapon systems are to be a fraction of the weight of current weapons yet as lethal and survivable. FCS' lightweight and small size are critical to meeting the Army's goals of deploying faster and being more transportable for big or small military operations. Rather than rely on heavy armor to withstand an enemy attack, FCS' systems will depend on superior communications to kill the enemy before being detected. One of FCS' key advantages is that it provides an architecture within which individual systems will be designed--an improvement over designing systems independently and making them interoperable after the fact. Another merit is that FCS is being acquired and developed with the full cooperation of the Army's program managers, contractors, and the warfighter community. FCS is at significant risk for not delivering required capability within budgeted resources. Three-fourths of FCS' needed technologies were still immature when the program started. The first prototypes of FCS will not be delivered until just before the production decision. Full demonstration of FCS' ability to work as an overarching system will not occur until after production has begun. This demonstration assumes complete success-- including delivery and integration of numerous complementary systems that are not inherently a part of FCS but are essential for FCS to work as a whole. When taking into account the lessons learned from commercial best practices and the experiences of past programs, the FCS strategy is likely to result in cost and schedule consequences if problems are discovered late in development. Because it is promising to deliver unprecedented performance capabilities to the warfighter community, the Army has little choice but to meet a very high standard and has limited flexibility in cutting FCS requirements. Because the cost already dominates its investment budget, the Army may find it difficult to find other programs to cut in order to further fund FCS. To avoid unanticipated cost and schedule problems late in development, several alternatives can be considered: (1) add time to FCS' acquisition schedule to reduce concurrent development; (2) take the time to develop and demonstrate the most critical capabilities first, such as the FCS network, then proceed with an acquisition program; and (3) focus on maturing the most critical technologies first, then bundle them in demonstrations of capabilities, and ensure that decision makers have attained the knowledge they need at critical junctures before moving forward.
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Generally, DOD provides longevity retirement pay to military service members upon completion of 20 creditable years of active duty service. DOD also provides disability retirement pay to eligible servicemembers who are determined unfit for duty-that is, unable to perform their military duties. To qualify for military disability retirement, the servicemember's disability must have been determined by DOD medical personnel to be permanent and the servicemember must have (1) at least 20 years of creditable service or (2) an evaluation board determination that the servicemember has a physical disability rating of at least 30 percent, and either at least 8 years of creditable service or a disability resulting from active duty. Nearly 1.5 million retired servicemembers received retirement and disability retirement pay in fiscal year 2002. In fiscal year 2000, the average disability retiree who had been an officer received about $2,022 per month, while the average enlisted disability retiree received about $698 per month. VA provides monthly disability compensation to veterans who have service-connected disabilities to compensate them for the average reduction in earnings capacity that is expected to result from injuries or diseases incurred or aggravated by military service. The payment amount is based on a disability rating scale that begins at 0 for the lowest severity and increases in 10-percent increments to 100 percent for the highest severity. Many veterans claim multiple disabilities, and veterans can reapply for higher ratings and more compensation if their disabilities worsen. For veterans who claim more than one disability, VA rates each claim separately and then combines them into a single rating. About 65 percent of compensated veterans receive payments based on a rating of 30 percent or less and about 8 percent are rated at 100 percent. Average monthly compensation payments in 2002 ranged from about $100 for a 10-percent rating to over $2,100 for a 100-percent rating. Military retirees with disabilities incurred during their military service may receive military retirement pay (based on either longevity or disability, whichever is more financially advantageous to the servicemember) from DOD and disability compensation from VA. For example, a servicemember who incurs a disability may still be fit for duty, depending on the nature and severity of the impairment. If that servicemember completes 20 years of creditable service, he or she may retire based on longevity and also qualify for VA disability compensation for the same impairment or a different impairment that is also service-connected. Similarly, a servicemember who incurs a disability and is found unfit for duty may receive military retirement pay based on disability if he or she meets additional eligibility requirements. This servicemember may also qualify for VA disability compensation for the same impairment or a different impairment that is also service-connected. Current law requires that military retirement pay be reduced ("offset") by the amount of VA disability benefits received. In 1891, Congress passed legislation to prohibit what it regarded to be dual compensation for either past or current service and a disability pension. Despite the reduction in military retirement pay, it is often to a retiree's advantage to receive VA disability compensation in lieu of military retirement pay. These VA benefits provide an after-tax advantage because they are not subject to federal income tax, as military retirement pay generally is. In addition, the disability compensation VA pays can be increased if medical reevaluation of the retiree's condition is found by VA to have worsened. Because VA disability compensation is based on the severity of the disability and not on actual earnings (as is military retirement pay), the VA benefit may, in some instances, be larger than the amount of military retirement pay. For certain retirees with serious disabilities, the National Defense Authorization Act of 2000 provides a cash benefit that is less than what they would have received through concurrent receipt of their military retirement pay and VA disability compensation. The statute states that these special compensation payments are not military retirement pay. As such, they are not subject to the offset provisions, and the legislation did not change the statute that prohibits concurrent receipt. The special compensation payments were reauthorized in 2001 and 2002. In addition, the 2003 National Defense Authorization Act (P.L. 107-314) authorized a new category of "special compensation" for retirees with disabilities, including those who received a Purple Heart or have a disability due to "combat-related" activities. Under the new law, eligible retirees would now be able to receive the financial equivalent of concurrent receipt, although, again, the legislation did not repeal the statute prohibiting concurrent receipt. Military retirees may become eligible for this special compensation if (1) their disability is attributable to an injury for which the member was awarded the Purple Heart, and is not rated less than a 10-percent disability by DOD or VA; or (2) they receive a disability rating of at least 60 percent from either DOD or VA for injuries that were incurred due to involvement in "armed conflict," "hazardous service," "duty simulating war" and through an instrumentality of war. Retirees who are eligible under this new special compensation category will no longer be entitled to the special compensation payments first enacted in 2000. The Congressional Budget Office (CBO) estimated that this new special compensation would cost about $6 billion over 10 years. Table 1 shows the 2003 monthly payments amounts of the special compensation enacted in 2000 as well as the monthly payment amounts for the new category of special compensation. Current proposals before Congress pertaining to concurrent receipt would, if enacted, expand the number of those eligible to simultaneously receive the equivalent of their full retirement pay and compensation for a disability beyond the 2003 National Defense Authorization Act. CBO estimated that an earlier version of these proposals would cost about $46 billion over 10 years. Over a longer time horizon, the additional financial liability would be of even greater significance because of mounting concerns about the long-term fiscal consequences of federal entitlements. Among the programs that provide benefits to individuals based on their previous work experience or their inability to continue working because of disability, many use offset provisions when an individual qualifies for benefits under more than one program. The specific rationales for these offset provisions vary, but they generally focus on restoring equity and fairness by treating beneficiaries of more than one program in a similar manner as beneficiaries who qualify for benefits under only one of the programs. Table 2 provides examples of benefit programs that include offset provisions. (See app. I for a description of these programs.) Some programs use offset provisions to ensure that the total benefits received from two programs do not exceed the total income received while working. For example, the Social Security Disability Insurance (DI) program provides benefits to insured persons to replace the income lost when they are unable to work because of physical or mental impairments. In addition to DI benefits, some individuals may also be eligible for workers' compensation (WC) if the illness or injury is work-related. WC benefits are designed to replace the loss of earnings resulting from work- related illnesses or injuries. Each state and the District of Columbia generally requires employers operating in its jurisdictions to provide WC insurance for their employees. The Social Security Administration (SSA) generally requires that DI benefits be reduced for persons who also receive WC. This offset applies when combined DI and WC benefits exceed 80 percent of the injured worker's average current earnings. The reduction can apply even if the DI and WC benefits are for unrelated injuries or illnesses. In 1971, the Supreme Court validated the WC offset provision stating that it was intended to provide an incentive for injured employees to return to work because the Congress did not believe it was desirable for injured workers to receive disability benefits that, in combination with their WC benefits, exceeded their preinjury earnings. Some programs use offset provisions to adjust benefit computation formulas that were not originally designed to account for individuals or their dependents working under more than one retirement system. An example is Social Security's Government Pension Offset (GPO) provision, enacted in 1977 to equalize the treatment of workers covered by Social Security and those with government pensions not covered by Social Security. The Social Security Act requires that most workers be covered by Social Security benefits. In addition to paying retirement and disability benefits to covered workers, Social Security also generally pays benefits to spouses of retired, disabled, or deceased workers. Although state and local government workers were originally excluded from Social Security, today about two-thirds of state and local government workers are covered by Social Security. Prior to 1977, a spouse receiving a pension from a government position not covered by Social Security could receive a full pension benefit and a full Social Security spousal benefit as if he or she were a nonworking spouse. The GPO prevents spouses from receiving a full spousal benefit in addition to a full pension benefit earned from noncovered government employment. Offset provisions are also used by state governments. For example, 29 states and the District of Columbia permit insurers to reduce WC cash payments when the beneficiary also receives other types of benefits, such as those from Social Security retirement, survivor, or disability programs or from government or private pension plans. In addition, as required by federal law, states must deduct from unemployment compensation the value of pensions, retirement pay, or annuities based on previous work in certain situations. The purpose of this offset is to reduce the incentive for retirees who receive pensions to file for unemployment compensation and increase their incentive to seek work. Private sector insurers also use offsets. Our study of three large private disability insurers found that nearly two-thirds of those receiving private long-term disability benefits from the three private insurers also received DI benefits. In such cases, the private disability benefit payments were generally reduced by the amount of the DI benefit payment. In addition to the cost of the benefits, allowing concurrent receipt would have implications for VA program management. Allowing concurrent receipt of military retirement pay and VA disability compensation could provide new incentives for military retirees to file for VA compensation or to seek increases in their disability ratings for VA compensation that they are already receiving. These new claims could further tax VA's claims processing system. We recently reported that VA faces long-standing challenges to improve the timeliness and quality of disability claims decisions. In addition to creating delays in veterans' receipt of entitled benefits, untimely, inaccurate, and inconsistent claims decisions can negatively affect veterans' receipt of other VA benefits and services, including health care, because VA's assigned disability ratings help determine eligibility and priority for these benefits. While the cost of these new benefits and VA's administrative challenges in processing the claims may not provide sufficient bases to retain the offset, they warrant consideration in weighing this matter. While VA has had difficulty making decisions in a timely and consistent manner, VA's disability programs also face more fundamental problems. Our concerns about the long-standing challenges that VA faces in claims processing contributed to our recent decision to place federal disability programs, including VA's programs, on our high-risk list of programs that need urgent attention and transformation to ensure that they function in the most economical, efficient, and effective manner possible. This designation was based in part on our finding that these programs use outmoded criteria for determining disability. For example, VA's disability ratings schedule is still primarily based on physicians' and lawyers' judgments made in 1945 about the effect service-connected conditions had on the average individual's ability to perform jobs requiring manual or physical labor. Although VA is revising the medical criteria for its Schedule for Rating Disabilities, the estimates of how impairments affect veterans' earnings have generally not been reexamined. As a result, changes in the nature of work that have occurred over the last half-century--which potentially affect the extent to which disabilities limit one's earning capacity--are overlooked by the program's criteria. For example, in an increasingly knowledge-based economy, one could consider whether physical impairments such as the loss of an extremity still reduce earning capacity by 40 to 70 percent. These outdated concepts persist despite scientific advances and economic and social changes that have redefined the relationship between impairments and the ability to work. Advances in medicine and technology have reduced the severity of some medical conditions and have allowed individuals to live with greater independence and function in work settings. Moreover, the nature of work has changed as the national economy has become increasingly knowledge-based. Without a current understanding of the impact of physical and mental conditions on earnings given labor market changes, VA and other agencies administering federal disability programs may be overcompensating some individuals while undercompensating or denying benefits to other individuals because of outdated information on earning capacity. At the same time, the projected slowdown in growth of the nation's labor force makes it imperative that those who can work are supported in their efforts to do so. In reexamining the fundamental concepts underlying the design of federal disability programs, approaches used by other disability programs may offer valuable insights. For example, our prior review of three private disability insurers shows that they have fundamentally reoriented their disability systems toward building the productive capacities of people with disabilities, while not jeopardizing the availability of cash benefits for people who are not able to return to the labor force. As we previously reported, to fully incorporate scientific advances and labor market changes into the disability programs would require more fundamental change, such as revisiting the programs' basic orientation from incapacity to capacity. Reorienting programs in this direction would align them with broader social changes that focus on building and supporting the work capacities of people with disabilities. Such a reorientation would require examining complex program design issues such as beneficiaries' access to medical care and assistive technologies, the benefits offered and their associated costs, and strategies to return beneficiaries to work. Moreover, reorientation of the federal disability programs would necessitate the integration of the many programs and policies affecting people with disabilities, including those of DOD and VA. Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or the other Subcommittee members might have. For further information regarding this testimony, please contact me at (202) 512-7101 or Carol Dawn Petersen at (202) 512-7215. Suit Chan, Beverly Crawford, and Shelia Drake also contributed to this statement. Benefits provided Cash benefits to workers and their dependents who qualify as beneficiaries under the Old-Age Survivors, and Disability Insurance (OASDI) programs of the Social Security Act. OASDI replaces a portion of earnings lost as a result of retirement, disability, or death. Cash benefits to retired or disabled railroad workers, their dependents and survivors. Railroad workers may also receive sickness and unemployment benefits. Cash benefits to coal miners who have become totally disabled due to coal workers' pneumoconiosis, and to widows and other surviving dependents of miners who have died of this disease Cash benefits to retired or disabled federal employees, and survivors of federal employees and retirees. Eligibility The worker and his/her eligible family members must meet different sets of requirements for each type of benefit. An underlying condition of payment of most benefits is that the worker has contributed to Social Security for the required period of time. Railroad worker must have had at least 120 months of creditable railroad service or 60 months of creditable railroad service if such service was performed after 1995. Coal miner must have worked in the nation's coal mines or a coal preparation facility and become totally disabled from pneumoconiosis. Federal employees whose initial federal employment began after December 31, 1983, or who voluntarily switched from Civil Service Retirement System (CSRS) to FERS. The worker must have at least 5 years of creditable civilian service. Survivor and disability benefits are available after 18 months of civilian service Specific eligibility requirements and benefit amounts vary from state to state. Various cash and medical benefits to workers injured while working or who have occupational diseases. Temporary financial assistance to eligible workers who are unemployed through no fault of their own and are actively engaged in job search. Short- or long-term disability insurance, or both, to replace income lost by employees because of injuries and illnesses. Worker must meet the state requirements for wages earned or time worked during an established period of time, and be determined unemployed through no fault of his/her own, and meet other eligibility requirements of his/her state law. Specific eligibility requirements vary from plan to plan.
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Because pending legislation would modify current law, which requires that military retirement pay be reduced by the amount of VA disability compensation benefit received, the Subcommittee on Personnel, Senate Committee on Armed Services asked GAO to discuss the treatment of concurrent benefit receipt in other programs. GAO was also asked to discuss its broader work on federal disability programs. Three factors are important to weigh in deliberations on the merits of modifying the military offset provision. First, many benefit programs use offset provisions when individuals qualify for benefits from more than one program. Generally, the provisions are designed to treat beneficiaries of multiple programs fairly and equitably in relation to all other program beneficiaries, consistent with the program's purpose. Moreover, eliminating the military retirement offset provision could establish a precedent for other federal benefit programs that could prove costly. Second, the proposed modifications to the concurrent receipt provisions in the military retirement system would have implications not only for the Department of Defense's retirement costs but would also increase the demand placed on the Department of Veterans Affairs' (VA) claim processing system. This would come at a time when the system is still struggling to correct problems with quality assurance and timeliness. Third, such increased demand would come at a time when the VA disability program compensation, along with other federal disability programs, is facing the need for more fundamental reform. Modifying the concurrent receipt provisions adds to the current patchwork of federal disability policies and programs at a time when transformation and modernization are needed. While we are not taking a position on whether military retirement should be modified, as the Congress and other policymakers deliberate this issue, it would be appropriate to consider how modifying the offset would affect the pursuit of more fundamental reforms.
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The safety and quality of the U.S. food supply is governed by a highly complex system stemming from 30 principal laws related to food safety that are administered by 15 agencies. In addition, dozens of interagency agreements are intended to address a wide range of food safety-related activities. The federal system is supplemented by the states, which have their own statutes, regulations, and agencies for regulating and inspecting the safety and quality of food products. USDA and FDA, within the Department of Health and Human Services, have most of the regulatory responsibilities for ensuring the safety of the nation's food supply and account for most federal food safety spending. Under the Federal Meat Inspection Act, the Poultry Products Inspection Act, and the Egg Products Inspection Act, USDA is responsible for the safety of meat, poultry, and certain egg products. FDA, under the Federal Food, Drug and Cosmetic Act, and the Public Health Service Act, regulates all other foods, including whole (or shell) eggs, seafood, milk, grain products, and fruits and vegetables. Appendix 1 summarizes the agencies' food safety responsibilities. The existing statutes also give the agencies different regulatory and enforcement authorities. For example, food products under FDA's jurisdiction may be marketed without the agency's prior approval. On the other hand, food products under USDA's jurisdiction must generally be inspected and approved as meeting federal standards before being sold to the public. Under current law, UDSA inspectors maintain continuous inspection at slaughter facilities and examine each slaughtered meat and poultry carcass. They also visit each processing facility at least once during each operating day. For foods under FDA's jurisdiction, however, federal law does not mandate the frequency of inspections (which FDA typically conducts every 1 to 5 years). Although recent legislative changes have strengthened FDA's enforcement authorities, the division of inspection authorities and other food safety responsibilities has not changed. As we have reported, USDA traditionally has had more comprehensive enforcement authority than FDA; however, the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 granted FDA additional enforcement authorities that are similar to USDA's. For example, FDA now requires all food processors to register with the agency so that they can be inspected. FDA also has the authority to temporarily detain food products when it has credible evidence that the products present a threat of serious adverse health consequences. Moreover, FDA requires that entities such as the manufacturers, processors, and receivers of imported foods keep records so that FDA can identify the immediate previous source and the immediate subsequent recipients of food. This record-keeping authority is designed to help FDA track foods in the event of future health emergencies, such as terrorism-related contamination. In addition, FDA now requires advance notice of imported food shipments under its jurisdiction. Despite these additional authorities, important differences remain between the agencies' inspection and enforcement authorities. For example, the Federal Meat Inspection Act and the Poultry Products Inspection Act require that meat and poultry products be inspected and approved for sale (i.e., stamped by USDA inspectors). The Federal Food, Drug and Cosmetic Act does not require premarket approval, in general, for FDA-regulated food products. Finally, following the events of September 11, 2001, in addition to their established food safety and quality responsibilities, the federal agencies began to address the potential for deliberate contamination of agriculture and food products. In 2001, by executive order, the President added the food industry to the list of critical infrastructure sectors that need protection from possible terrorist attack. As a result of this order, the Homeland Security Act of 2002 establishing the Department of Homeland Security, and subsequent presidential directives, the Department of Homeland Security provides overall coordination on how to protect the U.S. food supply from deliberate contamination. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 also included numerous provisions to strengthen and enhance food safety and security. Many proposals have been made to consolidate the U.S. food safety system. In 2001, parallel Senate and House bills proposed consolidating inspections and other food safety responsibilities in a single independent agency. In 2004 and 2005, legislation was again introduced in the Senate and the House to establish a single food safety agency. This proposed legislation would combine the two food safety regulatory programs of USDA and FDA, along with a voluntary seafood inspection program operated by the National Marines Fisheries Service (NMFS) in the Department of Commerce. In addition, in 1998, the National Academy of Sciences recommended integrating the U.S. food safety system and suggested several options, including a single food safety agency. More recently, the National Commission on the Public Service recommended that government programs designed to achieve similar outcomes be combined into one agency and that agencies with similar or related missions be combined into large departments. The commission chairman testified before the Congress that important health and safety protections fail when responsibility for regulation is dispersed among several departments, as is the case with the U.S. system. The four agencies we examined--USDA, FDA, the Environmental Protection Agency (EPA), and NMFS--are involved in key program functions related to food safety. These functions include inspection and enforcement, research, risk assessment, education and outreach, rulemaking and standard setting, surveillance and monitoring, food security, and administration. These agencies spend resources on similar food safety activities to ensure the safety of different food products. Table 1 illustrates similar activities that these agencies conduct. In fiscal year 2003, the four federal agencies spent nearly $1.7 billion on food safety-related activities. As figure 1 shows, USDA and FDA together are responsible for nearly 90 percent of federal expenditures for food safety. As figure 2 shows, most of the agencies' expenditures were incurred for inspection/enforcement activities, including inspections of domestic and imported food. However, these expenditures are not based on the volume of foods regulated by the agencies or consumed by the public. USDA's activities account for almost three-quarters of the agencies' inspection and enforcement expenditures. That is, the majority of federal expenditures for food safety inspection are directed toward USDA's programs for ensuring the safety of meat, poultry, and egg products; however, USDA is responsible for regulating about 20 percent of the food supply. In contrast, FDA, which is responsible for regulating about 80 percent of the food supply, accounted for only about 24 percent of these expenditures. As a result of the multiple laws governing food safety, several federal agencies conduct activities--inspections of domestic and imported foods, training, research, risk assessment, education, and rulemaking--that can serve overlapping, if not identical, purposes. USDA and FDA conduct overlapping, and even duplicative, inspections at more than 1,400 domestic facilities that produce foods such as canned goods and frozen entrees. Both agencies inspect these facilities because each has statutory responsibility for the safety of different foods or food ingredients. USDA inspects canning facilities at least daily if the company produces canned beans containing meat and poultry. If the facility produces canned beans without meat or poultry, FDA also inspects it, with a frequency ranging from 1 to 5 years. USDA and FDA inspections have common features--both agencies spend inspection resources to verify that facilities are sanitary and follow good manufacturing practices, such as verifying that facilities do not have rodent or insect infestations. At jointly regulated facilities, both USDA and FDA inspectors verify that HACCP systems are in place. In these instances, each agency verifies that the facility has created and implemented a HACCP plan specific to the products that the agency regulates. Each agency's regulations require the facility to maintain separate HACCP plans for each product and to develop separate analyses of critical control points and separate strategies to mitigate or eliminate food contaminants. While separate HACCP plans are generally necessary to address the specific hazards associated with specific food products, maintaining these separate plans, and the associated inspections and documentation that each agency requires, can be burdensome. For example, at a facility we visited that produces both crab cakes and breaded chicken, the manager must maintain a seafood HACCP plan and a poultry HACCP plan. He said that although both plans have similar elements, each agency's inspectors expect different levels of detail for the plans--something the manager finds confusing and difficult to comply with. USDA and FDA inspections of the same food-processing facility represent, in our view, an inefficient use of scarce government resources. For example, at a plant that produces both meat and seafood products, a USDA inspector told us that as part of his daily, routine inspections he walks through the seafood processing and storage section of the plant. (See fig. 3.) However, because FDA regulates seafood, the USDA inspector does not monitor or inspect the seafood storage section. The inspector noted that, with minimum training on seafood temperature controls, he could inspect this section of the plant as well. USDA headquarters officials said the agency's inspectors are capable of taking on FDA's inspection responsibilities at jointly regulated facilities, given the proper resources and training. USDA and FDA have new tools that could help reduce overlap in inspections. Under the Bioterrorism Act, FDA could commission USDA inspectors, who are present every day at these jointly regulated facilities, to inspect FDA-regulated food. In doing so, FDA could reduce overlapping inspections and redirect resources to other facilities for which it has sole jurisdiction. While they did not disagree in principle with the benefits of such an arrangement, FDA officials said that the savings would be somewhat offset because FDA would likely have to reimburse USDA for the costs of those inspections. Furthermore, FDA officials said that they do not currently plan to pursue this option and have not conducted any analyses of the costs or savings associated with it. USDA officials commented that their inspectors are fully occupied and that they would need to be trained before conducting joint inspections. Overlaps also occur at seafood processing facilities that both FDA and NMFS inspect. NMFS currently inspects approximately 275 domestic seafood facilities, and FDA inspects some of these plants as part of FDA's surveillance program. NMFS conducts safety and sanitation inspections, as well as other product quality inspections, on a fee-for-service basis. NMFS inspectors verify sanitation procedures, HACCP compliance, and good manufacturing practices--many of the same components of an FDA inspection. Although the two agencies' seafood safety inspections are similar, FDA does not take into account whether NMFS has already inspected a particular facility when determining how frequently its inspectors should visit that same facility. FDA officials said they do not rely on NMFS inspections for two reasons. First, FDA officials believe that NMFS has a potential conflict of interest because companies pay NMFS for these inspections; and therefore, as a regulatory agency, FDA should not rely on them. NMFS officials disagreed, stating that their fee-for-service structure does not affect their ability to conduct objective inspections. Furthermore, they noted, when NMFS inspectors find noncompliance with FDA regulations, they refer companies to FDA and/or to state regulatory authorities. NMFS officials stated that companies that contract with NMFS need the agency's certification in order to satisfy their customers. Second, FDA officials believe, it is difficult for FDA to determine which facilities NMFS inspects at any given time because NMFS' inspection schedules fluctuate often, according to changes in NMFS' contracts with individual companies. However, we believe that if FDA were to recognize the results of NMFS' inspection findings in targeting its resources, it could decrease or eliminate inspections at facilities that NMFS inspectors find are in compliance with sanitation and HACCP regulations. Both USDA and FDA maintain inspectors at 18 U.S. ports of entry to inspect imported food but do not share inspection resources. In fiscal year 2004, USDA spent almost $16 million on imported food inspections, and FDA spent about $121 million. According to USDA inspectors we interviewed, FDA-regulated imported foods are sometimes handled and stored in USDA-approved import inspection facilities. Although USDA inspectors are present at these ports more often than FDA inspectors, USDA inspectors have no jurisdiction over FDA-regulated products and, therefore, the FDA-regulated products may remain at the facilities for some time awaiting FDA inspection. FDA and USDA are also not sharing information they gather during their respective evaluations and/or visits to foreign countries to assess food safety conditions. For example, USDA evaluated 34 countries in 2004 to determine whether these countries' food safety systems for ensuring the safety of meat and poultry are equivalent to that of the United States. FDA conducted inspections in 6 of these countries, but officials said they do not take USDA's evaluations of the foreign countries' food safety systems into account when determining which countries to visit and that USDA's findings would be of little use to FDA because they relate to products under USDA's jurisdiction. Both USDA and FDA spend resources to provide similar training to food inspection personnel. USDA spent about $13.4 million and FDA spent about $1.7 million in fiscal year 2004. We found that, to a considerable extent, food inspection training addresses the same subjects--such as plant sanitation, good manufacturing practices, and HACCP principles, albeit for different food products. FDA's online curriculum includes over 106 courses that address topics common to both USDA and FDA, as well as courses that are specific to FDA's regulations and enforcement authorities. NMFS currently uses 74 of these courses to train its seafood inspectors. NMFS officials cite benefits to using FDA's online training, such as accessibility to training materials at times other than when their inspectors are "on duty," as well as cost savings attributable to reduced expenses for course materials and management. We identified 71 interagency agreements that the principal food safety agencies--USDA, FDA, EPA, and NMFS--have entered into to better protect the public health by addressing jurisdictional boundaries, coordinating activities, reducing overlaps, and leveraging resources. About one-third (24) of the agreements highlight the need to reduce duplication and overlap or make efficient and effective use of resources. However, the agencies cannot take full advantage of these agreements because they do not have adequate mechanisms for tracking them and, in some cases, do not effectively implement them. Agency officials had difficulty identifying the food safety agreements they are party to, and in many instances, the agencies did not agree on the number of agreements they had entered into. In addition, for the two comprehensive inspection-related agreements that we examined in detail, the agencies are not ensuring that their provisions are adhered to or that the overall objectives of the agreements are being achieved. For example: USDA and FDA are not fully implementing an agreement to exchange information about jointly regulated facilities in order to permit more efficient use of both their resources and contribute to improved public health protection. Under this agreement, the agencies are to share inspection information, but FDA does not routinely consider compliance information from USDA when deciding how to target its inspection resources. Also, the agreement calls for the agencies to explore the feasibility of granting each other access to appropriate computer- monitoring systems so that each agency can track inspection findings. However, the agencies maintain separate databases and the inspectors with whom we spoke continue to be largely unaware of a facility's history of compliance with the other agency's regulations. Inspectors told us that compliance information might be helpful when inspecting jointly regulated facilities so they could focus on past violations. An agreement between FDA and NMFS recognizes the agencies' related responsibilities at seafood-processing establishments. The agreement details actions the agencies can take to enable each to discharge its responsibilities as effectively as possible, minimizing FDA inspections at these facilities. However, we found that FDA is not using information from NMFS inspections, which could allow it to reduce the number of inspections at those facilities. Also, FDA rarely notifies NMFS of seizure actions it takes against NMFS-inspected plants, as outlined in the agreement. Although FDA is not implementing the agreement, it has recognized the potential benefits of working with NMFS to leverage resources. In a January 2004 letter to the Under Secretary of Commerce for Oceans and Atmosphere, the then-Commissioner of FDA noted, among other things, that using NMFS inspectors could be cost effective because the NMFS inspectors may already be on-site and the FDA inspector therefore would not have to travel to conduct an inspection. The stakeholders we contacted--selected industry associations, food- processing companies, consumer groups, and academic experts--disagree on the extent to which overlaps exist and on how best to improve the federal structure. Most of these stakeholders agree that the laws and regulations governing the system should be modernized so that scientific and technological advancements can be used to more effectively and efficiently control current and emerging food safety hazards. However, they differed about whether to consolidate food safety inspection and related functions into a single federal agency. Industry Associations: Representatives of industry associations do not see the need to consolidate food safety-related functions, but they see the need for minor changes within the existing regulatory framework to enhance communication and coordination among the existing agencies. Food Processing Companies: Representatives from the individual food companies inspected by USDA and FDA believe that consolidation would improve the effectiveness and efficiency of the system and ensure that food safety resources are distributed based on the best available science. They also said that overlaps can be burdensome or confusing. The representatives did not see the added value of FDA's once-a-year (or less) inspections because USDA inspectors already visit their plants daily. At one company, USDA and FDA inspectors gave the plant manager contradictory instructions--the USDA inspector did not want the company to paint sterilization equipment because he determined that paint chips could contaminate the food; whereas the FDA inspector told the company to paint the same equipment because he determined that it would be easier to identify sanitation problems on lightly painted surfaces. Academics and Consumer Groups: Academics and consumer groups support consolidating food safety inspection and related functions into a single agency. One group stated that the laws do not build prevention into the farm-to-table continuum and divide responsibility and accountability for food safety among federal agencies. Further, according to this group, the laws prevent risk-based allocation of resources across the federal food safety agencies. The division of responsibility among several government agencies responsible for food safety is not unique to the United States. According to food safety officials in seven countries whose consolidations of food safety systems we examined, they faced similar fragmentation and division of responsibilities in their systems. As reported in February 2005, we examined the efforts of Canada, Denmark, Ireland, Germany, the Netherlands, New Zealand, and the United Kingdom to streamline and consolidate their food safety systems. We found that, in each case, these countries (1) modified existing laws to achieve the necessary consolidation and (2) established a single agency to lead food safety management or enforcement of food safety legislation. We acknowledge that these countries have smaller populations than the United States, but they face several similarities in their efforts to ensure safe food. These countries, like the United States, are high-income countries in which consumers have very high expectations about the safety of their food supplies. In addition, U.S. consumers' spending on food as a percentage of total spending is somewhat similar to that of these seven countries, ranging from about 10 percent in the United States to over 16 percent in Ireland and the United Kingdom. In general, high- income countries tend to spend a smaller percentage of their income on food than low-income countries. The seven countries' approaches for modifying their systems, of course, differed. For example, Denmark created a new federal agency in which it consolidated almost all food safety functions and activities, including inspections, which were previously distributed among several government agencies. In contrast, Germany's new food safety agency functions as a coordinating body to lead food safety management, while the German federal states continue to be responsible for overseeing food inspections performed by local governments. These countries had two primary reasons for consolidating their food safety systems--public concern about the safety of the food supply and the need to improve program effectiveness and efficiency. In addition, an important factor motivating the European Union (EU) countries' consolidations has been the need to comply with recently adopted EU legislation. These EU changes aim to harmonize and simplify its food safety legislation and to create a single, transparent set of food safety rules that is applicable to all EU-member countries. As we previously reported, Canada reorganized its food safety system in 1997. As part of its consolidation of food safety functions, Canada also assigned responsibilities for animal disease control and feed inspections to the Canadian Food Inspection Agency (CFIA). As a result, CFIA is responsible for detecting animal diseases that may affect human health, such as mad cow disease in cattle as well as for preventing the introduction and spread of the disease through animal feed. Not unexpectedly, the countries faced challenges in implementing their new systems. Many countries had to determine (1) whether to place the new agency within the existing health or agriculture ministry or establish it as a stand-alone agency and (2) what responsibilities the new agency would have. For example, Ireland chose to place its new independent food safety agency under its existing Department of Health and Children, in part, to separate food safety responsibilities from the promotion of the food industry, which is the responsibility of the Department of Agriculture and Food. On the other hand, to separate food safety regulation from political pressures, New Zealand established a semi-autonomous food safety agency attached to the Ministry of Agriculture and Forestry. Officials in several countries also cited challenges in helping employees assimilate into the new agency's culture and support its priorities. As expected, most countries incurred start-up costs in reorganizing, including the costs associated with acquiring buildings and purchasing new laboratory equipment. Some countries also reported that they experienced a temporary reduction in the quantity of food safety activities performed due to consolidation-related disruptions. None of the countries has conducted an analysis to compare the effectiveness and efficiency of its consolidated food safety system with that of the previous system. However, government officials in these countries as well as other stakeholders consistently stated that consolidation of their systems has led to significant qualitative improvements in operations that enhance effectiveness or efficiency. According to these officials, the benefits included reduced overlaps in inspections, more targeted inspections based on food safety risk, more consistent or timely enforcement of food safety laws and regulations, and greater clarity in responsibilities. Danish officials stated that consolidation and the accompanying reform of food safety laws facilitated risk-based inspections. The frequency of most inspections is now based on an individual food product's safety risk and on an individual company's food safety record, not on agencies' jurisdiction, as was the case before consolidation. As a result, the frequency of inspections at some food processing plants and of lower risk food products has been reduced, making more resources available for inspections of higher risk companies and foods. Government officials in Canada, the Netherlands, and Denmark stated that some cost savings may be achieved as a result of changes that have already taken place or are expected from planned changes needed to complete their consolidation efforts. For example, Dutch officials said that reduced duplication in food safety inspections would likely result in decreased spending. In addition, they anticipate savings from an expected 25-percent reduction in administrative and management personnel and from selling excess property. Figures 4 and 5 illustrate key functions and activities that the governments of Denmark and Canada decided to consolidate in order to achieve more efficient food safety systems. In recent years, many proposals from the Congress and others have been made to reform existing laws and consolidate the governmental structure for ensuring the safety of the food supply. As we have reported in the past, the current system is fragmented and causes inefficient use of resources, inconsistent oversight and enforcement, and ineffective coordination. We have recommended that the Congress consider statutory and organizational reforms, and we continue to believe that the benefits of establishing a single national system for the regulation of our food supply outweigh the costs. In making these recommendations, we fully recognize the time and effort needed to develop a reorganization plan and to transfer authorities, as necessary, under such a reorganization. We also recognize that improvements short of restructuring the current system can be made to help reduce overlaps and duplication, and to leverage existing resources. Therefore, in the report that you are releasing today, we make several recommendations to that end. For example, if cost effective, we recommend that FDA, as authorized under the Bioterrorism Act, commission USDA inspectors to carry out inspections of FDA- regulated foods at food establishments that are under their joint jurisdiction. We also recommend that USDA and FDA examine the feasibility and cost effectiveness of establishing a joint training program for their food inspectors. For further information about this testimony, please contact Robert A. Robinson, Managing Director, Natural Resources and Environment, (202) 512-3841. Maria Cristina Gobin, Terrance N. Horner, Jr., Gary Brown, Katheryn Hubbell, Carol Herrnstadt Shulman, and Katherine Raheb made key contributions to this statement. Oversight of Food Safety Activities: Federal Agencies Should Pursue Opportunities to Reduce Overlap and Better Leverage Resources. GAO-05- 213. Washington, D.C.: March 30, 2005. Homeland Security: Much Is Being Done to Protect Agriculture from a Terrorist Attack, but Important Challenges Remain. GAO-05-214. Washington, D.C.: March 8, 2005. Mad Cow Disease: FDA's Management of the Feed Ban Has Improved, but Oversight Weaknesses Continue to Limit Program Effectiveness. GAO-05- 101. Washington, D.C.: February 25, 2005. Food Safety: Experiences of Seven Countries in Consolidating Their Food Safety Systems. GAO-05-212. Washington, D.C.: February 22, 2005. Food Safety: USDA and FDA Need to Better Ensure Prompt and Complete Recalls of Potentially Unsafe Food. GAO-05-51. Washington, D.C.: October 7, 2004. Posthearing Questions Related to Fragmentation and Overlap in the Federal Food Safety System. GAO-04-832R. Washington, D.C.: May 26, 2004. Federal Food Safety and Security System: Fundamental Restructuring Is Needed to Address Fragmentation and Overlap. GAO-04-588T. Washington, D.C.: March 30, 2004. Food Safety: FDA's Imported Seafood Safety Program Shows Some Progress, but Further Improvements Are Needed. GAO-04-246. Washington, D.C.: January 30, 2004. Bioterrorism: A Threat to Agriculture and the Food Supply. GAO-04-259T. Washington, D.C.: November 19, 2003. Combating Bioterrorism: Actions Needed to Improve Security at Plum Island Animal Disease Center. GAO-03-847. Washington, D.C.: September 19, 2003. Results-Oriented Government: Shaping the Government to Meet 21st Century Challenges. GAO-03-1168T. Washington, D.C.: September 17, 2003. School Meal Programs: Few Instances of Foodborne Outbreaks Reported, but Opportunities Exist to Enhance Outbreak Data and Food Safety Practices. GAO-03-530. Washington, D.C.: May 9, 2003. Agricultural Conservation: Survey Results on USDA's Implementation of Food Security Act Compliance Provisions. GAO-03-492SP. Washington, D.C.: April 21, 2003. Food-Processing Security: Voluntary Efforts Are Under Way, but Federal Agencies Cannot Fully Assess Their Implementation. GAO-03-342. Washington, D.C.: February 14, 2003. Meat and Poultry: Better USDA Oversight and Enforcement of Safety Rules Needed to Reduce Risk of Foodborne Illnesses. GAO-02-902. Washington, D.C.: August 30, 2002. Foot and Mouth Disease: To Protect U.S. Livestock, USDA Must Remain Vigilant and Resolve Outstanding Issues. GAO-02-808. Washington, D.C.: July 26, 2002. Genetically Modified Foods: Experts View Regimen of Safety Tests as Adequate, but FDA's Evaluation Process Could Be Enhanced. GAO-02-566. Washington, D.C.: May 23, 2002. Food Safety: Continued Vigilance Needed to Ensure Safety of School Meals. GAO-02-669T. Washington, D.C.: April 30, 2002. Mad Cow Disease: Improvements in the Animal Feed Ban and Other Regulatory Areas Would Strengthen U.S. Prevention Efforts. GAO-02-183. Washington, D.C.: January 25, 2002. Food Safety: Weaknesses in Meat and Poultry Inspection Pilot Should Be Addressed Before Implementation. GAO-02-59. Washington, D.C.: December 17, 2001. Food Safety and Security: Fundamental Changes Needed to Ensure Safe Food.GAO-02-47T. Washington, D.C.: October 10, 2001. Food Safety: CDC Is Working to Address Limitations in Several of Its Foodborne Disease Surveillance Systems. GAO-01-973. Washington, D.C.: September 7, 2001. Food Safety: Overview of Federal and State Expenditures. GAO-01-177. Washington, D.C.: February 20, 2001. Food Safety: Federal Oversight of Seafood Does Not Sufficiently Protect Consumers. GAO-01-204. Washington, D.C.: January 31, 2001. Food Safety: Actions Needed by USDA and FDA to Ensure That Companies Promptly Carry Out Recalls. GAO/RCED-00-195. Washington, D.C.: August 17, 2000. Food Safety: Improvements Needed in Overseeing the Safety of Dietary Supplements and "Functional Foods." GAO/RCED-00-156. Washington, D.C.: July 11, 2000. School Meal Programs: Few Outbreaks of Foodborne Illness Reported. GAO/RCED-00-53. Washington, D.C.: February 22, 2000. Meat and Poultry: Improved Oversight and Training Will Strengthen New Food Safety System. GAO/RCED-00-16. Washington, D.C.: December 8, 1999. Food Safety: Agencies Should Further Test Plans for Responding to Deliberate Contamination. GAO/RCED-00-3. Washington, D.C.: October 27, 1999. Food Safety: U.S. Needs a Single Agency to Administer a Unified, Risk- Based Inspection System. GAO/T-RCED-99-256. Washington, D.C.: August 4, 1999. Food Safety: U.S. Lacks a Consistent Farm-to-Table Approach to Egg Safety. GAO/RCED-99-184. Washington, D.C.: July 1, 1999. Food Safety: Experiences of Four Countries in Consolidating Their Food Safety Systems. GAO/RCED-99-80. Washington, D.C.: April 20, 1999. Food Safety: Opportunities to Redirect Federal Resources and Funds Can Enhance Effectiveness. GAO/RCED-98-224. Washington, D.C.: August 6, 1998. Food Safety: Federal Efforts to Ensure Imported Food Safety Are Inconsistent and Unreliable. GAO/T-RCED-98-191. Washington, D.C.: May 14, 1998. Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are Inconsistent and Unreliable. GAO/RCED-98-103. Washington, D.C.: April 30, 1998. Food Safety: Agencies' Handling of a Dioxin Incident Caused Hardships for Some Producers and Processors. GAO/RCED-98-104. Washington, D.C.: April 10, 1998. Food Safety: Fundamental Changes Needed to Improve Food Safety. GAO/RCED-97-249R. Washington, D.C.: September 9, 1997. Food Safety: Information on Foodborne Illnesses. GAO/RCED-96-96. Washington, D.C.: May 8, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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GAO has issued many reports documenting problems resulting from the fragmented nature of the federal food safety system--a system based on 30 primary laws. This testimony summarizes GAO's most recent work on the federal system for ensuring the safety of the U.S. food supply. It provides (1) an overview of food safety functions, (2) examples of overlapping and duplicative inspection and training activities, and (3) observations on efforts to better manage the system through interagency agreements. It also provides information on other countries' experiences with consolidation and the views of key stakeholders on possible consolidation in the United States. USDA and FDA have primary responsibility for overseeing the safety of the U.S. food supply; the Environmental Protection Agency (EPA) and the National Marine Fisheries Service also play key roles. In carrying out their responsibilities, these agencies spend resources on a number of overlapping activities, particularly inspection/enforcement, training, research, and rulemaking, for both domestic and imported food. For example, both USDA and FDA conduct similar inspections at 1,451 dual jurisdiction establishments--facilities that produce foods regulated by both agencies. To better manage the fragmented federal system, these agencies have entered into at least 71 interagency agreements--about a third of them highlight the need to reduce duplication and overlap or make efficient and effective use of resources. The agencies do not take full advantage of these agreements because they do not have adequate mechanisms for tracking them and, in some cases, do not fully implement them. Selected industry associations, food companies, consumer groups, and academic experts disagree on the extent of overlap, on how best to improve the federal system, and on whether to consolidate food safety-related functions into a single agency. However, they agreed that laws and regulations should be modernized to more effectively and efficiently control food safety hazards. As GAO recently reported, Canada, Denmark, Ireland, Germany, the Netherlands, New Zealand, and the United Kingdom also had fragmented systems. These countries took steps to consolidate food safety functions--each country modified its food safety laws and established a single agency to lead food safety management or enforcement of food safety legislation.
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The Internet is a vast network of interconnected networks that is used by governments, businesses, research institutions, and individuals around the world to communicate, engage in commerce, perform research, educate, and entertain. From its origins in the 1960s as a research project sponsored by the U.S. government, the Internet has grown increasingly important to both American and foreign businesses and consumers, serving as the medium for hundreds of billions of dollars of commerce each year. The Internet has also become an extended information and communications infrastructure, supporting vital services such as power distribution, health care, law enforcement, and national defense. Today, private industry--including telecommunications companies, cable companies, and Internet service providers--owns and operates the vast majority of the Internet's infrastructure. In recent years, cyber attacks involving malicious software or hacking have been increasing in frequency and complexity. Attacks against the Internet can come from a variety of sources, including criminal groups, hackers, and terrorists. Federal regulation recognizes the need to protect critical infrastructures such as the Internet. It directs federal departments and agencies to identify and prioritize critical infrastructure sectors and key resources and to protect them from terrorist attack. Furthermore, it recognizes that since a large portion of these critical infrastructures is owned and operated by the private sector, a public/private partnership is crucial for the successful protection of these critical infrastructures. Federal policy also recognizes the need to be prepared for the possibility of debilitating disruptions in cyberspace and, because the vast majority of the Internet infrastructure is owned and operated by the private sector, tasks DHS with developing an integrated public/private plan for Internet recovery. In its plan for protecting critical infrastructures, DHS recognizes that the Internet is a key resource composed of assets within both the information technology and the telecommunications sectors. It notes that the Internet is used by all critical infrastructure sectors to varying degrees and provides information and communications to meet the needs of businesses and government. In the event of a major Internet disruption, multiple organizations could help recover Internet service. These organizations include private industry, collaborative groups, and government organizations. Private industry is central to Internet recovery because private companies own most of the Internet's infrastructure and often have response plans. Collaborative groups--including working groups and industry councils-- provide information-sharing mechanisms to allow private organizations to restore services. In addition, government initiatives could facilitate a response to major Internet disruptions. Federal policies and plans assign DHS with the lead responsibility for facilitating a public/private response to and recovery from major Internet disruptions. Within DHS, responsibilities reside in two divisions within the Office of the Under Secretary for National Protection and Program, Office of Cybersecurity and Communications: the National Cyber Security Division (NCSD) and the National Communications System (NCS). NCSD operates the U.S. Computer Emergency Readiness Team (US-CERT), which coordinates defense against and response to cyber attacks. The other division, NCS, provides programs and services that assure the resilience of the telecommunications infrastructure in times of crisis. Additionally, the Federal Communications Commission can support Internet recovery by coordinating resources for restoring the basic communications infrastructures over which Internet services run. For example, after Hurricane Katrina, the commission granted temporary authority for private companies to set up wireless Internet communications supporting various relief groups; federal, state, and local government agencies; businesses; and victims in the disaster areas. Prior evaluations of DHS's cyber security responsibilities have highlighted issues and challenges facing the department. In May 2005, we issued a report on DHS's efforts to fulfill its cyber security responsibilities. We noted that while DHS had initiated multiple efforts to fulfill its responsibilities, it had not fully addressed any of the 13 key cyber security responsibilities noted in federal law and policy. We also reported that DHS faced a number of challenges that have impeded its ability to fulfill its cyber responsibilities. These challenges included achieving organizational stability, gaining organizational authority, overcoming hiring and contracting issues, increasing awareness of cyber security roles and capabilities, establishing effective partnerships with stakeholders, achieving two-way information sharing with stakeholders, and demonstrating the value that DHS can provide. In that report, we also made recommendations to improve DHS's ability to fulfill its mission as an effective focal point for cyber security, including recovery plans for key Internet functions. DHS agreed that strengthening cyber security is central to protecting the nation's critical infrastructures and that much remained to be done. The Internet's infrastructure is vulnerable to disruptions in service due to terrorist and other malicious attacks, natural disasters, accidents, technological problems, or a combination of these things. Disruptions to Internet service can be caused by cyber and physical incidents--both intentional and unintentional. Over the last few years, physical and cyber incidents have caused localized or regional disruptions, highlighting the importance of recovery planning. However, these incidents have also shown the Internet as a whole to be flexible and resilient. Even in severe circumstances, the Internet has not yet suffered a catastrophic failure. To date, cyber attacks have caused various degrees of damage. For example, 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. In 2003, the Slammer worm caused network outages, canceled airline flights, and automated teller machine failures. Slammer resulted in temporary loss of Internet access to some users, and cost estimates on the impact of the worm range from $1.05 billion to $1.25 billion. The federal government coordinated with security companies and Internet service providers and released an advisory recommending that federal departments and agencies patch and block access to the affected channel. However, because the worm had propagated so quickly, most of these activities occurred after it had stopped spreading. In 2002 and again in 2007, coordinated denial-of-service attacks were launched against all of the root servers in the Domain Name System. In the 2002 attack, at least nine of the thirteen root servers experienced degradation of service, while in the 2007 attack, six of the thirteen root servers experienced degradation of service. However, average end users hardly noticed the attacks. The attacks were efficiently handled by the server operators and their service providers. The 2002 attack pointed to a need for increased capacity for servers at Internet exchange points to enable them to manage the high volumes of data traffic during an attack. The 2007 attack demonstrated that some of the improvements made since 2002 to improve the resilience of the Internet had worked. Like cyber incidents, physical incidents could affect various aspects of the Internet infrastructure, including underground or undersea cables and facilities that house telecommunications equipment, Internet exchange points, or Internet service providers. For example, on July 18, 2001, a 60- car freight train derailed in a Baltimore tunnel, causing a fire that interrupted Internet and data services between Washington and New York. The tunnel housed fiber-optic cables serving seven of the biggest U.S. Internet service providers. The fire burned and severed fiber optic cables, causing backbone slowdowns for at least three major Internet service providers. Efforts to recover Internet service were handled by the affected Internet service providers; however, local and federal officials responded to the immediate physical issues of extinguishing the fire and maintaining safety in the surrounding area, and they worked with telecommunications companies to reroute affected cables. In another physical incident, Hurricane Katrina caused substantial destruction of the communications infrastructures in Louisiana, Mississippi, and Alabama, but it had minimal affect on the overall functioning of the Internet outside of the immediate area. According to an Internet monitoring service provider, while there was a loss of routing around the affected area, there was no significant impact on global Internet routing. According to the Federal Communications Commission, the storm caused outages for more than 3 million telephone customers, 38 emergency 9-1-1 call centers, hundreds of thousands of cable customers, and more than 1,000 cellular sites. However, a substantial number of the networks that experienced service disruptions recovered relatively quickly. Federal officials stated that the government took steps to respond to the hurricane, such as increasing analysis and watch services in the affected area, coordinating with communications companies to move personnel to safety, working with fuel and equipment providers, and rerouting communications traffic away from affected areas. However, private sector representatives stated that requests for assistance, such as food, water, fuel, and secure access to facilities were denied for legal reasons; the government made time-consuming and duplicative requests for information; and certain government actions impeded recovery efforts. Since its inception, the Internet has experienced disruptions of varying scale--including fast-spreading worms, denial-of-service attacks, and physical destruction of key infrastructure components--but the Internet has yet to experience a catastrophic failure. However, it is possible that a complex attack or set of attacks could cause the Internet to fail. It is also possible that a series of attacks against the Internet could undermine users' trust and thereby reduce the Internet's utility. Several federal laws and regulations provide broad guidance that applies to the Internet infrastructure, but it is not clear how useful these authorities would be in helping to recover from a major Internet disruption because some do not specifically address Internet recovery and others have seldom been used. Pertinent laws and regulations address critical infrastructure protection, federal disaster response, and the telecommunications infrastructure. Specifically, the Homeland Security Act of 2002 and Homeland Security Presidential Directive 7establish critical infrastructure protection as a national goal and describe a strategy for cooperative efforts by the government and the private sector to protect the physical and cyber-based systems that are essential to the operations of the economy and the government. These authorities apply to the Internet because it is a core communications infrastructure supporting the information technology and telecommunications sectors; however, they do not specifically address roles and responsibilities in the event of an Internet disruption. Regarding federal disaster response, the Defense Production Actand the Stafford Act provide authority to federal agencies to plan for and respond to incidents of national significance like disasters and terrorist attacks. Specifically, the Defense Production Act authorizes the President to ensure the timely availability of products, materials, and services needed to meet the requirements of a national emergency. It is applicable to critical infrastructure protection and restoration but has never been used for Internet recovery. The Stafford Act authorizes federal assistance to states, local governments, nonprofit entities, and individuals in the event of a major disaster or emergency. However, the act does not authorize assistance to for-profit companies--such as those that own and operate core Internet components. Other legislation and regulations, including the Communications Act of 1934and the NCS authorities,govern the telecommunications infrastructure and help to ensure communications during national emergencies. For example, the NCS authorities establish guidance for operationally coordinating with industry to protect and restore key national security and emergency preparedness communications services. These authorities grant the President certain emergency powers regarding telecommunications, including the authority to require any carrier subject to the Communications Act of 1934 to grant preference or priority to essential communications.The President may also, in the event of war or national emergency, suspend regulations governing wire and radio transmissions and authorize the use or control of any such facility or station and its apparatus and equipment by any department of the government. Although these authorities remain in force in the Code of Federal Regulations, they have seldom been used--and never for Internet recovery. Thus it is not clear how effective they would be if used for this purpose. In commenting on the statutory authority for Internet reconstitution following a disruption, DHS agreed that this authority is lacking and noted that the government's roles and authorities related to assisting in Internet reconstitution following a disruption are not fully defined. As of our June 2006 report, DHS had begun a variety of initiatives to fulfill its responsibility to develop an integrated public/private plan for Internet recovery, but these efforts were not complete or comprehensive. Specifically, DHS had developed high-level plans, including the National Response Plan and the National Infrastructure Protection Plan, for infrastructure protection and national disaster response, but the components of these plans that address the Internet infrastructure were not complete. In addition, DHS had started a variety of initiatives to improve the nation's ability to recover from Internet disruptions, including establishing working groups to facilitate coordination, such as the National Cyber Response Coordination Group and Internet Disruption Working Group, and exercises in which government and private industry practice responding to cyber events. While these activities were promising, the responsibilities and plans for selected working groups had not yet been defined, and key exercises lacked effective mechanisms for incorporating lessons learned. In addition, the relationships among the initiatives were not evident. For example, the National Cyber Response Coordination Group, the Internet Disruption Working Group, and the North American Incident Response Group were all meeting to discuss ways to address Internet recovery, but the interdependencies among the groups had not been clearly established. As a result, the nation was not prepared to effectively coordinate public/private plans for recovering from a major Internet disruption. Although DHS has various initiatives to improve Internet recovery planning, there are key challenges in developing a public/private plan for Internet recovery, including (1) innate characteristics of the Internet that make planning for and responding to a disruption difficult, (2) lack of consensus on DHS's role and on when the department should get involved in responding to a disruption, (3) legal issues affecting DHS's ability to provide assistance to restore Internet service, (4) reluctance of the private sector to share information on Internet disruptions with DHS, and (5) leadership and organizational uncertainties within DHS. Until these challenges are addressed, DHS will have difficulty achieving results in its role as a focal point for recovering the Internet from a major disruption. First, the Internet's diffuse structure, vulnerabilities in its basic protocols, and the lack of agreed-upon performance measures make planning for and responding to a disruption more difficult. The components of the Internet are not all governed by the same organization. In addition, the Internet is international. According to private-sector estimates, only about 20 percent of Internet users are in the United States. Also, there are no well-accepted standards for measuring and monitoring the Internet infrastructure's availability and performance. Instead, individuals and organizations rate the Internet's performance according to their own priorities. Second, there is no consensus about the role DHS should play in responding to a major Internet disruption or about the appropriate trigger for its involvement. The lack of clear legislative authority for Internet recovery efforts complicates the definition of this role. DHS officials acknowledged that their role in recovering from an Internet disruption needs further clarification because private industry owns and operates the vast majority of the Internet. Private sector officials representing telecommunication backbone providers and Internet service providers were also unclear about the types of assistance DHS could provide in responding to an incident and about the value of such assistance. There was no consensus on this issue. Many private-sector officials stated that the government does not have a direct recovery role, while others identified a variety of potential roles, including providing information on specific threats; providing security and disaster relief support during a crisis; funding backup communication infrastructures; driving improved Internet security through requirements for the government's own procurement; serving as a focal point with state and local governments to establish standard credentials to allow Internet and telecommunications companies access to areas that have been restricted or closed in a crisis; providing logistical assistance, such as fuel, power, and security, to focusing on smaller-scale exercises targeted at specific Internet disruption issues; limiting the initial focus for Internet recovery planning to key national security and emergency preparedness functions, such as public health and safety; and establishing a system for prioritizing the recovery of Internet service, similar to the existing Telecommunications Service Priority Program. A third challenge to planning for recovery is that there are key legal issues affecting DHS's ability to provide assistance to help restore Internet service. As noted earlier, key legislation and regulations guiding critical infrastructure protection, disaster recovery, and the telecommunications infrastructure do not provide specific authorities for Internet recovery. As a result, there is no clear legislative guidance on which organization would be responsible in the case of a major Internet disruption. In addition, the Stafford Act, which authorizes the government to provide federal assistance to states, local governments, nonprofit entities, and individuals in the event of a major disaster or emergency, does not authorize assistance to for-profit corporations. Several representatives of telecommunications companies reported that they had requested federal assistance from DHS during Hurricane Katrina. Specifically, they requested food, water, and security for the teams they were sending in to restore the communications infrastructure and fuel to power their generators. DHS responded that it could not fulfill these requests, noting that the Stafford Act did not extend to for-profit companies. A fourth challenge is that a large percentage of the nation's critical infrastructure--including the Internet--is owned and operated by the private sector, meaning that public/private partnerships are crucial for successful critical infrastructure protection. Although certain policies direct DHS to work with the private sector to ensure infrastructure protection, DHS does not have the authority to direct Internet owners and operators in their recovery efforts. Instead, it must rely on the private sector to share information on incidents, disruptions, and recovery efforts. Many private sector representatives questioned the value of providing information to DHS regarding planning for and recovery from Internet disruption. In addition, DHS has identified provisions of the Federal Advisory Committee Actas having a "chilling effect" on cooperation with the private sector. The uncertainties regarding the value and risks of cooperation with the government limit incentives for the private sector to cooperate in Internet recovery-planning efforts. Finally, DHS has lacked permanent leadership while developing its preliminary plans for Internet recovery and reconstitution. In May 2005, we reported that multiple senior DHS cyber security officials had recently left the department.These officials included the NCSD Director, the Deputy Director responsible for Outreach and Awareness, 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. DHS officials acknowledge that the current organizational structure has overlapping responsibilities for planning for and recovering from a major Internet disruption. Given the importance of the Internet infrastructure to our nation's communication and commerce, our June 2006 report suggested a matter for congressional consideration and made recommendations to DHS regarding improving efforts in planning for Internet recovery.17 Specifically, we suggested that Congress consider clarifying the legal framework that guides roles and responsibilities for Internet recovery in the event of a major disruption. This effort could include providing specific authorities for Internet recovery as well as examining potential roles for the federal government, such as providing access to disaster areas, prioritizing selected entities for service recovery, and using federal contracting mechanisms to encourage more secure technologies. This effort also could include examining the Stafford Act to determine whether there would be benefits in establishing specific authority for the government to provide for-profit companies--such as those that own or operate critical communications infrastructures--with limited assistance during a crisis. Additionally, to improve DHS's ability to facilitate public/private efforts to recover the Internet in case of a major disruption, we recommended that the Secretary of the Department of Homeland Security implement nine actions (see table 1). The department agreed with our recommendations and has made progress in addressing many of them. Still, work remains to be done to ensure that our nation is prepared to effectively respond to a disruption of the Internet infrastructure. GAO-06-672. Establish dates for revising the National Response Plan--including efforts to update key components that are relevant to the Internet. In process DHS revised its National Response Plan (the revised version is called the National Response Framework) and released it for public comment in September 2007. As part of this effort, the agency revised segments that are relevant to the Internet, including the Cyber Incident Annex. However, DHS did not provide a date for when it expects to complete the Framework. Use the planned revisions to the National Response Plan and the National Infrastructure Protection Plan as a basis to draft public/private plans for Internet recovery and obtain input from key Internet infrastructure companies. In process As noted above, DHS's National Response Framework has been updated and released for public comment, but has not yet been completed. In addition, DHS released the National Infrastructure Protection Plan's base plan in June 2006 and the sector specific plans in May 2007. Because both documents have been made available for input from key infrastructure companies, DHS expects that they should serve as the basis for public/private plans for Internet recovery. In process DHS officials stated that the creation of the Office of Cybersecurity and Communications acknowledges the increasing convergence of the IT and Communications Sectors. Further, DHS officials stated that NCS and NCSD are working closely together to ensure that activities are coordinated, issues are jointly addressed, and the resources and expertise of each organization are utilized. Moreover, the officials stated that the Office of Cybersecurity and Communications is working to co-locate the US-CERT and the NCC watch operations centers to ensure that IT and communications experts are working side-by-side to share situational awareness information and foster the early identification of attack trends, as well as the implications of these attacks, across all infrastructure sectors. We are currently evaluating DHS's efforts to restructure its organization in light of the convergence of voice and data communications. DHS has reported the roles and responsibilities of its multiple working groups and initiatives, but has not fully described the relationships and interdependencies among the various Internet recovery-related activities currently under way. DHS disbanded the IDWG because its functions are to be addressed by the IT and Communications Sector Specific Plans and the Cross-Sector Cyber Security Working Group. DHS officials reported that they may reconstitute the IDWG in the future if needed to address Internet resilience objectives that are not covered by other existing organizations. Identify ways to incorporate lessons learned from actual incidents and during cyber exercises into recovery plans and procedures. In process DHS officials stated that they developed a Cyber Storm After Action Report, which was used to revise the NCRCG's operating documents, and the lessons learned were taken into account in the development of Cyber Storm II. DHS officials stated that exercises such as Cyber Storm and Cyber Tempest, as well as data from the Katrina After Action Report have been used in updating the National Response Framework. However, DHS has not yet developed a formal process for incorporating the lessons learned. In process DHS officials stated that there are a number of ongoing initiatives within the department that seek to address the challenges to effective Internet recovery. DHS reported that the strategic partnerships formed through the IDWG, the framework of the NIPP, implementation of the sector specific plans, the National Cyber Response Coordination Group, and operational activities conducted by US-CERT are helping to define the appropriate government functions in responding to a major Internet disruption. An IDWG study examined the existence of incident triggers for responding to Internet disruptions and concluded that triggers or response thresholds vary from one private sector organization to another and that overall, the establishment of triggers would hold little value for infrastructure owners and operators. The study revealed that the development of triggers for the federal government could be useful if used across departments and agencies. Currently, US-CERT's incident levels provide the response categories that should guide department and agency involvement in responding to incidents. Moreover, the study demonstrated the need for greater understanding as to what the federal response would be in the event of an Internet disruption. Agency officials stated that DHS is collaborating with the private sector to better understand existing operational and corporate governance policies. DHS acknowledges that more needs to be done to fully address these challenges. In summary, as a critical information infrastructure supporting our nation's commerce and communications, the Internet is subject to disruption--from both intentional and unintentional incidents. While major incidents to date have had regional or local impacts, the Internet has not yet suffered a catastrophic failure. Should such a failure occur, however, existing legislation and regulations do not specifically address roles and responsibilities for Internet recovery. As the focal point for ensuring the security of cyberspace, DHS has initiated efforts to refine high-level disaster recovery plans; however, much remains to be done. DHS faces numerous challenges in developing integrated public/private recovery plans--not the least of which is that the government does not own or operate much of the Internet. In addition, there is no consensus among public and private stakeholders about the appropriate role of DHS and when it should get involved; legal issues limit the actions the government can take; the private sector is reluctant to share information on Internet performance with the government; and DHS is undergoing important organizational and leadership changes. As a result, the exact role of the government in helping to recover the Internet infrastructure following a major disruption remains unclear. To improve DHS's ability to facilitate public/private efforts to recover the Internet in case of a major disruption, we suggested that Congress consider clarifying the legal framework guiding Internet recovery. We also made recommendations to DHS to establish clear milestones for completing key plans, coordinate various Internet recovery-related activities, and address key challenges to Internet recovery planning. While DHS has made progress in implementing these recommendations, full implementation could greatly enhance our nation's ability to recover from a major Internet disruption. 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) 512-6244, or by e-mail at [email protected]. Other key contributors to this testimony include Scott Borre, Vijay D'Souza, Nancy Glover, Colleen Phillips, and Jeffrey Woodward. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since the early 1990s, growth in the use of the Internet has revolutionized the way that our nation communicates and conducts business. While the Internet originated as a U.S. government-sponsored research project, the vast majority of its infrastructure is currently owned and operated by the private sector. Federal policy recognizes the need to prepare for debilitating Internet disruptions and tasks the Department of Homeland Security (DHS) with developing an integrated public/private plan for Internet recovery. GAO was asked to summarize its report on plans for recovering the Internet in case of a major disruption (GAO-06-672) and to provide an update on DHS's efforts to implement that report's recommendations. The report (1) identifies examples of major disruptions to the Internet, (2) identifies the primary laws and regulations governing recovery of the Internet in the event of a major disruption, (3) evaluates DHS plans for facilitating recovery from Internet disruptions, and (4) assesses challenges to such efforts. A major disruption to the Internet could be caused by a physical incident (such as a natural disaster or an attack that affects key facilities), a cyber incident (such as a software malfunction or a malicious virus), or a combination of both physical and cyber incidents. Recent physical and cyber incidents, such as Hurricane Katrina, have caused localized or regional disruptions but have not caused a catastrophic Internet failure. Federal laws and regulations that address critical infrastructure protection, disaster recovery, and the telecommunications infrastructure provide broad guidance that applies to the Internet, but it is not clear how useful these authorities would be in helping to recover from a major Internet disruption. Specifically, key legislation on critical infrastructure protection does not address roles and responsibilities in the event of an Internet disruption. Other laws and regulations governing disaster response and emergency communications have never been used for Internet recovery. As of 2006, DHS had begun a variety of initiatives to fulfill its responsibility to develop an integrated public/private plan for Internet recovery, but these efforts were not yet comprehensive or complete. For example, the department had developed high-level plans for infrastructure protection and incident response, but the components of these plans that address the Internet infrastructure were not complete. As a result, the risk remained that the government was not adequately prepared to effectively coordinate public/private plans for recovering from a major Internet disruption. Key challenges to establishing a plan for recovering from Internet disruptions include (1) innate characteristics of the Internet that make planning for and responding to disruptions difficult, (2) lack of consensus on DHS's role and when the department should get involved in responding to a disruption, (3) legal issues affecting DHS's ability to provide assistance to restore Internet service, (4) reluctance of many in the private sector to share information on Internet disruptions with DHS, and (5) leadership and organizational uncertainties within DHS. Until these challenges are addressed, DHS will have difficulty achieving results in its role as a focal point for helping the Internet to recover from a major disruption. DHS has made progress in implementing GAO's recommendations by revising key plans in coordination with private industry infrastructure stakeholders, coordinating various Internet recovery-related activities, and addressing key challenges to Internet recovery planning. However, further work remains to complete these activities, including finalizing recovery plans and defining the interdependencies among DHS's various working groups and initiatives. Full implementation of these recommendations should enhance the nation's ability to recover from a major Internet disruption.
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Since 1991, DynCorp Aerospace Technology has provided support services for State's counternarcotics program in the Andean region and, occasionally, in Central America. In 1998, State awarded a 5-year, cost plus award fee contract to DynCorp for approximately $170 million to continue this support. The Bureau's Office of Aviation manages the overall aviation program from its main operating base at Patrick Air Force Base, Florida. As the aviation program's contractor, DynCorp performs major maintenance and initial pilot training at Patrick Air Force Base and flies and maintains U.S. aircraft and trains foreign personnel at various locations in Bolivia, Colombia, and Peru. The total budget for the aviation program is about $50 million annually. See appendix I for a summary of the aviation program's staffing and assets by country. In Colombia, the Office of Aviation and DynCorp maintain a headquarters office and hangar at the El Dorado International Airport in Bogota. They also operate forward operating locations at airfields on several Colombian military and police bases. The Office of Aviation and DynCorp fly aerial eradication missions from several locations in Colombia. In recent months, they have used a Colombian Army base at Larandia and a Colombian National Police base in San Jose--usually one or the other but currently both. The Office of Aviation and DynCorp are collocated with the Colombian Army Aviation Brigade in Tolemaida. They use this base primarily for training, maintenance, and repair. As we reported in June 1999 and October 2000, U.S. estimates indicate that the illicit drug threat from Colombia has both expanded and become more complex over the past several years. Insurgent and paramilitary groups have increased their drug-trafficking activities, severely complicating U.S. and Colombian efforts to reduce illicit drug cultivation and production. For example, the insurgents exercise some degree of control over 40 percent of Colombia's territory east and south of the Andes where, according to the Drug Enforcement Administration, most of the new coca cultivation sites and most of the major drug production facilities are located. As a result, the aerial eradication missions are dangerous; and as a normal course, helicopter gunships and search and rescue aircraft accompany the eradication aircraft. Eradication planes and the supporting helicopters are often shot at. Aerial eradication missions have been cancelled or redirected because Office of Aviation or government of Colombia officials considered the targeted locations too dangerous. The Office of Aviation's oversight of DynCorp met both State's overall contracting requirements and requirements specified in the contract with DynCorp. State requires the Office of Aviation to examine contractor performance to ensure compliance with the contract and coordinate with the contractor on all matters that may arise in the administration of the contract. The contract includes State's oversight requirements and also establishes DynCorp's performance-based award fee plan, which requires the Office of Aviation to evaluate contractor performance every 4 months to determine DynCorp's monetary award. Under the terms of the contract, DynCorp is entitled to reimbursement of reasonable and allowable costs incurred and an award fee--which averaged about $410,000 each trimester between June 1999 and January 2001--based on the Office of Aviation's evaluation of DynCorp's performance. The contract establishes four evaluation categories-- management, technical proficiency, safety, and cost--and four performance assessment levels--outstanding, excellent, satisfactory, and unsatisfactory. Each assessment level corresponds to a range of percentages of the additional compensation that could be granted to DynCorp. For example, if the Office of Aviation rates DynCorp's overall performance in the evaluation categories as outstanding, the Office would award a minimum of 95 percent of the award fee. An excellent rating would be 75 to 94 percent of the award fee. A key distinguishing factor between each assessment level is the Office's evaluation of DynCorp's ability to identify and correct deficiencies in the program or preclude deficiencies from occurring by proactive management. The Office of Aviation's oversight measures consisted of regular interaction with DynCorp officials and frequent visits to operating sites. In addition, Office of Aviation officials regularly reviewed reports submitted by DynCorp's senior in-country managers outlining DynCorp's performance on a daily, weekly, and monthly basis. The Office of Aviation is collocated with DynCorp at the main operating base and in each country, thus allowing Office of Aviation officials to monitor DynCorp's operations on a daily basis. At the headquarters office in Bogota, Colombia, for example, we observed a senior Office of Aviation official conferring with DynCorp's operations manager about the flight schedule of the C-27 cargo plane; frequent telephone communication among Office of Aviation and DynCorp officials about operational matters, such as the delivery of needed supplies or the availability of pilots and mechanics at specific locations; and discussions about a program to verify the amount of coca eradicated. Further, during our visits to Larandia and Tolemaida, DynCorp managers made frequent contacts with their Office of Aviation counterparts concerning the status of planned security upgrades and training for the Colombian Army Aviation Brigade, respectively. Senior Office of Aviation officials told us that they held regular meetings at the main operating base with DynCorp managers to discuss program objectives and provide guidance on operational plans and procedures. Several DynCorp employees stated that the regular meetings have improved the program's operations. The DynCorp maintenance manager in Colombia told us that Office of Aviation officials have incorporated his expertise when drafting or revising standard operating procedures on issues relevant to his duties. Furthermore, a manager's meeting in April 2001 addressed the delay in shipping special tools to the DynCorp maintenance manager in Tolemaida. To solve the problem, DynCorp is now assessing the status of requests and reviewing the procedures for ordering tools. Senior Office of Aviation officials also made frequent visits to Colombia to oversee DynCorp operations. The operations officer made seven visits from June 1999 to March 2001. On several of his visits in 2000, he provided guidance to help establish the aviation support for the Colombian Army's Aviation Brigade. He stated that he regularly accompanies the contractors on eradication missions to provide guidance. The Office of Aviation Director and other senior officials told us they made numerous trips to overseas locations, primarily Colombia, during the same period to confer with DynCorp managers and other Office of Aviation officials and provide technical assistance. Office of Aviation officials regularly reviewed DynCorp's reports, including monthly reports from DynCorp's in-country managers summarizing the contractor's performance. These reports are based on daily and weekly reports submitted by managers from each forward operating location. The Office of Aviation also regularly received daily and weekly reports on the flight status of all aircraft and copies of all contractor memorandums dealing with safety. The senior Office of Aviation official in Colombia told us he viewed the contractor's input as critical for his monthly evaluation of contractor performance. Although the Office of Aviation and DynCorp interacted regularly, several Office of Aviation and DynCorp officials told us that a high turnover of DynCorp managers in Colombia over the past 2 years had led to frequent misunderstandings between the main operating base in Florida and operational sites in Colombia. We were told about several instances when managers in Colombia communicated directly with the main operating base, bypassing DynCorp managers in Bogota. In late 2000, the Office of Aviation encouraged DynCorp to promote a pilot to operations manager in Bogota and, after a new country manager was hired, provided oral and written guidance clarifying the chain of command. A number of Office of Aviation and DynCorp officials told us that these changes had alleviated tension that had been building between the Office of Aviation and DynCorp and greatly improved the overall morale of personnel in the program. Every month, senior Office of Aviation officials in Bolivia, Colombia, and Peru submit a report to the main operating base in Florida evaluating DynCorp's performance using the evaluation categories--management, technical proficiency, safety, and cost. The Office of Aviation Deputy Director consolidates the country reports and an evaluation of contractor performance at the main operating base into an overall monthly evaluation. The consolidated report is used to evaluate DynCorp's performance and help make the trimester award fee determination. We reviewed the monthly and consolidated reports prepared from June 1999 through January 2001. We noted that the trimester performance evaluations encouraged DynCorp to correct deficiencies. For example: In August and September 1999, the senior Office of Aviation official in Peru rated DynCorp's performance in quality control (a measure within the technical proficiency category) as unsatisfactory--the lowest of four ratings. He determined that poor quality control resulted in unnecessary downtime for one of the aviation program's cargo planes and that the downtime affected daily operations. These evaluations were incorporated into the September 1999 trimester evaluation, lowering Peru's technical proficiency and overall ratings from the previous trimester evaluation. In October and November 1999, Peru's quality control ratings improved, and in January 2000 a joint review by Office of Aviation and DynCorp officials also noted improvements in Peru's quality control program. The January 2000 trimester evaluation showed Peru's quality control as excellent--the second highest of the four ratings. In the May 2000 trimester performance evaluation, the Office of Aviation lowered DynCorp's safety rating to satisfactory following a March 2000 internal safety survey that was highly critical of the Colombian program. Office of Aviation officials noted that most deficiencies resulted from an unqualified safety manager at one operating location. In response, DynCorp hired a new safety manager, who began conducting regular audits and inspections of each operating location in Colombia. The September 2000 trimester evaluation showed that DynCorp had addressed the shortcomings identified in the internal safety survey. In the January 2000 trimester performance evaluation, the Office of Aviation rated Bolivia's material support as unsatisfactory. The monthly reports leading to the evaluation cited lengthy delays in receiving spare parts and chemicals for a corrosion control program. Following the poor trimester rating, DynCorp improved the timeliness of its shipments and received an excellent rating in the April 2000 monthly report and the subsequent trimester evaluation in May 2000. In our review of the monthly and consolidated reports, we noted that DynCorp did not meet aspects of an evaluation category but received a high evaluation overall. Office of Aviation officials told us that in assessing DynCorp's overall performance, the evaluation system permits them to consider mitigating circumstances and other information not specifically in the formal assessment. We found this to be the case with the contract's technical proficiency category, which is based, in part, on the time aircraft cannot fly due to (1) maintenance deficiencies or (2) needed supplies were not available. During the majority of the period we examined (June 1999 through January 2001), DynCorp met the maintenance and supply rates. However, during two periods when DynCorp did not meet the contract's rates, it was rated satisfactory or better for these two subcategories. During July through September 1999, more aircraft flying hours were lost due to maintenance problems than the contract allowed. Office of Aviation officials determined that this loss was beyond DynCorp's control because an unusually high number of aircraft engine changes were needed. During August through December 2000, more aircraft flying hours were lost than allowed by the contract because DynCorp did not have needed supplies. Office of Aviation officials considered the situation beyond DynCorp's control because it was the Office's responsibility to provide the needed helicopter mast assemblies. Further, Office officials said that DynCorp did well to come as close as it did to this measure given the lack of mast assemblies. Although we are satisfied that the Office of Aviation considered each country's reports in preparing the consolidated reports, during July 1999 to May 2000, portions of the Bolivian Office of Aviation senior official's reports were not included. The current Office of Aviation officials in Bolivia and at the main operating base in Florida told us that the Office of Aviation official in Bolivia at the time sometimes provided information that was irrelevant to contractor performance. As a result, senior Office of Aviation officials at the main operating base often revised or excluded parts of the reports. For example, the official in Bolivia repeatedly reported that several training documents needed to be translated into Spanish, although translation was not part of the contract with DynCorp. In other instances, the official in Bolivia evaluated Office of Aviation performance rather than contractor performance--in more than half the affected reports, the official reported that the Office of Aviation did not provide needed supplies or guidance on the Bolivian nationalization program. To oversee and evaluate the safety of contractor operations and physical security of the aviation program's facilities, Office of Aviation officials relied on daily interaction with DynCorp's country managers and forward operating location managers, frequent site visits, periodic reports as part of the trimester performance evaluation, and internal and external reviews. Overall, these assessments judged aviation program operations to be safe and physically secure; however, some concerns have not been resolved. According to Office of Aviation and DynCorp senior officials, enhancing safety is an ongoing process, and their employees should always strive to identify and implement ways to enhance safety. To ensure that aircraft were maintained and operated safely, the Office of Aviation safety manager monitored and evaluated the safety of contractor operations at the main operating base and at overseas locations. The manager said he used a safety checklist based on U.S. government and aircraft manufacturers' requirements when inspecting contractor operations and maintenance. He said that he monitored the main operating base on a daily basis and made periodic trips to overseas locations to monitor the safety of operations and maintenance. His trip reports identified safety issues that needed to be resolved and progress made in implementing previously identified safety concerns. The safety manager also coordinated with the DynCorp staff responsible for maintaining safe aircraft operations. For example, they worked together to update the aviation program's accident response plan, modeling it after a plan the DynCorp safety manager used while serving in the U.S. Air Force. In addition, Office of Aviation officials conducted internal Aviation Resources Management Surveys of DynCorp operations at the main operating base and overseas locations. According to Office of Aviation officials, these surveys are intended to provide a stringent on-site safety assessment. The most recent survey for Colombia, completed in March 2000, concluded that DynCorp needed to devote more attention to safety. As previously noted, DynCorp hired a new safety manager who began conducting regular audits and inspections of each operating location in Colombia. In addition, DynCorp made other safety improvements, including establishing safety classes for pilots and instituting an airfield cleanup campaign. In August 2000, the Office of Aviation requested an independent evaluation of aviation operations and safety by the Inter-Agency Committee for Aviation Policy (ICAP). In November 2000, ICAP conducted a review of the Office of Aviation's operations at two forward operating locations and the headquarters office in Colombia and at the main operating base in Florida. In February 2001, ICAP issued its report. ICAP concluded that the aviation program in Colombia and at Patrick Air Force Base was safe but made approximately 80 suggestions and recommendations to enhance safety and security. Office of Aviation and DynCorp officials have taken action on or implemented most of ICAP's suggestions and recommendations. For instance: To improve their document control process, Office of Aviation and DynCorp officials told us they clarified the procedures for seeking comments on and approving changes to operating procedures and other directives. To improve maintenance oversight, DynCorp hired additional quality control staff to fill this role. To correct deficiencies identified at fuel stations at forward operating locations, DynCorp hired a fuel management specialist who has ensured that the deficiencies were corrected. In some instances, Office of Aviation officials disagreed with ICAP's suggestions and recommendations. Among others, we noted the following: ICAP recommended that search and rescue helicopters accompany eradication aircraft on night operations. The Office of Aviation Director and Deputy Director said that eradication planes are much less likely to be shot down during night operations than in the daylight because the planes cannot be easily seen. Deploying helicopters nearby would serve to alert drug traffickers to the impending arrival of eradication aircraft and increase the likelihood that the traffickers could shoot them down. Further, deploying many aircraft during night operations increases the likelihood of aircraft accidents. ICAP recommended that the Office of Aviation update manuals to reflect modifications that were made to certain eradication aircraft. Office of Aviation officials noted that the aircraft in question were originally used 40 years ago as unarmed observation planes by the U.S. military. Later, the U.S. military added armaments and tested and documented their effect on the airplane's performance. According to the Office of Aviation Director, the aviation program's modifications have less effect on the aircraft's performance than the U.S. military's modifications. He said that as a result the manuals reflect a worse case than necessary and the aircraft does not need additional testing. In addition, such testing would be very expensive. In other instances, Office of Aviation and DynCorp officials agreed with ICAP's suggestions or recommendations but have not yet corrected the problem. ICAP recommended that the aviation program provide emergency vehicles at its forward operating locations to assist in the event its aircraft have an accident during takeoff or landing. Office of Aviation officials said that they have asked the Department of Defense to identify any excess emergency vehicles in its inventory. The Office of Aviation was also searching for used emergency vehicles because new emergency vehicles are very expensive. ICAP pointed out that the aviation program needed to improve its management information system. Office of Aviation officials said they are implementing a new, integrated management information system and obtaining a satellite communications system to improve communication between remote locations. They said they expect to have both systems in place by November 2001. ICAP found that certification and training records for maintenance personnel were often not readily available or were dated. Office of Aviation and DynCorp officials agreed, and the DynCorp Program Manager said he would either hire a training coordinator or assign existing staff to fulfill those responsibilities. Although Office of Aviation and DynCorp officials assess physical security through regular site visits and inspections, State's Bureau of Diplomatic Security has overall responsibility for ensuring a secure as possible workplace for U.S. government employees at overseas locations. Its Regional Security Office (RSO) in Bogota has assessed the aviation program's security needs through site visits and inspection reports. RSO and Office of Aviation and other Bureau officials have reviewed Office of Aviation sites in Colombia to determine what action had been taken on previously identified weaknesses and to determine the adequacy of physical security. In May 2001, the forward operating location in use at Larandia still needed security improvements and, according to RSO officials, was especially vulnerable to sabotage. Specifically, a public road runs within a few feet of and parallel to a runway used for aerial eradication missions. On weekends the road carries considerable civilian traffic. The only physical security is a chain-link fence and a partially completed barrier. We observed that the public road had only minimal security with a checkpoint at the base entrance and an unmanned bunker near the airfield. RSO and other security reports have recommended additional security measures, such as adding a second checkpoint and erecting a solid barrier between the road and the airfield. Further, both RSO and ICAP have concluded that the headquarters office and hangar at the Bogota airport are not secure. The ICAP report identified this location as being especially vulnerable. During several weeks in April and May 2001, we observed that only one guard was at the entrance at any given time, and the office had no x-ray or bomb-detection equipment to inspect packages. Further, the office and hangar are on a public road adjacent to a commercial shipping business. Each day, we observed a large volume of vehicles entering the area and parking near the aviation program's office. Both RSO and ICAP recommended that State find a more secure facility. Office of Aviation and Bureau officials agreed with the physical security assessments and recommendations and said upgrades in security should be completed in the next few months. However, they noted that they must rely on government of Colombia and U.S. Embassy support to make the improvements because aviation program facilities are not located on U.S. government property. Office of Aviation officials told us that the U.S. Embassy is negotiating with the Colombian Army base commander at Larandia to increase security checkpoints on the public road. In addition, the Colombia National Police have increased the number of staff assigned to the airfield. The U.S. Embassy had found a more secure location for the aviation program's headquarters office and hangar at the Bogota airport and had been negotiating a lease. However, according to Office of Aviation officials, that location is no longer suitable and U.S. Embassy and Bureau officials have begun a search for another location. The Office of Aviation complied with the requirements of the State Department and the DynCorp contract through an integrated oversight and performance evaluation process. The Office's oversight measures, which include reviews of DynCorp reports and frequent communication, are a fundamental part of the process. These measures provide the Office with sufficient information to evaluate the effectiveness of DynCorp's performance. Based on this information, each month the Office of Aviation formally notifies the contractor of how well it is doing and actions that it needs to take to improve performance. These steps culminate in a trimester evaluation leading to a performance-based, monetary award. This monetary award serves as an incentive for the contractor to cooperate with the Office of Aviation throughout the evaluation process. Because Office of Aviation and contractor staff in Colombia must perform their mission in a hostile environment, maintaining the safety and security of these personnel, the physical structures, and aircraft is crucial. Although the Office of Aviation has taken steps to improve safety and security in Colombia, it has not completed all actions that ICAP and RSO identified as necessary. We recognize that guaranteeing the safety and security of Office of Aviation and contractor employees and assets is very difficult. Nevertheless, the Office of Aviation has not yet fully implemented all suggestions and recommendations to ensure that its employees and contractors work in locations that are as safe and secure as possible. To improve the safety and security of the Office of Aviation's forward operating locations and headquarters office in Colombia, we recommend that the Secretary of State direct the Assistant Secretary of State for the Bureau for International Narcotics and Law Enforcement Affairs to document what remains to be done to address the suggestions and recommendations made by ICAP and RSO and when action is expected to be completed. In those instances where the Bureau disagrees that corrective action is necessary, we recommend that it document the reasons why it disagrees. The Department of State provided written comments on a draft of this report (see app. II). It stated that the report findings are essentially factual and correct and that it will continue to pursue improvements where needed. State also noted, as we did, that many of the concerns presented in the report are outside the control or influence of the Office of Aviation. Therefore, we urge the Assistant Secretary of State for the Bureau for International Narcotics and Law Enforcement Affairs to work with the Bureau of Diplomatic Security and the U.S. Embassy in Bogota, in particular, to complete required action in these areas. In addition, in oral comments, Office of Aviation officials provided technical comments that we have incorporated into this report, as appropriate. To determine what oversight and evaluation requirements were applicable for the DynCorp contract, we reviewed State's regulations for contract oversight and the relevant contract provisions. We also discussed the contract oversight and evaluation requirements with State's contract officer. To determine whether the Office of Aviation was adhering to the applicable oversight and evaluation requirements, we examined the trimester performance evaluation documentation for the period June 1999 through January 2001 in detail. Specifically, we examined each of the monthly reports from Bolivia, Colombia, and Peru and the consolidated reports and related documents prepared by Office of Aviation and DynCorp officials for the period and discussed the specific reports and issues raised in them with Office of Aviation's senior officials, including the Director, the Deputy Director, and the Contract Technical Officer, at Patrick Air Force Base, Florida, and other Office of Aviation officials in Washington, D.C. In Colombia, we also discussed specific reports with Office of Aviation officials and DynCorp managers who had first-hand knowledge of the evaluations and the status of DynCorp's efforts in the country at the time the reports were prepared. To determine whether the Office of Aviation ensured the safe operations of its aircraft and physical security of its facilities, we examined the safety issues raised in the monthly reports prepared for the trimester performance evaluations and the findings of the recent ICAP and RSO reports and Aviation Resources Management Surveys. We met with the team that conducted the ICAP review and discussed their methodology and criteria and the support for many of their findings in more detail than is presented in ICAP's report. We followed up with Office of Aviation officials in Washington, D.C.; Patrick Air Force Base, Florida; and in Colombia to determine the status of their efforts to address the shortcomings raised in the reports. In Colombia, we discussed safety and physical security issues with cognizant Office of Aviation officials and DynCorp managers at the headquarters office at the El Dorado International Airport in Bogota, the forward operating location at Larandia, and the maintenance and training facility at Tolemaida. At each site, we also toured the facilities to make our own observations and met with fixed-wing aircraft and helicopter pilots and mechanics to obtain their views on flight operations, safety, and physical security. In addition, at the main operating base in Florida, we flew on an eradication training mission. Finally, we discussed the Office of Aviation's implementation of its contract oversight and evaluation requirements and germane safety and security issues and concerns with the U.S. Ambassador and Deputy Chief of Mission at the U.S. Embassy in Bogota, Colombia; senior Bureau officials in Washington, D.C.; and the Director and Deputy Director at the main operating base in Florida. Our review was conducted from November 2000 through August 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairman, Senate Caucus on International Narcotics Control; interested congressional committees; and the Secretary of State. Copies will also be made available to other interested parties upon request. If you or your staff have any questions concerning this report, please call me at (202) 512-4268. An additional GAO contact and staff acknowledgments are listed in appendix III. The State Department's Office of Aviation manages a major counternarcotics aviation program with a highly mobile workforce that includes State employees and staff on loan from other U.S. agencies. As of July 31, 2001, the Office of Aviation had 24 staff to oversee the contractor- operated aviation program in Bolivia, Colombia, and Peru. Table 1 lists the number of Office of Aviation staff, where they are located, and their major job responsibilities. As of July 31, 2001, DynCorp, the contractor that implements the aviation program, employed about 545 staff--including 25 fixed-wing aircraft pilots hired under a subcontract with Eagle Aviation Services Technology, Inc. Of the 545 employees, 344 are assigned to Colombia--about 90 are U.S. citizens and count against the congressionally-mandated ceiling limiting U.S. civilian contractors in Colombia at any time to 300. About 88 DynCorp employees are stationed in Colombia permanently; the rest-- mainly pilots and mechanics--rotate in and out of Colombia about every 2 weeks. Table 2 shows the number of DynCorp employees supporting State's aviation program, where they are located, and their major job responsibilities. Table 3 lists the number and type of aircraft the Office of Aviation has assigned to Patrick Air Force Base and each of the three countries involved in the aviation program. In addition to the contact named above, Jim Strus and Chris Hall made key contributions to this report.
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The Andean region continues to cultivate, produce, and export almost all of the world's cocaine as well as an increasing amount of heroin, according to the State Department. Colombia is the source of 90 percent of the cocaine entering the United States and about two-thirds of the heroin found on the East Coast. Although coca cultivation estimates have fallen by about two-thirds in Bolivia and Peru since 1996, increases in coca cultivation in Colombia have offset much of these successes. Under State's Bureau for International Narcotics and Law Enforcement Affairs, the Office of Aviation, through a contract with DynCorp Aerospace Technology, supports foreign governments' efforts to locate and eradicate illicit drug crops in the Andean region. In recent years, DynCorp has maintained and operated aircraft to locate and eradicate drug crops in Colombia, trained pilots and mechanics for the Colombian Army Aviation Brigade, and provided logistical and training support for the aerial eradication programs of the Colombian National Police and manual eradication programs in Bolivia and Peru. The Office of Aviation met both State's overall contracting oversight requirements and more specific oversight and evaluation requirements in the DynCorp contract. Office of Aviation officials interacted daily with DynCorp managers at the main operating base and in each country, made regular site visits to each country, and reviewed DynCorp's internal reports. The Office of Aviation ensured that its aviation program operated safely and was physically secure, but it can do more. The Office relied on monthly reports and the trimester performance evaluations, as well as periodic surveys and independent assessments of DynCorp's operations and facilities. Overall, these reports have concluded that the aviation program was safe and that physical security was adequate. However, several matters of concern have not been resolved.
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The Stryker family of vehicles consists of 10 eight-wheeled armored vehicles mounted on a common chassis that provide transport for troops, weapons, and command and control. Stryker vehicles weigh on average about 19 tons--or 38,000 pounds, substantially less than the M1A1 Abrams tanks (68 tons) and the Bradley Fighting vehicle (33 tons), the primary combat platforms of the Army's heavier armored units. The C-130 cargo aircraft is capable of tactical, or in-theater, transport of one Stryker vehicle; the Army's Abrams tank and Bradley Fighting vehicle exceed the C-130 aircraft's size and weight limits. The Army's original operational requirements for Stryker vehicles included (1) the capability of entering, being transportable in, and exiting a C-130 aircraft; (2) the vehicle's combat capable deployment weight must not exceed 38,000 pounds to allow C-130 transport of 1,000 miles; and (3) the Stryker vehicles must be capable of immediate combat operations after unloading. The Army's most current operational requirements for Stryker vehicles required the same vehicle weight and C-130 transport capabilities without reference to C-130 transport of 1,000 miles. The Army has similar operational requirements for its Future Combat Systems' vehicles. The Army's April 2003 Operational Requirements document for the Future Combat Systems requires the vehicles' essential combat configuration to be no greater than 38,000 pounds and have a size suitable for C-130 aircraft transport. A memorandum of agreement between the Air Force and the Army issued in 2003, set procedures allowing C-130 transport of 38,000-pound Stryker vehicles aboard Air Force aircraft, but required that the combined weight of the vehicles, other cargo, and passengers shall not exceed C-130 operational capabilities, which vary based on mission requirements, weather, airfield conditions, among other factors. Eight of the 10 vehicle configurations are being acquired production ready--meaning they require little engineering design and development work prior to production. Two of the 10 vehicle configurations, the Mobile Gun System and the NBC Reconnaissance vehicle, are developmental vehicle variants--meaning that a substantial amount of design, development, and testing is needed before they can go into production. Table 1 provides descriptions of the ten Stryker vehicles. Three of the vehicles are shown in figures 1 to 3. The Army selected one light infantry brigade and one mechanized infantry brigade at Fort Lewis, Washington, to become the first two of six planned Stryker brigades. The first of these brigades, the 3rd Brigade, Second Infantry Division, became operational in October 2003, at which time the Brigade was deployed to Iraq. The second of the two Fort Lewis brigades became operational in May 2004, and plans are for it to deploy to Iraq in late 2004. The Army plans to form four more Stryker brigades from 2005 through 2008. The planned locations of the next four brigades are Fort Wainwright/Fort Richardson, Alaska; Fort Polk, Louisiana; Schofield Barracks, Hawaii; and a brigade of the Pennsylvania Army National Guard. Acquisition of the eight Stryker production vehicle configurations is about two-thirds complete with about 68 percent of the over 1,800-planned production vehicles ordered, and a low rate of production for the two developmental Strykers is scheduled for September 2004. Estimated program costs have increased because of, among other reasons, increases in the Army's estimate for related military construction, such as for the cost of building new Stryker vehicle maintenance facilities. However, the Army does not yet have reliable estimates for the Stryker's operating costs, such as for vehicle maintenance, because of limited peacetime operational experience with the vehicles. The Army is pursuing three acquisition schedules for the Stryker production and developmental vehicles. Since the November 2000 Stryker vehicle contract award, the Army has ordered 1,231 production vehicles--about 68 percent--of the 1,814 production vehicles the Army plans to buy for the six Stryker brigades. Of the 1,231 vehicles ordered, 800 have been delivered to the brigades, including all of the production vehicles for the first two Stryker brigades. The Army is currently fielding Stryker production vehicles for the third of the six planned brigades. The third brigade is to be fielded in Alaska. Thus far, the Army has bought limited quantities of the developmental vehicle variants--8 Mobile Gun System and 4 NBC Reconnaissance vehicles--as prototypes and for use in testing at various test sites around the country. Of 238 Mobile Gun Systems the Army plans to buy overall, current plans are to buy 72 initially upon approval for low-rate initial production scheduled for September 2004. The Army plans low-rate initial production of 17 NBC Reconnaissance vehicles also in September 2004. The Mobile Gun System is not scheduled to reach a full production decision until September 2006 at the earliest, while the NBC Reconnaissance vehicle is not scheduled to reach its full production decision until 2007. Table 2 below shows the status of Stryker vehicle acquisition as of April 2004. The Stryker vehicle program's total costs increased, in then-year dollars, from the original November 2000 estimate of $7.1 billion to the December 2003 estimate of $8.7 billion--or about 22 percent. The increases occurred primarily due to revised estimates for the associated cost of military construction, such as that needed to upgrade maintenance and training facilities for a Stryker brigade, but were also due to lesser increases in procurement and research, development, test, and evaluation (RDT&E) costs for the vehicles--which together grew by about 8 percent from the original November 2000 estimate. In then-year dollars, the estimated cost of military construction accounted for the largest increase in the Stryker program's cost estimate. In December 2003, the Army increased its estimate for military construction by about $1.01 billion over the original November 2000 estimate, from $322 million to $1.3 billion. (See table 3.) As in all major Department of Defense acquisition programs, military construction costs are included in the program's total costs. According to the Army, the military construction cost estimate increased because the December 2003 estimate reflects (1) the identification of all five sites scheduled to receive Stryker brigades and (2) the total cost of upgrading or building maintenance and training facilities at these installations to accommodate a Stryker brigade. When the original estimate was made, only one site had been identified to receive a Stryker brigade and that estimate identified just the cost of maintenance facility upgrades. The Stryker vehicle's procurement costs increased by about $390 million. The largest factor in the increase of procurement costs was the higher than originally estimated costs of procuring add-on reactive armor, including the additional costs to equip six Stryker brigades with add-on armor, instead of four brigades as originally planned. Also, the cost of RDT&E increased about $138 million, from $508 million to $645.6 million. Most of the RDT&E cost increase is attributable to revised estimates for the cost of test and evaluation, development, and system engineering for the developmental vehicles. The average acquisition cost per vehicle increased by about $0.79 million, from $3.34 million to $4.13 million. The program costs and average acquisition cost per vehicle estimates reflect a reduction in the number of Strykers planned from 2,131 to 2,096. (See table 3 above.) The Army does not have reliable estimates of Stryker vehicle operating costs because, with the first Stryker brigade's deployment to Iraq, it lacks sufficient peacetime operational experience with the vehicles. The Army considers 3 years of actual peacetime operational cost data to be sufficient for reliable estimates. Since none of the production vehicles have 3 years of peacetime operating experience, reliable operating cost estimates will not be available until 2005 at the earliest. With the Mobile Gun System and NBC Reconnaissance vehicles still in development, it will be several years before these vehicles are fully fielded and sufficient data are available for reliable estimates of their operating costs. According to the Army, current Stryker vehicle operating cost estimates, shown in table 4 below, are engineering estimates based in part on operating costs for another vehicle in the Army's inventory--the M-113 armored personnel carrier. The estimates assume peacetime operations. Vehicle operating costs include the cost for maintenance, repair, and the cost of consumable and repairable parts. The Army calculates vehicle cost per mile by tracking vehicle mileage and the actual costs of consumable or replaceable parts used. However, the short time frame from fielding the first Stryker brigade's production vehicles--May 2002 through January 2003--and the brigades' deployment to Iraq in October 2003, limited the amount of time and miles the vehicles were in peacetime service. Similarly, fielding of Stryker vehicles for the second brigade was completed in January 2004. While the Army collected operational cost and mileage data for both brigades, there were insufficient actual operating costs and miles on the vehicles to make reliable estimates. Consequently, until the Army can collect more actual peacetime operating cost data for the production vehicles, it will not be able to determine actual vehicle operating costs and make reliable operating cost estimates for these vehicles. Similarly, reliable operating cost estimates for the Mobile Gun System and NBC Reconnaissance vehicle will not be available until after 2006 when they are scheduled to begin full production and fielding. According to Army and OSD test reports, the tested Stryker production vehicles met operational requirements with certain limitations and, overall, support the key operational capabilities and force effectiveness of the Stryker Brigade Combat Team. The separate developmental testing schedules of the Mobile Gun System and NBC Reconnaissance vehicles have been delayed, resulting in delays in meeting planned production milestone dates. Delay in the Mobile Gun System's development was due in part to shortfalls in meeting performance requirements of the vehicle's ammunition autoloader system. The NBC Reconnaissance vehicle's development schedule was delayed pending OSD approval of an updated technology readiness assessment for the vehicle and its nuclear, biological, and chemical sensor systems. Following the Army's completion of live-fire tests and evaluation for seven production vehicles in February 2004 and its ongoing test evaluation of the eighth, the Army stated that the Stryker production vehicles met operational requirements, with limitations; and OSD approved full production. The Army's System Evaluation Report for the Stryker production decision concluded that overall, the Stryker family of vehicles is effective, suitable, and survivable, and supports the key operational capabilities and force effectiveness of the Stryker Brigade Combat Team. The report concluded that the Stryker production vehicle configurations met operational requirements with limitations. For example, in the area of lethality, the report noted that four Stryker vehicle configurations have a remote weapons station that provides effective protective and supporting fires for dismounted maneuver. However, limitations of the remote weapons station's capability to provide accurate and continuous fires at night and while moving reduce its effectiveness and lethality. Similarly, while the Stryker vehicles contribute to force protection and meet survivability requirements, there are inherent and expected survivability limitations as in any armored vehicle system. Table 5 lists some of the operational requirements of the vehicles and excerpts of selected performance capabilities and limitations from the Army's Stryker system evaluation report. The OSD Director, Operational Test and Evaluation, found that six Stryker production vehicles are operationally effective for employment in small- scale contingency operations and operationally suitable with certain limitations. OSD found that the Engineer Squad vehicle is not operationally suitable because of poor reliability. However, in its March 2004 Stryker acquisition decision, OSD determined that the operational capabilities provided by the Engineer Squad vehicle supported its continued production in light of planned fixes, operational work-arounds, and planned follow-on testing. It also determined that corrective actions are needed to address survivability and ballistic vulnerability limitations of the vehicles, such as ensuring basic armor performance and reducing exposure of Stryker personnel. Although developmental testing is ongoing, the development and testing schedule of the Mobile Gun System has been delayed, resulting in more than a 1-year delay in meeting planned production decision milestone dates, with initial limited production to start in September 2004. The delay in the Mobile Gun System's development was due in part to shortfalls in meeting performance requirements of the vehicle's ammunition autoloader system. At the time of our review, the Mobile Gun System was undergoing additional testing to find a fix for the autoloader, in preparation for a low- rate production decision. The Mobile Gun System is scheduled for production qualification testing through July 2004, production verification testing starting in October 2005, and live-fire test and evaluation starting in November 2005 through September 2006. The Army's earlier Mobile Gun System acquisition schedule was to complete developmental testing and have a low-rate initial production decision in 2003 and begin full production in 2005. Current Army plans are to buy limited quantities of Mobile Gun System vehicles upon OSD approval of low-rate initial production planned for September 2004. A full-rate production decision for the Mobile Gun System is currently scheduled for late in 2006. The Mobile Gun System has a 105mm cannon with an autoloader for rapidly loading cannon rounds without outside exposure of its three- person crew. The principal function of the Mobile Gun System is to provide rapid and lethal direct fires to protect assaulting infantry. The Mobile Gun System cannon is designed to defeat bunkers and create openings in reinforced concrete walls through which infantry can pass to accomplish their missions. According to the Army's Stryker Program Management Office, the autoloader system was responsible for 80 percent of the system aborts during initial Mobile Gun System reliability testing because of cannon rounds jamming in the system. As of February 2004, the Army was planning additional testing and working with the autoloader's manufacturer to determine a solution. A functioning autoloader is needed if the Mobile Gun System is to meet its operational requirements because manual loading of cannon rounds both reduces the desired rate of fire and requires brief outside exposure of crew. In its March 2004 Stryker acquisition decision, OSD required the Army to provide changes to the Mobile Gun System developmental exit criteria within 90 days, including the ability to meet cost and system reliability criteria. Although its developmental testing is also ongoing, the development schedule of the NBC Reconnaissance vehicle has also been delayed, and its production is now scheduled to occur about two years later than planned. The delay was primarily due to additional time needed to develop and test the vehicle's nuclear, biological, and chemical sensor systems. As a result, low-rate initial production, previously scheduled for December 2003, will not occur until September 2004. A full-rate production decision, which had previously been scheduled for June 2005, will not occur until July 2007. In its March 2004 Stryker acquisition decision, OSD required the Army to provide within 90 days an updated technology readiness assessment for the NBC Reconnaissance vehicle and its nuclear, biological, and chemical sensor systems. At that time, OSD will make a determination as to whether the vehicle is ready for production. Although the Army demonstrated during training events that Stryker vehicles can be transported short distances on C-130 aircraft and unloaded for immediate combat, the average 38,000 pound weight of Stryker vehicles, other cargo weight concerns, and less than ideal environmental conditions present significant challenges in using C-130s for routine Stryker transport. Similar operational limits would exist for C-130 transport of the Army's Future Combat Systems because they are also being designed to weigh about 38,000 pounds. In addition, much of the mission equipment, ammunition, fuel, personnel, and armor a Stryker brigade would need to conduct a combat operation might need to be moved on separate aircraft, increasing the numbers of aircraft or sorties needed to deploy a Stryker force, adding to deployment time and the time it would take after arrival to begin operations. Yet, the Army's weight requirement and C-130 transport requirements for the vehicles, and information the Army provided to Congress in budget documents and testimony, created expectations that Stryker vehicles could be routinely transported by C-130 aircraft within an operational theater. In a December 2003 report on the first Stryker Brigade's design evaluation, we reported that the Stryker Brigade demonstrated the ability to conduct tactical deployments by C-130 aircraft. At the National Training Center in April 2003, we observed the brigade conduct a tactical movement by moving a Stryker infantry company with its personnel, supplies, and 21 Stryker vehicles via seven C-130 aircraft flying 35 sorties from Southern California Logistics Airfield to a desert airfield on Fort Irwin about 70 miles away. Figure 4 shows a Stryker vehicle being offloaded from a C-130 at the National Training Center. A team from the Department of Defense's (DOD) Office of the Director for Operational Test and Evaluation and the Army's Test and Evaluation Command also observed the Stryker vehicle's deployment and recorded the weight of the vehicles and the total load weight onboard the aircraft. The average weight for the eight production vehicle configurations was just less than 38,000 pounds, while the total load weight--including a 3- days' supply of fuel, food, water, and ammunition--averaged more than 39,100 pounds. Table 6 shows the weight of eight-production vehicles and their total load weight recorded at the time of the April 2003 National Training Center deployment. We noted in our December 2003 report, however, that while the tactical deployment of Stryker vehicles by C-130 aircraft was demonstrated, the Army had yet to demonstrate under various environmental conditions, such as high temperature and airfield altitude, just how far Stryker vehicles can be tactically deployed by C-130 aircraft. The weight of Stryker vehicles presents significant challenges for C-130 aircraft transport because, as a general rule U.S. Air Force air mobility planning factors specify an allowable C-130 cargo weight of about 34,000 pounds for routine flight. With most Stryker vehicles weighing close to 38,000 pounds on board, the distance--or range--that a C-130 aircraft could fly is significantly reduced when taking-off in high air temperatures or from airfields located in higher elevations. In standard, or nearly ideal, flight conditions--such as day-time, low head-wind, moderate air temperature, and low elevation--an armored C-130H with a cargo payload of 38,000 pounds can generally expect to fly 860 miles from takeoff to landing. Furthermore, according to a Military Traffic Management Command's Transportation Engineering Agency study of C-130 aircraft transportability of Army vehicles, a C-130's range is significantly reduced with only minimal additional weight, and ideal conditions rarely exist in combat scenarios. The C-130 aircraft's range may be further reduced if operational conditions such as high-speed takeoffs and threat-based route deviations exist because more fuel would be consumed under these conditions. Even in ideal flight conditions, adding just 2,000 pounds onboard the aircraft for associated cargo such as mission equipment, personnel, or ammunition reduces the C-130 aircraft's takeoff-to-landing range to 500 miles. In addition, the more than 41,000-pound weight of the Mobile Gun System would limit the C-130 aircraft's range to a maximum distance of less than 500 miles. Figure 5 shows the affects of cargo weight on an armored C-130H aircraft's flight range in nearly ideal flight conditions. The addition of armor to the Strykers would pose additional challenges. With removable armor added to Strykers, the vehicles will not fit inside a C-130. To provide interim protection against rocket-propelled grenades, the Stryker vehicles of the brigade that deployed to Iraq in October 2003, were fitted with Slat armor weighing about 5,000 pounds for each vehicle (see fig. 6). By 2005, the Army expects to complete the development of add-on reactive armor--weighing about 9,000 pounds per vehicle--for protection against rocket-propelled grenades. With either type of armor installed, a Stryker vehicle will not fit inside a C-130 aircraft cargo bay. Regardless, with the added weight of the armor even in ideal flight conditions, the aircraft would be too heavy to take off. Furthermore, according to the Army Test and Evaluation Command's Stryker System Evaluation, in less than favorable flight conditions, the Air Force considers routine transport of the 38,000-pound cargo weight of a Stryker vehicle on C-130 aircraft risky, and such flight may not be permitted under the Air Force's flight operations risk management requirements if other transport means are available. In two theaters where U.S. forces are currently operating--the Middle East and Afghanistan, high temperatures and elevation can reduce C-130 aircraft range if carrying a 38,000-pound Stryker vehicle. Table 7 shows the reduced C-130 aircraft transport range due to daytime average summer temperatures of more than 100 degrees Fahrenheit in Iraq and high temperatures and elevations in Afghanistan. From two locations in Afghanistan (Bagram at 4,895 feet elevation and Kabul at 5,871 feet elevation) during daytime in the summer, a C-130 with a Stryker vehicle on board would not be able to take off at all. In winter from these same locations, its flight range would be reduced to 610 miles departing from Bagram and to 310 miles departing from Kabul. These same weight concerns would also apply to the Army's Future Combat Systems vehicles, which according to the Army's operational requirements should be no larger than 38,000 pounds and be transportable by a C-130. Additionally, the Mobile Gun System, expected to weigh over 41,000 pounds, is probably too heavy to transport a significant distance via C-130 aircraft. Furthermore, the C-130 aircraft cannot transport many of a Stryker brigade's vehicles at all. Stryker vehicles make up a little more than 300 of the over 1,000 vehicles of a Stryker brigade, and many of the brigade's support vehicles, such as fuel trucks, are too large or heavy for C-130 transport. Because a C-130's range is limited by weight and a Stryker's weight exceeds limits for routine C-130 loading, a tactical movement of significant distance of a Stryker brigade via C-130 aircraft in less than ideal conditions could necessitate moving much of the mission equipment, ammunition, fuel, personnel, and armor on separate aircraft. Such use of separate aircraft for moving Stryker vehicles and associated equipment, personnel, and supplies increases the force closure, or deployment, time and might limit the deployed forces' ability to be capable of immediate combat operations upon arrival--one of the Army's key operational requirements for the Stryker vehicles--because aircraft would arrive at different times and potentially different locations. In combination, a 38,000-pound Stryker vehicle, and the associated equipment, personnel, or armor that would have to be transported on separate aircraft are likely to increase the number of aircraft or sorties that would be needed to deploy a Stryker force. For example, if a decision were made to use a Stryker's add-on armor for a tactical mission, at about 9,000 pounds for each vehicle's armor, it would take at least one additional C-130 aircraft sortie to transport the armor for about four vehicles. Or, because of potential limits of the availability of C-130 lift assets, the size of a Stryker force and number of Stryker vehicles that could be tactically deployed would have to be reduced. At the National Training Center in April 2003, we observed, upon landing, an infantry company unload the vehicles from the C-130 aircraft, reconfigure them for combat missions, and move onward to a staging area. All Stryker variants except one reconfigured into combat capable modes within their designated time standard. Once reconfigured, units of the Stryker brigade also demonstrated the ability to conduct immediate combat operations. However, this was a short-range movement with only seven aircraft and did not require fitting armor on the vehicles. In an operational mission, depending on the size of the Stryker force deployed, using separate C-130 aircraft for transporting vehicles and associated people and equipment could significantly increase force deployment time because of the increased numbers of aircraft sorties needed. Upon arrival, it would also increase the time needed to reconfigure and begin operations because the vehicles, equipment, and personnel on different aircraft might arrive at different times or at different airfield locations. In addition, if a decision were made to use add-on armor for a mission, the armor would need to be installed after arrival, adding an average of about 10 hours per vehicle in reconfiguration time to install the armor. The capability of transporting Stryker vehicles on C-130 aircraft, despite its challenges and limitations, is a major objective of the Army's transformation to a lighter more responsive force. As such, the Army's weight and C-130 transport requirements for the vehicles, as well as information the Army provided to Congress, created expectations that Stryker vehicles could be routinely transported within an operational theater by C-130 aircraft. For example, in several congressional hearings since 2001, senior Army leadership testified that Stryker vehicles would be capable of transport by C-130 aircraft. In addition, annual budget justifications, which the Army submits to Congress for Stryker vehicle acquisition, highlight the C-130 transport capability of Stryker-vehicle- equipped Brigade Combat Teams. During our review, Army officials acknowledged the significant challenges and limitations of meeting expectations for transporting Stryker vehicles-- and beyond 2010, the Future Combat Systems--on C-130 aircraft in terms of limited flight range, the size force that could be deployed, and the challenges of arriving ready for combat. The officials, however, believe that the capability to transport Stryker vehicles or the Future Combat Systems' vehicles on C-130 aircraft, even over short distances, offers the theater combatant commanders an additional option among other modes of intratheater transportation--such as C-17 aircraft, sealift, or driving over land--for transporting Stryker brigades and vehicles in tactical missions. In addition, the officials believe that the ability to transport elements of a Stryker brigade as small as a platoon with four Stryker vehicles-- as a part of an operational mission of forces moving by other means, greatly enhances the combatant commander's war-fighting capabilities. In less than 4 years from the November 2000 Stryker vehicle contract award, the Army is well under way in fielding the eight production vehicle configurations, and Stryker vehicles are already in use in military operations in Iraq. However, program costs have increased, largely because of the cost of military construction related to Stryker vehicle needs, and delays in developing and testing the two remaining variants will delay their fielding and use. Furthermore, although the Army has successfully demonstrated that Stryker vehicles can be transported on C-130 aircraft during training events, routine use of the C-130 for airlifting Stryker vehicles, for other than short-range missions with limited numbers of vehicles, would be difficult in theaters where U.S. forces are currently operating. Therefore, the intended capability of Stryker brigades to be transportable by C-130 aircraft would be markedly reduced. The Army's operational requirements and information the Army provided to Congress created expectations that a Stryker vehicle weight of 38,000 pounds--and a similar weight for Future Combat System vehicles--would allow routine C-130 transport in tactical operations. Consequently, congressional decision makers do not have an accurate sense or realistic expectations of the operational capabilities of Stryker vehicles and Future Combat Systems. We recommend that the Secretary of Defense, in consultation with the Secretary of the Army and the Secretary of the Air Force, take the following two actions: 1. Provide to Congress information that clarifies the expected C-130 tactical intratheater deployment capabilities of Stryker brigades and Stryker vehicles and describes probable operational missions and scenarios using C-130 transport of Stryker vehicles that are achievable, including the size of a combat capable C-130 deployable Stryker force; describes operational capability limitations of Stryker brigades given the limits of C-130 transport; and identifies options for, and the feasibility of, alternative modes of transportation--such as C-17 aircraft-- for transporting Stryker brigades within an operational theater. 2. Provide the Congress similar clarification concerning the operational requirements and expected C-130 tactical airlift capabilities of Future Combat System vehicles, considering the limits of C-130 aircraft transportability. In commenting on a draft of this report, the Department of Defense partially concurred with our recommendations. The department also provided technical comments, which we incorporated in the report where appropriate. DOD concurred that operational requirements for airlift capability for brigade transport need clarification and stated that the ongoing Mobility Capabilities Study, scheduled for completion in the spring of 2005, will include an assessment of the intratheater transport of Army Stryker Brigade Combat Teams and address the recommendations of this report. In responding to our recommendation to provide information to Congress concerning C-130 transport of Stryker-equipped brigades, the department partially concurred and stated that the Army has studied C-130 transportability in depth. While we agree that the Army has studied C-130 transportability of Stryker vehicles--including the limitations that we point out in this report--their comments provide no assurance that this information will be provided to Congress, and we believe Congress needs this type of information to have an accurate sense of the operational capabilities of Stryker brigades. The department also partially concurred with our recommendation to provide to Congress similar clarification concerning the operational requirements and expected C-130 tactical airlift capabilities of Future Combat System vehicles, considering the limits of C-130 aircraft transportability. The department noted in its response that the Army is currently considering many factors, including C- 130 tactical airlift capability limits, as it reviews Future Combat Systems Unit of Action capability requirements. The department also stated that the Mobility Capabilities Study would include intratheater transport of Army units of action--the Army's Future Combat Systems-equipped future force. Given the ongoing congressional interest in the implications of the Army's requirements for C-130 transport of Stryker vehicles and Future Combat System ground vehicles, we agree that the information the Congress would need, if addressed in the Mobility Capabilities Study and provided to Congress, would meet the intent of our recommendations. With the Mobility Capabilities Study not scheduled for completion until the spring of 2005, we will assess at that time the adequacy of the study's assessment of intratheater transport of Army Stryker- and Future Combat System- equipped units. The Senate Armed Services Committee has directed GAO to monitor DOD's processes used to conduct the Mobility Capabilities Study, and to report on the adequacy and completeness of the study to the congressional defense committees no later than 30 days after the completion of the study. The appendix contains the full text of the department's comments. To determine the current status of Stryker vehicle acquisition and the latest Stryker vehicle program and operating cost estimates, we analyzed documents on Stryker vehicle acquisition plans, contract performance requirements, and costs and interviewed officials from the Army Program Executive Office/Stryker Program Management Office, Warren, Michigan. To determine Stryker program costs, we reviewed the DOD approved December 2003 Selected Acquisition Report (SAR) and interviewed Stryker Program Management Office officials. For our analysis of Stryker vehicle-operating costs, we reviewed the Army's mileage cost estimates and the Army's methodology for calculating costs per mile. We did not verify source information the Army used in its calculations. To determine the status and results of Stryker vehicle tests, we reviewed the results of Stryker vehicle developmental and survivability testing from the Army Test and Evaluation Command, Alexandria, Virginia, and the Army Developmental Test Command, Aberdeen Proving Ground, Maryland. We also reviewed the U.S. Army Test and Evaluation Command, Army Evaluation Center's Stryker System Evaluation Report and OSD Director, Operational Test and Evaluation's Operational Test and Evaluation and Live Fire Test and Evaluation Report for the Stryker family of vehicles. To determine the ability of C-130 aircraft to transport Stryker vehicles within a theater of operations, we reviewed a Military Traffic Management Command's, Transportation Engineering Agency study of the C-130 aircraft's range and payload capabilities and interviewed U.S. Army, Air Force and Transportation Command officials. We notified U.S. Central Command of our objective to review plans for C-130 aircraft transport of Stryker vehicles within the command's area of operations, but Central Command officials determined that this was an Army issue, rather than a combatant command's issue. Our review was conducted from July 2003 through June 2004 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of other Senate and House committees and subcommittees that have jurisdiction and oversight responsibilities for DOD. We are also sending copies to the Secretary of Defense and the Director, Office of Management and Budget. Copies 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 (202) 512-8365, or Assistant Director, George Poindexter, at (202) 512-7213. Major contributors to this report were Kevin Handley, Frank Smith, and M. Jane Hunt. Defense Acquisitions: The Army's Future Combat Systems' Features, Risks, and Alternatives. GAO-04-635T. Washington, D.C.: April 1, 2004. Military Transformation: The Army and OSD Met Legislative Requirements for First Stryker Brigade Design Evaluation, but Issues Remain for Future Brigades. GAO-04-188. Washington, D.C.: December 12, 2003. Issues Facing the Army's Future Combat Systems Program. GAO-03- 1010R. Washington, D.C.: August 13, 2003. Military Transformation: Realistic Deployment Timelines Needed for Army Stryker Brigades. GAO-03-801. Washington, D.C.: June 30, 2003. Military Transformation: Army's Evaluation of Stryker and M-113A3 Infantry Carrier vehicles Provided Sufficient Data for Statutorily Mandated Comparison. GAO-03-671. Washington, D.C.: May 30, 2003. Army Stryker Brigades: Assessment of External Logistic Support Should Be Documented for the Congressionally Mandated Review of the Army's Operational Evaluation Plan. GAO-03-484R. Washington, D.C.: March 28, 2003. Military Transformation: Army Actions Needed to Enhance Formation of Future Interim Brigade Combat Teams. GAO-02-442. Washington, D.C.: May 17, 2002. Military Transformation: Army Has a Comprehensive Plan for Managing Its Transformation but Faces Major Challenges. GAO-02-96. Washington, D.C.: November 16, 2001. Defense Acquisition: Army Transformation Faces Weapons Systems Challenges. GAO-01-311. Washington, D.C.: May 21, 2001. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select "Subscribe to Updates."
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In its transformation to a more responsive and mobile force, the Army plans to form 6 Stryker Brigade Combat teams equipped with a new family of armored vehicles known as Strykers. The Stryker--which provides transport for troops, weapons, and command and control--was required by the Army to weigh no more than 38,000 pounds and be transportable in theater by C-130 cargo aircraft arriving ready for immediate combat operations. The Army plans to equip its future force with a new generation of vehicles--Future Combat Systems--to also be transportable by C-130s. GAO was asked to assess (1) the current status of Stryker vehicle acquisition, including the most current Stryker vehicle program and operating cost estimates; (2) the status and results of Stryker vehicle tests; and (3) the ability of C-130 aircraft to transport Stryker vehicles within a theater of operations. This report also addresses the transportability of the Army's Future Combat Systems on C-130 aircraft. The acquisition of the Stryker vehicles is about two-thirds complete; with about 1,200 of 8 production vehicle configurations ordered and 800 delivered to units. In addition, limited quantities of two developmental vehicles--the Mobile Gun System and the Nuclear, Biological, and Chemical Reconnaissance vehicle prototypes--have also been ordered for testing. Stryker program costs have increased about 22 percent from the November 2000 estimate of $7.1 billion to the December 2003 estimate of $8.7 billion. Total program costs include acquisition costs--procurement, research, development, and test and evaluation--as well as military construction costs related to Strykers. The Army does not yet have reliable estimates of the Stryker's operating costs because of limited peacetime use to develop data. As of June 2004, testing of the eight production Strykers was mostly complete, with the vehicles meeting Army operational requirements with limitations. However, development and testing schedules of the two developmental Strykers have been delayed, resulting in an over 1-year delay in meeting the vehicles' production milestones and fielding dates. While the Army has demonstrated the required transportability of Strykers by C-130 aircraft in training exercises, in an operational environment, the Stryker's average weight of 38,000 pounds--along with other factors such as added equipment weight and less than ideal flight conditions--significantly limits the C-130's flight range and reduces the size force that could be deployed. These factors also limit the ability of Strykers to conduct combat operations immediately upon arrival as required. With the similar maximum weight envisioned for Future Combat System vehicles intended for the Army's future force, the planned C-130 transport of those vehicles would present similar challenges.
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The financial statements and accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the Foundation's financial position as of September 30, 2005, and 2004, and the results of its activities and its cash flows for the fiscal years then ended. However, material misstatements may nevertheless occur in other information reported by the Foundation on its financial status to its Board of Directors and others as a result of the material weakness in internal control over financial reporting described in this report. As discussed in a later section of this report and in Note 12 to the financial statements, the Foundation continues to experience difficulties in meeting its financial obligations. The Foundation's continuing financial difficulties raise substantial doubt, for the fourth consecutive year, about its ability to continue as a going concern. The financial statements have been prepared under the assumption that the Foundation would continue as a going concern, and do not include any adjustments that would need to be made if the Foundation were to cease operations. Because of the material weakness in internal control discussed below, the Foundation did not maintain effective internal control over financial reporting (including safeguarding assets) but did have effective control over compliance with laws and regulations. The Foundation's controls did not provide reasonable assurance that losses and misstatements material in relation to the financial statements would be prevented or detected on a timely basis. Our opinion is based on criteria established in our Standards for Internal Control in the Federal Government. In our report on the results of our audit of the Foundation's fiscal year 2004 financial statements, we reported that the deteriorating financial condition of the Foundation led to further deterioration in controls over the financial reporting process, impeding its ability to prepare timely and accurate financial statements. At the conclusion of our audit of the Foundation's fiscal year 2004 financial statements, we stressed to the Foundation's management the importance of documenting the Foundation's financial reporting policies and procedures, and further stressed that the policies and procedures should detail such functions as the monthly closing process, preparation of the financial statements, and review of financial data by management. During fiscal year 2005, the Foundation hired an accountant to help ensure that accurate and timely accounting and reporting of financial information occurred. This enabled the Foundation to provide us with a draft of the financial statements within 5 months after the fiscal year-end, something the Foundation had been unable to do in each of the preceding two financial statement audits. However, the Foundation continued to lack appropriate written procedures during fiscal year 2005 for making closing entries in its financial records and for preparing complete and accurate financial statements. The continued lack of written policies and procedures during fiscal year 2005 contributed to errors we identified during our audit of the Foundation's fiscal year 2005 financial statements. For example, the Foundation did not adequately perform its year-end bank reconciliation and misclassified the forgiveness by vendors of some of its outstanding debt. Both of these issues resulted in audit adjustments to the financial statements. In addition, numerous errors in the financial statements were not detected by management's review. This resulted in the need for management to make material adjustments to correct errors we identified during our audit. The Foundation was ultimately able to produce financial statements that were fairly stated in all material respects for fiscal years 2005 and 2004, but not without substantial adjustments identified during our audit. Subsequent to fiscal year 2005, the Foundation's Board of Directors' newly elected Treasurer worked with the National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. Since these procedures were not drafted until after fiscal year 2005, and the procedures related to financial reporting were not implemented in fiscal year 2005, they had no effect on the fiscal year 2005 financial statements. However, if properly implemented, they should lead to improvements in financial management going forward. We will evaluate the effectiveness of these new policies and procedures during our audit of the Foundation's fiscal year 2006 financial statements. Foundation management asserted that, with the exception of the material weakness in financial reporting, its internal control during the period was effective based on criteria established under GAO's Standards for Internal Control in the Federal Government. In making its assertion, Foundation management stated the need to improve control over financial reporting. Although the weakness did not materially affect the final fiscal year 2005 financial statements as adjusted for errors identified by the audit process, deficiencies in internal control may adversely affect any decision by management that is based, in whole or in part, on other information that is inaccurate because of the deficiencies. Unaudited financial information reported by the Foundation may also contain misstatements resulting from these deficiencies. Our tests for compliance with relevant provisions of laws and regulations for fiscal year 2005 disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our audit was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. For the fiscal year 2004 audit, our tests for compliance with relevant provisions of laws and regulations disclosed one area of material noncompliance that was reportable under U.S. generally accepted government auditing standards. This concerned the Foundation's ability to ensure that it had appropriate procedures for fiscal control and fund accounting and that its financial operations were administered by personnel with expertise in accounting and financial management. Specifically, section 104(c)(1) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(1)), requires the Director, in consultation with the Congressional Award Board, to "ensure that appropriate procedures for fiscal control and fund accounting are established for the financial operations of the Congressional Award Program, and that such operations are administered by personnel with expertise in accounting and financial management." The Comptroller General is required by section 104(c)(2)(A) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(2)(A)), to (1) annually determine whether the Director has substantially complied with the requirement to have appropriate procedures for fiscal control and fund accounting for the financial operations of the Congressional Award Program and to have personnel with expertise in accounting and financial management to administer the financial operations, and (2) report the findings in the annual audit report. For 2004, because the Foundation did not have appropriate fiscal procedures and did not have an individual with expertise in accounting and financial management to routinely administer the procedures and account for the financial operations of the Foundation, we determined that the Director did not substantially comply with the requirements in section 104(c)(1) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(1)). As discussed earlier, during fiscal year 2005, the Foundation hired an accountant to focus on improving financial management. Subsequent to fiscal year 2005, the newly elected Treasurer and Audit Committee Chair worked with the National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. Due to these actions, we were able to conclude that for the year under audit, the Foundation was in compliance with the provisions of the Act. The Foundation incurred a gain (increase in net assets) of about $10,000 in fiscal year 2005 as compared to a loss (decrease in net assets) of almost $168,000 in fiscal year 2004. This difference of approximately $178,000 was due primarily to a reduction in salary expenses in fiscal year 2005. Salary expenses were less in fiscal year 2005 because the National Director, who retired at the end of fiscal year 2004, was not replaced during fiscal year 2005. The Program Director functioned in two positions, serving as the Acting National Director as well as the Program Director. As a result, the Foundation's salary costs were reduced by over $172,000 between fiscal years 2004 and 2005. Although the Foundation's overall expenses decreased by over $130,000 between fiscal years 2004 and 2005, operating revenues and other support decreased by over $134,000, attributable in part to a nearly $64,000 decline in contributions. The Foundation attributed this decline in contributions to the fact that the Foundation was not reauthorized by the Congress for fiscal year 2005 which, it believes, discouraged some donors from contributing to the Foundation. The Foundation's previous authorization expired on October 1, 2004. On December 22, 2005, the President signed Public Law 109-143, which reauthorized the Congressional Award Foundation through September 30, 2009. During fiscal year 2002, the Foundation borrowed $100,000, the maximum amount allowable against its revolving line of credit, due to ongoing cash flow problems associated with its daily operations. This debt, partially secured by a $50,000 certificate of deposit, remained outstanding at September 30, 2005. Note 12 to the financial statements acknowledges the Foundation's difficulties in meeting its financial obligations. The Foundation has taken steps to decrease its expenditures and liabilities. For example, accounts payable at September 30, 2005, were approximately $16,000, down from $135,500 in fiscal year 2004. This decrease in accounts payable was due to the Foundation using funds from the Congressional Award Fellowship Trust to pay off a substantial portion of its liabilities, and its ability to negotiate with certain of its vendors to cancel about $63,000 in liabilities to these vendors during fiscal year 2005. In addition, the Foundation showed considerable cost reductions as evidenced by the decrease in operating expenses (primarily salaries) from over $594,000 in fiscal year 2004 to about $464,000 in fiscal year 2005. However, these steps may not be sufficient to allow it to continue operations. Unaudited financial data compiled by the Foundation as of March 31, 2006, showed that its financial condition has not improved through the first half of fiscal year 2006. While the Foundation has $112,000 in contributions receivable as of March 31, 2006, $52,000 of this contribution is to be used to cover costs associated with its planned Congressional Award Golf Classic fundraising event in May, and $30,000 is to be used to cover costs associated with the annual Gold Award ceremony in June. The golf fundraising event resulted in net revenues for the first time in fiscal year 2004, so its ability to raise funds annually cannot be assured, and the Gold Award ceremony is not a fundraising event. There are also indications that the Foundation is continuing to have difficulty meeting its obligations; according to the minutes of the January 31, 2006, Board of Directors' meeting, the Acting National Director and the Controller delayed cashing their pay checks for two pay periods in January 2006 due to cash flow problems at the Foundation. In addition, the Foundation has a $100,000 line of credit that is payable upon demand. If this liability needed to be paid immediately, the Foundation would have to liquidate its $55,000 certificate of deposit, equity securities of about $36,000 (reported as outstanding at March 31, 2006), and its remaining cash balance of about $6,700. In its plan to deal with its financial difficulties and increase its revenues, the Foundation modified its approach to fundraising during the past 2 years by holding more frequent but smaller and less expensive fundraising events than in the past. However, these smaller fundraisers did not increase contributions, which decreased by over $64,000, or 23 percent, from fiscal years 2004 to 2005. In an effort to further improve fundraising efforts, the Foundation stated that its Board created a Congressional Liaison Committee, Development Committee, and Program Committee during fiscal year 2005. The Foundation reported that these committees have raised the visibility of the Foundation. In addition, the Development Committee has increased the number of fundraisers from one in the first half of fiscal year 2005 to three in the first half of fiscal year 2006. The newly elected Development Chairperson is leading fundraising initiatives in the corporate community, including pursuing grant opportunities, and the Foundation continues to work with professional fundraisers to more actively involve congressional members. The Foundation is currently prohibited from receiving federal funds, but is permitted to receive certain in-kind and indirect resources, as explained in Note 5 to the financial statements. The Foundation's management is responsible for preparing the annual financial statements in conformity with U.S. generally accepted accounting principles; establishing, maintaining, and assessing the Foundation's internal control to provide reasonable assurance that the Foundation's control objectives are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles; and (2) management maintained effective internal control, the objectives of which are the following. Financial reporting--transactions are properly recorded, processed, and summarized to permit the preparation of financial statements, in conformity with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition. Compliance with laws and regulations--transactions are executed in accordance with laws and regulations that could have a direct and material effect on the financial statements. We are also responsible for testing compliance with selected provisions of laws and regulations that have a direct and material effect on the financial statements. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made evaluated the overall presentation of the financial statements and notes; read unaudited financial information for the Foundation for the first 6 months of fiscal year 2006; obtained an understanding of the internal control related to financial reporting (including safeguarding assets) and compliance with laws and regulations; tested relevant internal control over financial reporting and compliance and evaluated the design and operating effectiveness of internal control; and tested compliance with selected provisions of the Congressional Award Act, as amended. We did not evaluate internal control relevant to operating objectives, such as controls relevant to ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. We did not test compliance with all laws and regulations applicable to the Foundation. We limited our tests of compliance to those provisions of laws and regulations that we deemed to have a direct and material effect on the financial statements for the fiscal year ended September 30, 2005. We caution that noncompliance may occur and not be detected by our tests and that such testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards. In commenting on a draft of this report, the Foundation stressed its efforts to secure funds to adequately support the program. The Foundation noted that contributions and pledges received through April 2006 showed significant increases over funding received in fiscal year 2005. The Foundation attributed this to both the recent reauthorization of the program in December 2005, and the Congress reaffirming its commitment to the Foundation, resulting in donors being more willing to contribute financially. The Foundation also discussed its plans to hold more fundraising events with Members of Congress. Additionally, the Foundation noted its efforts to reduce its operating expenses in order to meet its financial obligations. The Foundation also discussed efforts it has made to improve its internal controls over accounting and financial reporting through its development of written policies and procedures for financial operations and reporting. As we discuss in our report, these written policies and procedures were not drafted until after the period covered by our fiscal year 2005 financial audit. Consequently, they had no impact on the preparation of the Foundation's fiscal year 2005 financial statements. If properly implemented, however, they should lead to improvements in the Foundation's financial management. We will evaluate the effectiveness of these new policies and procedures during our audit of the Foundation's fiscal year 2006 financial statements. The complete text of the Foundation's comments is reprinted in appendix I. Contributions receivable (note 3) Congressional Award Fellowship Trust (note 4) Equipment, furniture, and fixtures, net Accounts payable (note 9) Line of credit (note 8) Accrued payroll, related taxes, and leave Temporarily restricted (note 6) Total liabilities and net assets The accompanying notes are an integral part of these financial statements. Changes in unrestricted net assets: Operating revenue and other support Contributions - In-kind (note 5) Interest and dividends applied to current operations Net assets released from restrictions (note 6) Total operating revenue and other support Operating expenses (note 11) Salaries, benefits, and payroll taxes Program, promotion, and travel (22,452) (18,548) Unrealized investment gains not applied to current operations Realized investment (losses) applied to current operations (3,279) (1,669) Increase (decrease) in unrestricted net assets (3,785) Changes in temporarily restricted net assets: Net assets released from restrictions (note 6) (3,060) (164,171) (Decrease) in temporarily restricted net assets (3,060) (164,171) Increase (decrease) in net assets (167,956) The accompanying notes are an integral part of these financial statements. Cash flows from operating activities: $10,016 ($167,956) Adjustments to reconcile change in net assets to net cash (38,807) (16,432) Realized loss on sale of investments Certificate of deposit interest not applied to current operations (1,401) (1,572) Change in operating assets: (1,068) Change in operating liabilities: (119,686) (14,840) Accrued payroll, related taxes and leave (47,641) (462) Net Cash (Used) in Operating Activities (172,420) (52,268) Cash Flows from Investing Activities: Proceeds from sale of investments Net Cash Provided by Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents (2,590) Cash and Cash Equivalents, beginning of year Cash and Cash Equivalents, end of year The accompanying notes are an integral part of these financial statements. For the Fiscal Years Ended September 30, 2005 and 2004 The Congressional Award Foundation (the Foundation) was formed in 1979 under Public Law 96-114 and is a private, nonprofit, tax-exempt organization under Section 501(c)(3) of the Internal Revenue Service Code established to promote initiative, achievement, and excellence among young people in the areas of public service, personal development, physical fitness, and expedition. New program participants totaled over 3,000 in fiscal year 2005. During fiscal year 2005, there were approximately 21,000 participants registered in the Foundation's Award program. The Foundation's previous authorization expired on October 1, 2004. On December 22, 2005, the President signed Public Law 109-143, which reauthorized the Congressional Award Foundation through September 30, 2009. The financial statements are prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles applicable to not-for- profit organizations. B. Cash Equivalents and Certificate of Deposit The Foundation considers funds held in its checking account and all highly liquid investments with an original maturity of 3 months or less to be cash equivalents. Money market funds held in the Foundation's Congressional Award Fellowship Trust (the Trust) are not considered cash equivalents for financial statement reporting purposes. The Foundation has a $50,000 certificate of deposit which is pledged as collateral on the $100,000 line of credit (see note 8). Unconditional promises to give are recorded as revenue when the promises are made. Contributions receivable to be collected within less than one year are measured at net realizable value. D. Equipment, Furniture and Fixtures, and Related Depreciation Equipment, furniture, and fixtures are stated at cost. Depreciation of furniture and equipment is computed using the straight-line method over estimated useful lives of 5 to 10 years. Expenditures for major additions and betterments are capitalized; expenditures for maintenance and repairs are charged to expense when incurred. For the Fiscal Years Ended September 30, 2005 and 2004 Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in revenue or expense, as appropriate. E. Congressional Award Fellowship Trust - Investments The Trust investments consist of equity securities and money market funds which are stated at market value. F. Classification of Net Assets The net assets of the Foundation are reported as follows: Unrestricted net assets represent the portion of expendable funds that are available for the general support of the Foundation. Temporarily restricted net assets represent amounts that are specifically restricted by donors or grantors for specific programs or future periods. The Foundation has no permanently restricted net assets. Contribution revenue is recognized when received or promised and recorded as temporarily restricted if the funds are received with donor or grantor stipulations that limit the use of the donated assets to a particular purpose or for specific periods. When a stipulated time restriction ends or purpose of the restriction is met, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. H. Functional Allocation of Expenses The costs of providing the various programs and other activities have been summarized on a functional basis as described in note 11. Accordingly, certain costs have been allocated among the programs and supporting services benefitedThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. For the Fiscal Years Ended September 30, 2005 and 2004 Certain reclassifications have been made to the fiscal year 2004 Statement of Cash Flows to conform to the fiscal year 2005 presentation. In fiscal year 2005, the Foundation changed the format of its Statement of Cash Flows from direct method to the indirect method for purposes of reporting cash flows from operating activities. Accordingly, the Statement of Cash Flows for 2004 contains certain reclassifications to conform to the Foundation's current financial statement format. For fiscal years 2004 and 2005, the reconciliation of net income to net cash provided by operating activities is included in the Statement of Cash Flows. Note 3. Contributions Receivable At September 30, 2005, and 2004, promises to give totaled $45,000 and $60,573, respectively, none of which was temporarily restricted by the donors. At September 30, 2005, and 2004, $45,000 and $60,573, respectively, were due within 1 year. At September 30, 2005, and 2004, net assets of $28,568 and $31,626, respectively, were temporarily restricted by donors for future periods. Note 4. Congressional Award Fellowship Trust The Congressional Award Fellowship Trust (the Trust) was established in 1990 to benefit the charitable and educational purposes of the Foundation. The Trust Fund received $264,457 of contributions since 1990, which were designated as permanently restricted by the donors when the donations were originally made. During the fiscal year ended September 30, 2004, the trust conditions changed. The Declaration of Trust of the Congressional Award Trust was amended, with the consent of the original declarants of the Trust and the Trustees, effective December 2003. Among other changes, the Amended Trust Declaration removes the permanent restriction on the use of endowment donations. Trust Fund amounts may be distributed to the Foundation at the discretion of the Trustees. During the fiscal year ended September 30, 2005, the Trustees authorized the use of $178,563 of the Trust Fund to support fiscal year 2005 operations. For the Fiscal Years Ended September 30, 2005 and 2004 Activity in the Trust Fund for the fiscal years ended September 30, 2005, and 2004 was as follows: Net realized gains (losses) (3,279) (1,669) Net unrealized gains (losses) Total investment gains (losses) Investments transferred to current operations (178,563) (55,092) Investment earnings applied to current operations Net change in Trust Fund investments (137,020) (34,915) Trust Fund investments, beginning of year Trust Fund investments, end of year During fiscal year 2005, the Foundation received in-kind (non-cash) contributions from donors. Donated professional services are accounted for as contribution revenue and as current period operating expenses. In-kind contributions received also resulted from the forgiveness of debts which were accounted for as contribution revenue. During fiscal year 2005, the Foundation negotiated cancellation of $63,262 of its liabilities with vendors. The vendors offered these balances owed as in-kind contributions to the Foundation. The value of the in-kind contributions recognized was $131,114 for fiscal year 2005 and $94,596 for fiscal year 2004. These non-cash contributions are as follows. For the Fiscal Years Ended September 30, 2005 and 2004 In addition, Section 7(c) of Public Law 101-525, the Congressional Award Amendments of 1990, provided that "the Board may benefit from in-kind and indirect resources provided by the Offices of Members of Congress or the Congress." Resources so provided include use of office space, office furniture, and certain utilities. In addition, section 102 of the Congressional Award Act, as amended, provides that the United States Mint may charge the United States Mint Public Enterprise Fund for the cost of striking Congressional Award Medals. The costs of these resources cannot be readily determined and, thus, are not included in the financial statements. Note 6. Temporarily Restricted Net Assets Temporarily restricted net assets at September 30, 2005, and 2004 were available for the following programs and future periods: Puerto Rico Council development 17,396 17,561 Nevada Council development 10,381 12,282 Oklahoma Council development ___791 1,783 Total net assets temporarily restricted for use: Net assets released from restrictions during the years ended September 30, 2005, and 2004 were as follows: 2005 2004 Contributions released from restriction for use in fiscal years 2005 and 2004, respectively Puerto Rico Council development 166 Nevada Council development 1,901 1,765 Oklahoma Council development 993 2,246 Total temporarily restricted net assets released for use: $ 3,060 $164,171 Note 7. Employee Retirement Plan For the benefit of its employees, the Foundation participates in a voluntary 403(b) tax- deferred annuity plan, which was activated on August 27, 1993. Under the plan, the Foundation may, but is not required to, make employer contributions to the plan. There was no contribution to the plan in fiscal years 2005 and 2004. Note 8. Line of Credit The Foundation has a $100,000 revolving line of credit with its bank that bears interest at 7.75 percent per annum. The line of credit is partially secured by the Foundation's investment in a $50,000 certificate of deposit held by the same bank. At September 30, 2005 and 2004, the outstanding balance on the line of credit was $100,000. Note 9. Accounts Payable The accounts payable balance is $15,817 at September 30, 2005. The accounts payable balance at September 30, 2004 was $135,503. During fiscal year 2005, $63,262 in amounts owed to vendors for goods and services received primarily in fiscal year 2002 were forgiven by the vendors. These amounts are reflected as in-kind contributions on the Foundation's Statements of Activities (see note 5). Note 10. Related Party Activities During fiscal year 2005, an ex-officio director of the Board provided pro bono legal services to the Foundation. The value of legal services has been included in the in-kind contributions and professional fees line items (see note 5). In addition, a former Board Member served as portfolio manager with the brokerage firm responsible for managing the Congressional Award Fellowship Trust account during fiscal years 2005 and 2004. During March 2004, the Foundation entered into an agreement with a professional fundraiser. Also in 2004, the spouse of this professional fundraiser was elected to the Board of Directors of the Foundation. The professional fundraiser was retained on a 10 percent commission basis for fiscal year 2004. During fiscal year 2005, the commission basis was increased to 15 percent. Expenses incurred by the Foundation during fiscal year 2005 and 2004 to the related party totaled $12,891 and $9,756, respectively. Note 11. Expenses by Functional Classification The Foundation has presented its operating expenses by natural classification in the accompanying Statements of Activities for the fiscal years ending September 30, 2005, and 2004. Presented below are the Foundation's expenses by functional classification for the fiscal years ended September 30, 2005, and 2004. Note 12. The Foundation's Ability to Continue as a Going Concern The Congressional Award Foundation is dependent on contributions to fund its operations and, to a far lesser extent, other revenues, interest, and dividends. The Foundation's net assets increased by $10,016 in fiscal year 2005 and decreased by $167,956 in fiscal year 2004. The increase in net assets in fiscal year 2005 was due primarily to increases in unrealized investment gains. In fiscal year 2005, the Foundation released Trust funds to eliminate past due accounts payable and improve the Foundation's fiscal position. As a result, the Foundation's investments decreased $137,020 in fiscal year 2005 from $195,551 to $58,531. The Foundation has taken steps to substantially decrease administrative expenses, and has implemented numerous initiatives to increase fundraising revenue. The Foundation's ability to continue as a going concern is dependent on increasing revenues. Unaudited financial data compiled by the Foundation as of March 31, 2006, show that the Foundation's financial condition has not improved from September 30, 2005. During fiscal year 2005, the Board elected several new Members and the Foundation hired an accountant, who was promoted to Controller in fiscal year 2006, to focus on improving financial management. Subsequent to fiscal year 2005, the newly elected Treasurer and Audit Committee Chair worked with the National Office staff to improve internal control over financial reporting by developing written fiscal policies and procedures, and financial reporting guidelines. These efforts are expected to provide more accurate and timely accounting and reporting. To improve fundraising efforts, the Board created a Congressional Liaison Committee, Development Committee, and Program Committee during fiscal year 2005. The newly elected Development Chairperson is leading fundraising initiatives in the corporate community and continuing to work with professional fundraisers to more actively involve congressional members with monthly Capitol Hill fundraising events focused around key Members. These events are generating funds from new donors and providing opportunities to maintain relations with current Foundation supporters. Note 13. Subsequent Events On December 22, 2005, the President signed Public Law 109-143, which reauthorized the Congressional Award Foundation for another five years, "as though no lapse or termination of the Board ever occurred." Four Foundation Board Members were appointed by the Speaker of the House of Representatives to serve on the National Board on March 30, 2006. One new Foundation Board Member was elected at the April 3, 2006, meeting of the Board of Directors. The Spouse Executive Council, made up of spouses of Congressional members, was created and held its first meeting on February 6, 2006, to assist with fundraising and the overall mission of the Foundation.
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This report presents our opinion on the financial statements of the Congressional Award Foundation for the fiscal years ended September 30, 2005, and 2004. These financial statements are the responsibility of the Congressional Award Foundation. This report also presents (1) our opinion on the effectiveness of the Foundation's related internal control as of September 30, 2005, and (2) our conclusion on the Foundation's compliance in fiscal year 2005 with selected provisions of laws and regulations we tested. We conducted our audit pursuant to section 107 of the Congressional Award Act, as amended (2 U.S.C. 807), and in accordance with U.S. generally accepted government auditing standards. This report also includes our determination required under section 104(c)(2)(A) of the Act (2 U.S.C. 804(c)(2)(A)) relating to the Foundation's financial operations. We have audited the statements of financial position of the Congressional Award Foundation (the Foundation) as of September 30, 2005, and 2004, and the related statements of activities and statements of cash flows for the fiscal years then ended. We found (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, although substantial doubt exists about the Foundation's ability to continue as a going concern; (2) the Foundation did not have effective internal control over financial reporting (including safeguarding assets) but did have effective control over compliance with laws and regulations; and (3) no reportable noncompliance with the provisions of laws and regulations we tested during fiscal year 2005.
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Several different federal agencies are involved with the implementation of the Subtitle B program, including Labor, HHS, and Energy. However, Labor has primary responsibility for administering the program. Labor receives the claims, determines whether the claimant meets the eligibility requirements, and adjudicates the claim. When considering the compensability of certain claims, Labor relies on dose reconstructions developed by NIOSH, under HHS. To avoid gathering similar information for each claim associated with a particular facility, NIOSH compiles facility-specific information in "site profiles," which assist NIOSH in completing the dose reconstructions. NIOSH contracted with Oak Ridge Associated Universities and the Battelle Corporation to develop site profiles and draft dose reconstructions. Energy is responsible for providing Labor and NIOSH with employment verification, estimated radiation dose, and facility-wide monitoring data. Labor does not refer all claims to NIOSH for dose reconstruction. For example, reconstructions are not needed for workers in the special exposure cohort. For special exposure cohort claimants, Labor verifies the employment and illness, and develops a recommended compensability decision that is issued to the claimant. The act specified that classes of workers from four designated locations would constitute the special exposure cohort and authorized the Secretary of HHS to add additional classes of employees. Classes of workers may petition HHS to be added to the cohort. A class of employees is generally defined by the facility at which they worked, the specific years they worked, and the type of work they did. NIOSH collects and evaluates the petitions and gives the results of its evaluations to the advisory board for review. The board, in turn, submits a recommendation to the Secretary of HHS to accept or deny the petition. To date, 13 classes of workers have been approved at 10 sites, and petitions from 9 additional sites have been qualified for evaluation. A petition from one site has been evaluated and denied. Our May 2004 report identified various problems with Energy's processing of Subtitle D cases. Energy got off to a slow start in processing cases but had taken some steps to reduce the backlog of cases waiting for review by a physician panel. For example, Energy took steps to expand the number of physicians who would qualify to serve on the panels and recruit more physicians. Nonetheless, a shortage of qualified physicians continued to constrain the agency's capacity to decide cases more quickly. Further, insufficient strategic planning and systems limitations made it difficult to assess Energy's achievement of goals relative to case processing and program objectives, such as the quality of the assistance provided to claimants in filing for state workers' compensation. We concluded that in the absence of changes that would expedite Energy's review, many claimants would likely wait years to receive the determination they needed from Energy to pursue a state workers' compensation claim, and in the interim their medical conditions might worsen or they might even die. We made several recommendations to Energy to help improve its effectiveness in assisting Subtitle D claimants in obtaining compensation. Specifically, we recommended that Energy take additional steps to expedite the processing of claims through its physician panels, enhance the quality of its communications with claimants, and develop cost- effective methods for improving the quality of case management data and its capabilities to aggregate these data to address program issues. Energy generally agreed with these recommendations. Our May 2004 report also identified structural problems that could lead to inconsistent benefit outcomes for claimants whose illness was determined by a physician panel to be caused by exposure to toxic substances while employed at an Energy facility. Our analysis of cases associated with Energy facilities in nine states indicated that a few thousand cases would lack a "willing payer" of workers' compensation benefits; that is, they would lack an insurer that--by order from, or agreement with, Energy-- would not contest these claims. As a result, in some instances, these cases may have been less likely to receive compensation than cases for which there was a willing payer. We identified various options for restructuring the program to improve payment outcomes and presented a framework of issues to consider in evaluating these options. Congress subsequently enacted legislation that dramatically restructured the program, transferred it from Energy to Labor, and incorporated features of some of the options we identified. Labor told us it has taken actions to address each of the recommendations we made to the Secretary of Energy in our report. For example, Labor has compiled a data base of the toxic substances that may have been present at Energy facilities and linked them to medical conditions to help expedite the processing of claims. In addition, Labor has rebuilt its case management system which tracks all Subtitle E claims transferred from Energy and enhanced the system's performance and reliability. Our September 2004 report on the Subtitle B program found that in the first 2 1/2 years of the program, Labor and NIOSH had fully processed only 9 percent of the more than 21,000 claims that were referred to NIOSH for dose reconstruction. NIOSH officials reported that the backlog of dose reconstruction claims arose because of several factors, including the time needed to get the necessary staff and procedures in place for performing dose reconstructions and to develop site profiles. NIOSH learned from its initial implementation experience that completing site profiles is a critical element for efficiently processing claims requiring dose reconstructions. To enhance program management and promote greater transparency with regard to timeliness, we recommended that the Secretary of HHS direct agency officials to establish time frames for completing the remaining site profiles, which HHS has done. Our February 2006 report discussed the roles of certain federal agency officials involved in the advisory board's review of NIOSH's dose reconstructions and site profiles that raised concerns about the independence of this review. The project officer who was initially assigned responsibility for reviewing the monthly progress reports and monitoring the technical performance of the contractor reviewing NIOSH's dose reconstruction activities for the advisory board was also a manager of the NIOSH dose reconstruction program. In addition, the person assigned to be the designated federal officer for the advisory board, who is responsible for scheduling and attending board meetings, was also the director of the dose reconstruction program being reviewed. In response to concerns about the appearance of conflicting roles, the director of NIOSH replaced both of these officials in December 2004 with a senior NIOSH official not involved in the program. The contractor and members of the board told us that implementation of the contract improved after these officials were replaced. Since credibility is essential to the work of the advisory board and the contractor assisting the board, we concluded that continued diligence by HHS is required to prevent such problems from recurring when new candidates are considered for these roles. With regard to structural independence, we found it appropriate that the contracting officers managing the contract on behalf of the advisory board were officials from the Centers for Disease Control and Prevention, NIOSH's parent agency, who do not have responsibilities for the NIOSH program under review and are not accountable to its managers. In addition, advisory board members helped facilitate the independence of the contractor's work by playing the leading role in developing and approving the initial statement of work for the contractor and the independent government cost estimate for the contract. Our February 2006 report identified further improvements that could be made to the oversight and planning of the advisory board's contracted review of NIOSH's dose reconstructions and site profiles. We found that this review presented a steep learning curve for the various parties involved. In the first 2 years, the contractor assisting the board had spent almost 90 percent of the $3 million that had been allocated to the contract for a 5-year undertaking. In addition, the contractor's expenditure levels were not adequately monitored by the agency in the initial months and the contractor's monthly progress reports did not provide sufficient details on the level of work completed compared to funds expended. The advisory board had made mid-course adjustments to the contractor's task orders and review procedures, such as by revising task orders to reduce the number of reviews to be completed or extend completion dates. However, the board had not comprehensively reexamined its long-term plan for the overall project to determine whether the plan needed to be modified in light of knowledge gained over the past few years. Finally, without a system to track the actions taken by NIOSH in response to the findings and recommendations of the advisory board and contractor, there was no assurance that needed improvements were being made. We made three recommendations to HHS to address these shortcomings. First, we recommended that HHS provide the board with more integrated and comprehensive data on contractor spending levels compared with work actually completed, which HHS has done. Second, we recommended that HHS consider the need for providing HHS staff to collect and analyze pertinent information to help the advisory board comprehensively reexamine its long-term plan for assessing the NIOSH site profiles and dose reconstructions. HHS is considering the need for such action. Third, we recommended that the Director of NIOSH establish a system to track actions taken by the agency in response to the board and contractor's findings and recommendations. NIOSH now tracks agency actions to resolve the board and contractor's comments. As part of our ongoing work, we are examining to what extent, if any, Labor is involved in certain Subtitle B activities. While the director of Labor's Office of Workers' Compensation Programs stated that Labor has not taken any actions to implement the options outlined in the OMB memorandum, Labor's internal correspondence reflects major concerns about the potential for rapidly expanding costs in Subtitle B benefits resulting from adding new classes of workers to the special exposure cohort. One aspect of our ongoing work is determining whether Labor is involved in activities that have been tasked to NIOSH, the advisory board, or the contractor assisting the board, and if so, whether these activities reflect an effort to constrain the costs of benefits. Our work in this area is still ongoing and we have not drawn any conclusions. Nonetheless, we would like to briefly highlight the types of issues we will be analyzing as our work proceeds. NIOSH has, in some cases, shared draft versions of key documents with Labor before finalizing and sending them to the advisory board for review. For example, NIOSH has shared draft special exposure cohort petition evaluations with Labor. Similarly, NIOSH has agreed to allow Labor to review and comment on drafts of various technical documents such as site profiles, technical basis documents, or technical information bulletins, all of which are used to help perform dose reconstructions. Labor has provided comments on some of these draft documents. Labor officials told us that the basis of their involvement is Labor's designation as lead agency with primary responsibility for administering the program. Labor officials added that their reviews of these documents focus on changes needed to promote clarity and consistency in the adjudication of claims. In addition, Labor has reviewed individual dose reconstructions completed by NIOSH. Labor officials told us that they review all NIOSH dose reconstructions and return them for rework if, for example, they find errors in factual information or in the way the dose reconstruction methodology was applied. We are currently examining the extent, nature, and outcome of Labor's comments on these various documents. As our review proceeds, we plan to obtain more information on key issues such as the timing, nature, and basis of Labor's activities in light of the program's design and assignment of responsibilities. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-7215. Key contributors to this testimony were Claudia Becker, Meeta Engle, Robert Sampson, Andrew Sherrill, and Charles Willson. Department of Energy, Office of Worker Advocacy: Deficient Controls Led to Millions of Dollars in Improper and Questionable Payments to Contractors. GAO-06-547. Washington, D.C.: May 31, 2006. Energy Employees Compensation: Adjustments Made to Contracted Review Process, but Additional Oversight and Planning Would Aid the Advisory Board in Meeting Its Statutory Responsibilities. GAO-06-177. Washington, D.C.: Feb. 10, 2006. Energy Employees Compensation: Many Claims Have Been Processed, but Action Is Needed to Expedite Processing of Claims Requiring Radiation Exposure Estimates. GAO-04-958. Washington, D.C.: Sept. 10, 2004. Energy Employees Compensation: Even with Needed Improvements in Case Processing, Program Structure May Result in Inconsistent Benefit Outcomes. GAO-04-516. Washington, D.C.: May 28, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Energy Employees Occupational Illness Compensation Program Act (EEOICPA) was enacted in 2000 to compensate Department of Energy employees and contractors who developed work-related illnesses such as cancer and lung disease. Energy administered Subtitle D of the program. Subtitle B of the program is administered by the Department of Labor, which uses estimates of workers' likely radiation exposure to make compensation decisions. The estimates, known as dose reconstructions, are performed by the National Institute for Occupational Safety and Health (NIOSH) under the Department of Health and Human Services (HHS). The act specified that the President establish an Advisory Board on Radiation and Worker Health to review the scientific validity of NIOSH's dose reconstructions and recommend whether workers should be part of special exposure cohorts whose claimants can be compensated without dose reconstructions. A recent memorandum from the Office of Management and Budget (OMB) to Labor has raised concern about potential efforts to unduly contain the cost of benefits paid to claimants. This testimony presents GAO's past work on program performance and the work of the advisory board. It also highlights GAO's ongoing work relevant to issues raised by the OMB memorandum. GAO interviewed key officials and reviewed contract and other agency documents. GAO issued two reports in 2004 that focused on claims processing and program structure. The first report found that Energy got off to a slow start in processing Subtitle D claims and faced a backlog of cases. In addition, limitations in data systems made it difficult to assess Energy's performance. GAO recommended that Energy take actions to expedite claims processing, enhance communication with claimants, and improve case management data. The report also highlighted problems with program structure that could lead to inconsistent benefit outcomes and GAO presented various options for restructuring the program. Congress subsequently incorporated features of some of these options in enacting new legislation that dramatically restructured the program and transferred it from Energy to Labor. Labor has taken action to address the recommendations GAO made to Energy. The second report found that Labor and NIOSH faced a large backlog of claims awaiting dose reconstruction. To enhance program management and transparency, HHS implemented GAO's recommendation to establish time frames for completing profiles of Energy work sites, which are a critical element in efficiently processing claims that require dose reconstruction. GAO's February 2006 report found that the roles of two key NIOSH officials involved with the work of the advisory board may not have been sufficiently independent because these officials also represented the dose reconstruction program under review. In response, NIOSH replaced them with a senior official not involved in the program. Since credibility is essential to the advisory board's work, GAO concluded that ongoing diligence by HHS is required to avoid actual or perceived conflicts of roles when new candidates are considered for these roles. GAO also found that the board's work presented a steep learning curve, prompting adjustments to the work done by the contractor assisting the board. GAO recommended actions to provide the board with more comprehensive data on contractor spending levels compared to work actually completed, assist the board in reexamining its long-term plan for reviewing NIOSH's work, and better track agency actions taken in response to board and contractor findings. HHS has implemented these recommendations. One aspect of GAO's ongoing work especially relevant to the OMB memorandum is the extent to which Labor's concerns over potentially escalating benefit costs may have led the agency to be involved in activities tasked to NIOSH, the advisory board, or the contractor assisting the board. NIOSH agreed to provide Labor with draft versions of some of its evaluations of special exposure cohort petitions and other NIOSH technical documents before sending them for board review. Labor has commented on some of these draft documents. Labor officials told us that their reviews focus on changes needed to promote clarity and consistency in the adjudication of claims. As the review proceeds, GAO plans to obtain more information on key issues such as the timing, nature, and basis of Labor's activities in light of the program's design and assignment of responsibilities.
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Within USDA, FSA has the overall administrative responsibility for implementing agricultural programs. FSA is responsible for, among other things, stabilizing farm income, helping farmers conserve environmental resources, and providing credit to new or disadvantaged farmers. FSA's management structure is highly decentralized; the primary decision-making authority for approving loans and applications for a number of agricultural programs rests in its county and district loan offices. In county offices, for example, committees, made up of local farmers, are responsible for deciding which farmers receive funding for the Agricultural Conservation Program (ACP). Similarly, FSA officials in district loan offices decide which farmers receive direct loans. These FSA officials are federal employees. Under the ACP, FSA generally paid farmers up to 75 percent of a conservation project's cost, up to a maximum of $3,500 annually. FSA allocated funds annually to the states on the basis of federally established priorities. The states in turn distributed funds to the county committees on the basis of the states' priorities. Farmers could propose projects at any time during the fiscal year, and the county committees could approve the proposals at any time after the funds became available. Consequently, county committees often obligated their full funding allocation before receiving all proposals for the year. The district loan offices administer the direct loan program, which provides farm ownership and operating loans to individuals who cannot obtain credit elsewhere at reasonable rates and terms. Each district loan office is responsible for one or more counties. The district loan office's agricultural credit manager is responsible for approving and servicing these loans. FSA accepts a farmer's loan application documents, reviews and verifies these documents, determines the applicant's eligibility to participate in the loan program, and evaluates the applicant's ability to repay the loan. In servicing these loans, FSA assists in developing farm financial plans, collects loan payments, and restructures delinquent debt. For both the ACP and the direct loan program, as well as other programs, farmers may appeal disapproval decisions to USDA's National Appeals Division (NAD). FSA's efforts to achieve equitable treatment for minority farmers are overseen by the agency's Civil Rights and Small Business Development Staff through three separate activities. First, the Staff investigates farmers' complaints of discrimination in program decisions through its Civil Rights and Small Business Development Staff. During fiscal years 1995 and 1996, the Staff closed 28 cases in which discrimination was alleged on the basis of race or national origin. In 26 of these cases, the Staff found no discrimination. In the other two cases, the Staff found that FSA employees had discriminated on the basis of race in one case and national origin in the other. At the time of review, USDA had not resolved how it would deal with the employees and compensate the affected farmers. As of January 7, 1997, the Staff had 110 cases of discrimination alleged on the basis of race or national origin under investigation. Ninety-one percent of these cases were filed since January 1, 1995. Second, the Staff conducts management evaluations of FSA's field offices to ensure that procedures designed to protect civil rights are being followed. During fiscal years 1995 and 1996, the Staff evaluated management activities within 13 states. None of the evaluations concluded that minority farmers were being treated unfairly. And third, the Staff provides equal employment opportunity (EEO) and civil rights training to its employees. Beginning in 1993, the Staff began to present revised EEO and civil rights training to all FSA state and county employees. About half of the FSA employees have been trained, according to the Staff, and all are scheduled to complete this training by the end of 1997. The training covers such areas as civil rights (program delivery) and EEO counseling, mediation, and complaints. In addition to these activities, FSA has specific efforts to increase minority farmers' participation in agricultural programs. For example, since September 1993, the Small Farmer Outreach Training and Technical Assistance Program has assisted small and minority farmers in applying for loans. Over 2,500 FSA borrowers have been served by these efforts. FSA has also assisted Native American farmers by establishing satellite offices on reservations. More recently, in July 1996, FSA created an outreach office to increase minority farmers' knowledge of, and participation in, the Department's agricultural programs. In the 101 counties with the highest numbers of minority farmers, representing 34 percent of all minority farmers in the nation, FSA employees and county committee members were often members of a minority group. As of October 1996, 32 percent of FSA's employees serving the 101 counties were members of a minority group. In the offices serving 77 of these counties, at least one staff member was from a minority group. Moreover, 89 percent of these minority employees were either county executive directors or program assistants. Minority farmers make up about 17 percent of the farmer population in these 101 counties. In addition, 7 of the 10 county and district loan offices we visited had at least one minority employee. The executive directors of two county offices, Holmes, Mississippi, and Duval, Texas, were members of a minority group, as were the managers of two district loan offices, Elmore, Alabama, and Jim Wells, Texas, and the deputy managers of three district loan offices, Holmes, Jim Wells, and Byron, Georgia. The number of minority employees could change as FSA continues its current reorganization. FSA plans to decrease its field structure staff from 14,683 in fiscal year 1993 to 11,729 in fiscal year 1997--a change of about 20 percent. We do not know how this reduction will affect the number of minority employees in county and district loan offices. We found that for the 101 counties with the highest numbers of minority farmers, 36 had at least one minority farmer on the county committee. In the five county offices we visited, two committees had minority members and the other three had minority advisers. We have previously reported on this issue. In March 1995, in Minorities and Women on Farm Committees (GAO/RCED-95-113R, Mar. 1, 1995), we reported that minority farm owners and operators, nationwide, accounted for about 5 percent of those eligible to vote for committee members, and about 2 percent of the county committee members came from a minority group. According to FSA's data, applications for the ACP for fiscal year 1995 and for the direct loan program from October 1994 through March 1996 were disapproved at higher rates nationwide for minority farmers than for nonminority farmers. To develop an understanding of the reasons for disapprovals, we examined the files for applications submitted under both programs during fiscal years 1995 and 1996 in five county and five district loan offices. We chose these offices because they had higher disapproval rates for minority farmers or because they were located in areas with large concentrations of farmers from minority groups. We chose the ACP and the direct loan program because decisions on participation in these programs are made at the local level. In addition, nationally, these programs have higher disapproval rates for minority farmers than for nonminority farmers. Nationally, during fiscal year 1995, the disapproval rates for applications for ACP funds were 33 percent for minority farmers and 27 percent for nonminority farmers. We found some differences in the disapproval rates for different minority groups. Specifically, 25 percent of the ACP applications from Native American and Asian American farmers were disapproved, while 34 percent and 36 percent of the applications from African American and Hispanic American farmers, respectively, were disapproved. To develop an understanding of the reasons why disapprovals occurred, we examined the ACP applications for fiscal years 1995 and 1996 at five county offices. (See attachment I for the number of ACP applications during this period from minority and nonminority farmers in each of the five counties, as well as the number and percent of applications that were disapproved.) When ACP applications were received in the county offices we visited, they were reviewed first for compliance with technical requirements. These requirements included such considerations as whether the site was suitable for the proposed project or practice, whether the practice was still permitted, or whether the erosion rate at the proposed site met the program's threshold requirements. Following this technical evaluation, if sufficient funds were available, the county committees approved all projects that met the technical evaluation criteria. This occurred for all projects in Dooly County and for a large majority of the projects in Glacier County. In Holmes County, the county committee ranked projects for funding using a computed cost-per-ton of soil saved, usually calculated by the Department's local office of the Natural Resources Conservation Service. The county committee then funded projects in order of these savings until it had obligated all funds. In the remaining two counties, Russell and Duval, the county committees, following the technical evaluations, did not use any single criterion to decide which projects to fund. For example, according to the county executive director in Russell County, the committee chose to fund several low-cost projects submitted by both minority and nonminority farmers rather than one or two high-cost projects. It also considered, and gave higher priority to, applicants who had been denied funds for eligible projects in previous years. In contrast, the Duval county committee decided to support a variety of farm practices. Therefore, it chose to allocate about 20 percent of its funds to projects that it had ranked as having a medium priority. These projects were proposed by both minority and nonminority farmers. In the aggregate, 98 of 271 applications from minority farmers were disapproved in the five county offices we visited. Thirty-three were disapproved for technical reasons and 62 for lack of funds. FSA could not find the files for the remaining three minority applicants. We found that the applications of nonminority farmers were disapproved for similar reasons. Of the 305 applications for nonminority farmers we reviewed, 106 were disapproved. Fifty-three were disapproved for technical reasons and 52 for lack of funds. FSA could not find the file for the remaining applicant. Approval and disapproval decisions were supported by material in the application files, and the assessment criteria used in each location were applied consistently to applications from minority and nonminority farmers. Nationally, the vast majority of all applicants for direct loans have their applications approved. However, the disapproval rate for minority farmers is higher than for nonminority farmers. From October 1994 through March 1996, the disapproval rate was 16 percent for minority farmers and 10 percent for nonminority farmers. We found some differences in the disapproval rates for different minority groups. Specifically, 20 percent of the loan applications from African American farmers, 16 percent from Hispanic American farmers, 11 percent from Native American farmers, and 7 percent from Asian American farmers, were disapproved. To assess the differences in disapproval rates, we examined the direct loan applications for fiscal years 1995 and 1996 at five district loan offices. (See attachment II for more detailed information on direct loan disapproval rates in five district offices.) Our review of the direct loan program files in these locations showed that FSA's decisions to approve and disapprove applications appeared to follow USDA's established criteria. These criteria were applied to the applications of minority and nonminority farmers in a similar fashion and were supported by materials in the files. The process for deciding on loan applications is more uniform for the direct loan program than for the ACP. The district loan office first reviews a direct loan application to determine whether the applicant meets the eligibility criteria, such as being a farmer in the district, having a good credit rating, and demonstrating managerial ability. Farmers who do not demonstrate this ability may take a course, at their own expense, to meet this standard. If the applicant meets these criteria, the loan officer determines whether the farmer meets the requirements for collateral and has sufficient cash flow to repay the loan. These decisions are based on the Farm and Home Plan--the business operations plan for the farmer--prepared by the loan officer with information provided by the farmer. If the collateral requirements and the cash flow are sufficient, the farmer generally receives the loan. In the five district loan offices we visited, 22 of the 115 applications from minority farmers were disapproved. Twenty were disapproved because the applicants had poor credit ratings or inadequate cash flow. One was disapproved because the applicant was overqualified and was referred to a commercial lender. In the last case, the district loan office was unable to locate the loan file because it was apparently misplaced in the departmental reorganization. However, correspondence dealing with this applicant's appeal to NAD indicates that the application was disapproved because the applicant did not meet the eligibility criterion for recent farming experience. NAD upheld the district loan office's decision. The Department allows all farmers to appeal adverse program decisions made at the local level through NAD. The division conducts administrative hearings on program decisions made by officers, employees, or committees of FSA and other USDA agencies. The applications of nonminority farmers that we reviewed were disapproved for similar reasons. Of the 144 applications from nonminority farmers we reviewed, 15 were disapproved. Nine were disapproved because of poor credit ratings or inadequate cash flow; five were disapproved because the applicants did not meet eligibility criteria; and one was disapproved because of insufficient collateral. Additionally, in reviewing the 129 approved applications of nonminority farmers, we did not find any that were approved with evidence of poor credit ratings or insufficient cash flow. We also wanted to obtain information on whether FSA was more likely to foreclose on loans to minority farmers while restructuring or writing down loans to nonminority farmers. Between October 1, 1994, and March 31, 1996, we found only one foreclosed loan for a--nonminority farmer--in the five district loan offices we reviewed. We also found 62 cases in which FSA restructured delinquent loans. Twenty-two of these were for minority farmers. Finally, the amount of time FSA takes to process applications from minority and nonminority farmers is about the same. Nationwide, from October 1994 through March 1996, FSA took an average of 86 days to process the applications of nonminority farmers and an average of 88 days to process those of minority farmers. More specifically, for African Americans, FSA took 82 days; for Hispanic Americans and Native Americans, 94 days; and for Asian Americans, 97 days. This completes my prepared statement. I will be happy to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 work on the U.S. Department of Agriculture's (USDA) efforts to achieve equitable treatment of minority farmers, focusing on the: (1) Farm Service Agency's (FSA) efforts to treat minority farmers in the same way as nonminority farmers in delivering program services; (2) representation of minorities in county office staffing and on county committees in the counties with the highest number of minority farmers; and (3) disposition of minority and nonminority farmers' applications for participation in the Agricultural Conservation Program (ACP) and the direct loan program at the national level and in five county and five district loan offices for fiscal years 1995 and 1996. GAO noted that: (1) FSA's Civil Rights and Small Business Development Staff oversees the agency's efforts to achieve fair treatment for minority farmers; (2) in fiscal years 1995 and 1996, the Staff closed 28 complaints of discrimination against farmers on the basis of race or national origin and found discriminatory practices in 2 of the 28 cases; (3) the Staff also conducted 13 management reviews of field offices and found no evidence of unfair treatment; (4) finally, according to the Staff, they are in the midst of training all FSA personnel on civil rights matters and the Staff projects that this training will be completed by the end of 1997; (5) GAO did not evaluate the quality and thoroughness of the Staff's activities; (6) with respect to the representation of minority employees in FSA's field offices, USDA's database showed that, as of October 1996, 32 percent of the employees serving the 101 counties with the highest number of minority farmers are members of a minority group; (7) moreover, for the same period, 89 percent of these minority employees were either county executive directors or program assistants; (8) minority farmers makeup about 17 percent of the farmer population in these counties; (9) furthermore, in 36 of the 101 counties, at least one minority farmer is a member of the county committee; (10) the applications of minority farmers for ACP for fiscal year 1995 and for the direct loan program from October 1994 through March 1996 were disapproved at a higher rate nationwide than for nonminority farmers; (11) GAO found that disapproval rates for minority farmers were also higher at three of the five county offices and three of the five district loan offices it visited; and (12) however, GAO's review of the information in the application files at these offices showed that decisions to approve or disapprove applications were supported by information in the files and that decisionmaking criteria appeared to be applied to minority and nonminority applicants in a similar fashion.
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The Internet is a worldwide network of networks made up of servers, routers, and backbone networks. To send a communication from one computer to another, a series of addresses is attached to information sent from the first computer to route the information to its final destination. The protocol that guides the administration of the routing addresses is the Internet protocol. The most widely deployed version of IP is version 4 (IPv4). The two basic functions of IP include (1) addressing and (2) fragmentation of data, so that information can move across networks. An IP address consists of a fixed sequence of numbers. IPv4 uses a 32-bit address format, which provides approximately 4.3 billion unique IP addresses. By providing a numerical description of the location of networked computers, addresses distinguish one computer from another on the Internet. In some ways, an IP address is like a physical street address. For example, if a letter is going to be sent from one location to another, the contents of the letter must be placed in an envelope that provides addresses for the sender and receiver. Similarly, if data are to be transmitted across the Internet from a source to a destination, IP addresses must be placed in an IP header. Figure 1 is a simplified illustration of this concept. In addition to containing the addresses of sender and receiver, the header also contains a series of fields that provide information about what is being transmitted. Limited IPv4 address space prompted organizations that need large numbers of IP addresses to implement technical solutions to compensate. For example, network administrators began to use one unique IP address to represent a large number of users. In other words, to the outside world, all computers behind a device known as a network address translation router appear to have the same address. While this method has enabled organizations to compensate for the limited number of globally unique IP addresses available with IPv4, the resulting network structure has eliminated the original end-to-end communications model of the Internet. Because of the limitations of IPv4, in 1994 the Internet Engineering Task Force (IETF) began reviewing proposals for a successor to IPv4 that would increase IP address space and simplify routing. The IETF established a working group to be specifically responsible for developing the specifications and standardization of IPv6. Over the past 10 years, IPv6 has evolved into a mature standard. A complete list of the IPv6 documents can be found at the IETF Web site. Interest in IPv6 is gaining momentum around the world, particularly in parts of the world that have limited IPv4 address space to meet their industry and consumer communications needs. Regions that have limited IPv4 address space, such as Asia and Europe, have undertaken efforts to develop, test, and implement IPv6 deployments. As a region, Asia controls only about 9 percent of the allocated IPv4 addresses, and yet has more than half of the world's population. As a result, the region is investing in IPv6 development, testing, and implementation. For example, the Japanese government's e-Japan Priority Policy Program mandated the incorporation of IPv6 and set a deadline of 2005 to upgrade existing systems in both the public and private sectors. The government has helped to support the establishment of an IPv6 Promotion Council to facilitate issues related to development and deployment and is providing tax incentives to promote deployment. In addition, major Japanese corporations in the communications and consumer electronics sectors are also developing IPv6 networks and products. Further, the Chinese government has reportedly set aside approximately $170 million to develop an IPv6-capable infrastructure. The European Commission initiated a task force in April 2001 to design an IPv6 Roadmap. The Roadmap serves as an update and plan of action for development and future perspectives. It also serves as a way to coordinate European efforts for developing, testing, and deploying IPv6. Europe currently has a task force that has the dual mandate of initiating country/regional IPv6 task forces across European states and seeking global cooperation around the world. Europe's Task Force and the Japanese IPv6 Promotion Council forged an alliance to foster worldwide deployment. The key characteristics of IPv6 are designed to increase address space, promote flexibility and functionality, and enhance security. For example, IPv6 dramatically increases the amount of IP address space available from the approximately 4.3 billion in IPv4 to approximately 3.4 x 10This large number of IPv6 addresses means that almost any electronic device can have its own address. While IP addresses are commonly associated with computers, they are increasingly being assigned to other items such as cellular phones, consumer electronics, and automobiles. In contrast to IPv4, the massive address space available in IPv6 will allow virtually any device to be assigned a globally reachable address. This change fosters greater end-to-end communications between devices with unique IP addresses and can better support the delivery of data-rich content such as voice and video. In addition to the increased number of addresses, IPv6 improves the routing of data, provides mobility features for wireless, and eases automatic configuration capabilities for network administration, quality of service, and security. These characteristics are expected to enable advanced Internet communications and foster new software applications. While applications that fully exploit IPv6 are still in development, industry experts have identified various federal functions that might benefit from IPv6-enabled applications, such as border security, first responders, public health, and information sharing. The transition to IPv6 is under way for many federal agencies because their networks already contain IPv6-capable software and equipment. For example, most major operating systems, printers, and routers currently support IPv6. Therefore, it is important for agencies to note that the transition to IPv6 is different from a software upgrade because, when it is installed, its capability is also being integrated into the software and hardware. Besides recognizing that an IPv6 transition is already under way, other key considerations for federal agencies to address in an IPv6 transition include significant IT planning efforts and immediate actions to ensure the security of agency information and networks. Important planning considerations include the following: * Developing inventories and assessing risks--An inventory of equipment (software and hardware) provides management with an understanding of the scope of an IPv6 transition and assists in focusing agency risk assessments. These assessments are essential steps in determining what controls are required to protect a network and what level of resources should be expended on controls. * Creating business cases for an IPv6 transition--A business case usually identifies the organizational need for the system and provides a clear statement of the high-level system goals. One key aspect to consider while drafting the business case for IPv6 is to understand how many devices an agency wants to connect to the Internet. This will help in determining how much IPv6 address space is needed for the agency. Within the business case, it is crucial to include how the new technology will integrate with the agency's existing enterprise architecture. * Establishing policies and enforcement mechanisms--Developing and establishing IPv6 transition policies and enforcement mechanisms are important considerations for ensuring an efficient and effective transition. Furthermore, because of the scope, complexities, and costs involved in an IPv6 transition, effective enforcement of agency IPv6 policies is an important consideration for management officials. * Determining the costs--Cost benefit analyses and return-on- investment calculations can be used to justify investments. During the year 2000 (Y2K) technology challenge, the federal government amended the Federal Acquisition Regulation and mandated that all contracts for information technology include a clause requiring the delivered systems or service to be ready for the Y2K date change. This helped prevent the federal government from procuring systems and services that might have been obsolete or that required costly upgrades. Similarly, proactive integration of IPv6 requirements into federal acquisition requirements can reduce the costs and complexity of the IPv6 transition of federal agencies and ensure that federal applications are able to operate in an IPv6 environment without costly upgrades. * Identifying timelines and methods for the transition--Timelines and process management can assist a federal agency in determining when to authorize its various component organizations to allow IPv6 traffic and features. Additionally, agencies can benefit from understanding the different types of transition methods or approaches that can allow them to use both IPv4 and IPv6 without causing significant interruptions in network services. As IPv6-capable software and devices accumulate in agency networks, they could be abused by attackers if not managed properly. For example, IPv6 is included in most computer operating systems and, if not enabled by default, is easy for administrators to enable either intentionally or as an unintentional byproduct of running a program. We tested IPv6 features and found that, if firewalls and intrusion detection systems are not appropriately configured, IPv6 traffic may not be detected or controlled, leaving systems vulnerable to attacks by malicious hackers. Further, in April 2005, the United States Computer Emergency Response Team (US-CERT), located at the Department of Homeland Security (DHS), issued an IPv6 cyber security alert to federal agencies based on our IPv6 test scenarios and discussions with DHS officials. The alert warned federal agencies that unmanaged or rogue implementations of IPv6 present network management security risks. Specifically, the US-CERT notice informed agencies that some firewalls and network intrusion detection systems do not provide IPv6 detection or filtering capability and that malicious users might be able to tunnel IPv6 traffic through these security devices undetected. Further, one feature of IPv6, known as automatic configuration (where a device that is IPv6 enabled will derive its own IP address from neighboring routers without an administrator's intervention), could allow devices to automatically configure themselves with an IPv6 address without authorization. US-CERT provided agencies with a series of short-term solutions including * determining if firewalls and intrusion detection system products support IPv6 and implement additional IPv6 security measures and identifying IPv6 devices and disabling if not necessary. The Department of Defense's transition to IPv6 is a key component of its business case to improve interoperability among many information and weapons systems, known as the Global Information Grid (GIG). The IPv6 component of GIG facilitates DOD's goal of achieving network-centric operations by exploiting the key characteristics of IPv6, including * enhanced mobility features, * enhanced configuration features, * enhanced quality of service, and * enhanced security features. The department's efforts to develop policies, timelines, and methods for transitioning to IPv6 are progressing. In 2004, Defense established an IPv6 Transition Office to provide the overall coordination, common engineering solutions, and technical guidance across the department to support an integrated and coherent transition to IPv6. The Transition Office is in the early stages of its work and has developed a set of products, including a draft system engineering management plan, risk management planning documentation, budgetary documentation, requirements criteria, and a master schedule. The management schedule includes a set of implementation milestones that include DOD's goal of transitioning to IPv6 by fiscal year 2008. In parallel with the Transition Office's efforts, the Office of the DOD Chief Information Officer has created an IPv6 transition plan. The Chief Information Officer has responsibility for ensuring a coherent and timely transition and for establishing and maintaining the overall departmental transition plan, and is the final approval authority for any IPv6 transition waivers. Although DOD has made substantial progress in developing a planning framework for transitioning to IPv6, the department still faces several challenges, including developing a full inventory of IPv6-capable software and hardware, finalizing its IPv6 systems engineering management plan, monitoring its operational networks for unauthorized IPv6 traffic, and developing a comprehensive enforcement strategy, including using its existing budgetary and acquisition review process. Unlike DOD, the majority of other federal agencies reporting have not yet initiated transition planning efforts for IPv6. For example, of the 22 agencies that responded to our survey, 4 agencies reported having established a date or goal for transitioning to IPv6. The majority of agencies have not addressed key planning considerations. For example, * 22 agencies reported not having developed a business case, * 21 agencies reported not having plans, * 19 agencies reported not having inventoried their IPv6-capable * 22 agencies reported not having estimated costs. Agency responses demonstrate that few efforts outside DOD have been initiated to address IPv6. If agency planning is not carefully monitored, it could result in significant and unexpected costs for the federal government. To address the challenges IPv6 presents to federal networks, in our report we recommended that federal agencies begin addressing key IPv6 planning considerations. Specifically, we recommended that the Director of OMB instruct agencies to begin developing inventories and assessing risks, creating business cases for the IPv6 transition, establishing policies and enforcement mechanisms, determining the costs, and identifying timelines and methods for transition, as appropriate. To help ensure that IPv6 would not result in unexpected costs for the federal agencies, we recommended that the Director consider amending the Federal Acquisition Regulation with specific language that requires that all information technology systems and applications purchased by the federal government be able to operate in an IPv6 environment. Finally, because poorly configured and unmanaged IPv6 capabilities present immediate risks to federal agency networks, we recommended that agency heads take immediate action to address the near-term security risks. Such actions could include determining what IPv6 capabilities they may have and initiating steps to ensure that they can control and monitor IPv6 traffic to prevent unauthorized access. In summary, transitioning to IPv6 is a pervasive, crosscutting challenge for federal agencies that could result in significant benefits to agency services and operations. But such benefits may be diminished if action is not taken to ensure that agencies are addressing the attendant challenges, including addressing key planning considerations and acting to ensure the security of agency information and networks. If agencies do not address these key planning issues and do not seek to understand the potential scope and complexities of IPv6 issues--whether agencies plan to transition immediately or not--they will face potentially increased costs and security risks. Mr. Chairman, this completes our prepared statement. We would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact David Powner at (202)-512- 9286 or Keith Rhodes at (202)-512-6412. We can also be reached by e-mail at [email protected] and [email protected] respectively. Key contributors to this testimony were Scott Borre, Lon Chin, West Coile, Camille Chaires, John Dale, Neil Doherty, Nancy Glover, Richard Hung, Hal Lewis, George Kovachick, J. Paul Nicholas, Christopher Owens, Eric Trout, and Eric Winter. 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 Internet protocol (IP) provides the addressing mechanism that defines how and where information such as text, voice, and video moves across interconnected networks. Internet protocol version 4 (IPv4), which is widely used today, may not be able to accommodate the increasing number of global users and devices that are connecting to the Internet. As a result, IP version 6 (IPv6) was developed to increase the amount of available IP address space. The new protocol is gaining increased attention from regions with limited IP addresses. For its testimony, GAO was asked to discuss the findings and recommendations of its recent study of IPv6 (GAO-05-471). In this study, GAO was asked to (1) describe the key characteristics of IPv6; (2) identify the key planning considerations for federal agencies in transitioning to IPv6; and (3) determine the progress made by the Department of Defense (DOD) and other major agencies in the transition to IPv6. The key characteristics of IPv6 are designed to increase address space, promote flexibility and functionality, and enhance security. For example, by using 128-bit addresses rather than 32-bit addresses, IPv6 dramatically increases the available Internet address space from approximately 4.3 billion in IPv4 to approximately 3.4 x 10^38 in IPv6. Key planning considerations for federal agencies include recognizing that the transition is already under way, because agency networks already include IPv6-capable software and equipment. Other important agency planning considerations include developing inventories and assessing risks; creating business cases that identify organizational needs and goals; establishing policies and enforcement mechanisms; determining costs; and identifying timelines and methods for transition. Managing the security aspects of transition is also an important consideration because poorly managed IPv6 capabilities can put agency information and systems at risk. DOD has made progress in developing a business case, policies, timelines, and processes for transitioning to IPv6. Unlike DOD, the majority of other major federal agencies reported that they have not yet initiated key planning efforts for IPv6. In its report, GAO recommended, among other things, that the Director of the Office of Management and Budget (OMB) instruct agencies to begin to address key planning considerations for the IPv6 transition and that agencies act to mitigate near-term IPv6 security risks. Officials from OMB, DOD, and Commerce generally agreed with the contents of the report.
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Since the enactment of key financial management reforms in the 1990s, the federal government has made significant progress in improving financial management activities and practices. For fiscal year 2010, 20 of 24 Chief Financial Officers (CFO) Act agencies were able to attain unqualified audit opinions on their accrual-based financial statements within an accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal year 1996. Also, accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. Further, the preparation and audit of financial statements has identified numerous deficiencies, leading to actions to strengthen controls and systems. It is important for the individual federal departments and agencies to remain committed to maintain the progress that has been achieved in obtaining positive audit results and to build upon that progress to make needed improvements. Although this progress is commendable, the federal government was unable to demonstrate the reliability of significant portions of the U.S. government's accrual-based consolidated financial statements for fiscal years 2010 and 2009, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work. As a result, we were unable to provide an opinion on such statements. Further, significant uncertainties (discussed in Note 26 to the consolidated financial statements), primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 Statement of Social Insurance, prevented us from expressing an opinion on that statement. We were, however, able to render unqualified opinions on the 2009, 2008, and 2007 Statements of Social Insurance. Given the importance of social insurance programs like Medicare and Social Security to the federal government's long-term fiscal outlook, the Statement of Social Insurance is critical to understanding the federal government's financial condition and fiscal sustainability. The federal government did not maintain adequate systems or have sufficient, reliable evidence to support certain material information reported in the U.S. government's accrual-based consolidated financial statements. The underlying material weaknesses in internal control, which generally have existed for years, contributed to our disclaimer of opinion on the U.S. government's accrual-based consolidated financial statements for the fiscal years ended 2010 and 2009. Those material weaknesses relate to the federal government's inability to satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the Department of Defense (DOD), were properly reported in the accrual-based consolidated financial statements; reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported; support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities; adequately account for and reconcile intragovernmental activity and balances between federal entities; ensure that the federal government's accrual-based consolidated financial statements were (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in conformity with U.S. generally accepted accounting principles (GAAP); and identify and either resolve or explain material differences between (1) certain components of the budget deficit reported in Treasury's records that are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit, the Statement of Changes in Cash Balance from Unified Budget and Other Activities, and the Fiscal Projections for the U.S. Government (included in the Supplemental Information section of the Financial Report) and (2) related amounts reported in federal entities' financial statements and underlying financial information and records. These material weaknesses continued to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government's ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an efficient and effective manner. In addition to the material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial statements, we found the following three other material weaknesses in internal control. These other material weaknesses were the federal government's inability to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce improper payments, identify and resolve information security control deficiencies and manage information security risks on an ongoing basis, and effectively manage its tax collection activities. Also, many of the CFO Act agencies continue to struggle with financial systems that are not integrated and do not meet the needs of management for reliable, useful, and timely financial information. Often, agencies expend major time, effort, and resources to develop financial information that their systems should be able to provide on a daily or recurring basis. Three major impediments continued to prevent us from rendering an opinion on the U.S. government's accrual-based consolidated financial statements: (1) serious financial management problems at DOD that have prevented DOD's financial statements from being auditable, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities, and (3) the federal government's ineffective process for preparing the consolidated financial statements. Additional impediments, such as certain entities' fiscal year 2010 financial statements that, as of the date of our audit report, received disclaimers of opinion or were not audited, also contributed to our inability to render an opinion on the U.S. government's accrual-based consolidated financial statements. Extensive efforts by DOD and other entity officials and cooperative efforts between entity chief financial officers, Treasury officials, and Office of Management and Budget (OMB) officials will be needed to resolve these obstacles to achieving an opinion on the U.S. government's accrual-based consolidated financial statements. Given DOD's size and complexity, the resolution of its serious financial management problems is essential to achieving an opinion on the U.S. government's consolidated financial statements. Reported weaknesses in DOD's financial management and other business operations adversely affect the reliability of DOD's financial data; the economy, efficiency, and effectiveness of its operations; and its ability to produce auditable financial statements. Several DOD business practices, including financial management, continue to be included on GAO's list of high-risk programs designated as vulnerable to waste, fraud, abuse, and mismanagement or in need of transformation. To transform its business operations, DOD management must have reliable financial information. Without it, DOD is severely hampered in its ability to make sound budgetary and programmatic decisions, monitor trends, make adjustments to improve performance, reduce operating costs, or maximize the use of resources. DOD continues to take steps toward resolving the department's long- standing financial management weaknesses. The department's Financial Improvement and Audit Readiness (FIAR) Plan, which defines DOD's strategy and methodology for improving financial management operations and controls, has continued to evolve and mature. DOD's Comptroller has established two priority focus areas--first, strengthening processes, controls, and systems that produce budgetary information and support the department's Statements of Budgetary Resources; and second, improving the accuracy and reliability of management information pertaining to mission-critical assets, including military equipment and real property, and validating improvement through existence and completeness testing. In 2010, DOD revised its FIAR strategy, governance framework, and methodology to support the DOD Comptroller's direction and priorities. We are supportive of this initiative and believe that a focused and consistent approach may increase DOD's ability to demonstrate incremental progress toward auditability in the short term. Budgetary and asset-accountability information is widely used by DOD managers at all levels. As such, its reliability is vital to daily operations and management. In this regard, the U.S. Marine Corps (USMC) recently underwent an audit of its fiscal year 2010 Statement of Budgetary Resources (SBR). Although the auditors were unable to express an opinion on the USMC SBR, DOD indicated that the lessons learned from the audit will be applied to the fiscal year 2011 USMC SBR audit currently underway and shared with the other DOD components to assist them in their audit readiness efforts. A key element of DOD's strategy is successful implementation of Enterprise Resource Planning (ERP) systems. However, inadequate requirements management, inadequate systems testing, ineffective oversight over business system investments, and other challenges have hindered the department's efforts to implement these systems on schedule and within budget. Effective and sustained leadership and oversight of the department's ERP implementation will be important to ensure that these important initiatives result in the integrated capabilities needed to transform the department's financial management and related business operations. which requires DOD's financial statements to be validated as audit ready no later than September 30, 2017. The interim milestones shall include, for each military department and for the defense agencies and defense field activities, interim milestones for (1) achieving audit readiness for each major element of the Statement of Budgetary Resources, and (2) addressing the existence and completeness of each major category of assets, including military equipment, real property, and operating material and supplies; and examine the costs and benefits of alternative approaches to the valuation of DOD assets, select a valuation approach, and begin to prepare a business case analysis supporting the selected approach. Important to the success of DOD's current priorities and the FIAR program are high-quality, detailed plans, and effective implementation at all levels. Long-term, to achieve financial statement auditability and improve financial management information, it will be important that DOD establish sound strategic planning and effective implementation across the department, and at all levels, with efforts that can be sustained through leadership transitions. We are encouraged by continuing congressional oversight of DOD's business transformation and financial management improvement efforts and the commitment of DOD's leaders to implementing sustained improvements in the department's ability to produce reliable, useful, and timely information for decision making and reporting. We will continue to monitor DOD's progress in addressing its financial management weaknesses and transforming its business operations. Federal entities are unable to adequately account for and reconcile intragovernmental activity and balances. For both fiscal years 2010 and 2009, amounts reported by federal entity trading partners for certain intragovernmental accounts were not in agreement by significant amounts. Although OMB and Treasury require the CFOs of 35 significant federal entities to reconcile, on a quarterly basis, selected intragovernmental activity and balances with their trading partners, a substantial number of the entities did not adequately perform those reconciliations for fiscal years 2010 and 2009. As a result of these circumstances, the federal government's ability to determine the impact of the unreconciled differences between trading partners on the amounts reported in the accrual-based consolidated financial statements is significantly impaired. GAO has identified and reported on numerous intragovernmental activities and balances issues and has made several recommendations to Treasury and OMB to address those issues. Treasury and OMB have generally taken or plan to take actions to address these recommendations. Treasury continues to take steps to help resolve material differences in intragovernmental activity and balances. For example, during fiscal year 2010, Treasury established additional focus groups, consisting of Treasury and agency personnel, to begin identifying and resolving certain reported material differences. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong commitment by federal entities to fully implement guidance regarding business rules for intragovernmental transactions issued by OMB and Treasury as well as continued strong leadership by OMB and Treasury. While further progress was demonstrated in fiscal year 2010, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with GAAP. For example, Treasury's process did not ensure that the information in certain of the accrual-based consolidated financial statements was fully consistent with the underlying information in 35 significant federal entities' audited financial statements and other financial data. To make the fiscal years 2010 and 2009 consolidated financial statements balance, Treasury recorded net increases of $0.8 billion and $17.4 billion, respectively, to net operating cost on the Statement of Operations and Changes in Net Position, which it labeled "Unmatched transactions and balances." Treasury recorded an additional net $3.8 billion and $8 billion of unmatched transactions in the Statement of Net Cost for fiscal years 2010 and 2009, respectively. Treasury is unable to fully identify and quantify all components of these unreconciled activities. Treasury's reporting of certain financial information required by GAAP continues to be impaired, and will remain so until federal entities, such as DOD, can provide Treasury with complete and reliable information required to be reported in the consolidated financial statements. A detailed discussion of additional control deficiencies regarding the process for preparing the consolidated financial statements can be found on pages 240 through 243 of the Financial Report. During fiscal year 2010, Treasury, in coordination with OMB, continued implementing corrective action plans and made progress in addressing certain internal control deficiencies we have previously reported regarding the process for preparing the consolidated financial statements. Resolving some of these internal control deficiencies will be a difficult challenge and will require a strong commitment from Treasury and OMB as they continue to execute and implement their corrective action plans. While not as significant as the major impediments noted above, financial management problems at the Department of Homeland Security (DHS) and the Department of Labor (Labor) also contributed to the disclaimer of opinion on the federal government's accrual-based consolidated financial statements for fiscal year 2010. About $28 billion, or about 1 percent, of the federal government's reported total assets as of September 30, 2010, and approximately $235 billion, or about 5 percent, of the federal government's reported net cost for fiscal year 2010 relate to these two agencies. The auditors for DHS and Labor reported that they were unable to provide opinions on the financial statements because they were not able to obtain sufficient evidential support for certain amounts presented in financial statements. For example, only selected DHS financial statements were subjected to audit, and the auditors stated that DHS was unable to provide sufficient evidence to support certain financial statements balances at the Coast Guard and Transportation Security Administration; and auditors for Labor reported that the department was unable to provide sufficient support for certain accounts in Labor's fiscal year 2010 financial statements. The auditors for DHS and Labor made recommendations to address control deficiencies at the agencies, and management for these agencies generally expressed commitment to resolve the deficiencies. It will be important that management at each of these agencies remain committed to addressing noted control deficiencies and improving financial reporting. Because of significant uncertainties (as discussed in Note 26 to the consolidated financial statements), primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 Statement of Social Insurance, we were unable to, and we did not, express an opinion on the 2010 Statement of Social Insurance. The Statement of Social Insurance presents the actuarial present value of the federal government's estimated future revenue to be received from or on behalf of participants and estimated future expenditures to be paid to or on behalf of participants, based on benefit formulas in current law and using a projection period sufficient to illustrate the long-term sustainability of the social insurance programs. The significant uncertainties, discussed in further detail in Note 26 to the consolidated financial statements, include: Medicare projections in the 2010 Statement of Social Insurance were based on full implementation of the provisions of the Patient Protection and Affordable Care Act (PPACA), including a significant decrease in projected Medicare costs from the 2009 Statement of Social Insurance related to (1) reductions in physician payment rates totaling 30 percent over the next 3 years and (2) productivity improvements for most other categories of Medicare providers. However, there are significant uncertainties concerning the achievement of these projected decreases in Medicare costs. Management has noted that actual future costs for Medicare are likely to exceed those shown by the current-law projections presented in the 2010 Statement of Social Insurance due to the likelihood of modifications to the scheduled reductions. The extent to which actual future costs exceed the projected current-law amounts due to changes to the physician payments and productivity adjustments depends on both the specific changes that might be legislated and on whether legislation would include other provisions to help offset such costs. Management has developed an illustrative alternative projection intended to provide additional context regarding the long-te rm sustainability of the Medicare program and to illustrate the uncertainties in the Statement of Social Insurance projections. The present value of future estimated expenditures in excess of future estimated revenue for Medicare, included in the illustrative alternative projection, exceeds the $22.8 trillion estimate in the 2010 Statement of Social Insurance by $12.4 trillion. The recent economic recession and the federal government's actions to stabilize financial markets and promote economic recovery contin significantly affect the federal government's financial condition. In December 2007, the United States entered what has turned out to be its deepest recession since the end of World War II. Gross domestic produ ct (GDP) fell 4.1 percent from the beginning of the recession through the second quarter of 2009, which marked the recession's end. Since the end of the reces sion, GDP has grown slowly and unemployment remains at a high level. As of September 30, 2010, the federal government's actions to stabilize the financial markets and to promote economic recovery resulted in assets of over $400 billion, which is net of about $75 billion in valuation losses. In addition, the federal government reported incurring significant liabilities and related net cost resulting from these actions. Although the federal government has received positive returns from investments in certain large financial institutions, it continues to report significant costs overall related to these actions. Because the valuation of the related assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. Actions taken to stabilize financial markets--including aid to the automotive industry--increased borrowing and added to federal debt hel by the public. The revenue decreases and spending increases enacted in the American Recovery and Reinvestment Act of 2009 also added to borrowing and federal debt held by the public. Federal debt held by the public increased from 40 percent of GDP as of September 30, 2008, to 62 d percent as of September 30, 2010. The economic downturn and the nature and magnitude of the actions taken to stabilize the financial markets and to promote economic recovery will continue to shape federal government's near-term budget and debt outlook. While defic its are projected to decrease as federal support for states and the financial sector winds down and the economy recovers, the increased debt and related interest costs will remain. The ultimate cost of the federal government's actions to stabilize the financial markets and promote economic recovery will not be known for some time as these uncertainties are resolved and further federal government actions are taken in fiscal year 2011 and later. Looking ahead, it will be important for the federal government to continue to determine the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. The 2010 Financial Report includes the first sustainability statement required under new financial reporting standards. This statement presents comprehensive long-term fiscal projections for the U.S. government, expanding on similar information presented in recent years' financial reports and consistent with the fiscal simulations that GAO has published since 1992. This enhanced reporting will hopefully increase public awareness and understanding of the long-term fiscal outlook: both its overall size and the major drivers of that outlook. Information on the imbalance between revenues and spending currently built into the structure of the budget can help stimulate public and policy debates and help policymakers make more informed decisions about the overall sustainability of government finances. For more than a decade, GAO has been running fiscal simulations to tell more about this longer-term story. The Congressional Budget Office (CBO) has also published long-term simulations for many years. The federal government faced large and growing structural deficits--and hence rising debt--before the instability in financial markets and the economic downturn. Under the projections included in the Financial Report and under the most recent CBO and GAO simulations using a range of assumptions, these structural deficits--driven on the spending side primarily by rising health care costs and known demographic trends--lead to continuing increases in federal debt held by the public as a share of GDP, which is unsustainable. In closing, even though progress has been made in improving federal financial management activities and practices, much work remains given the federal government's long-term fiscal challenges and the need for the new Congress, the administration, and federal managers to have reliable, useful, and timely financial and performance information to effectively meet these challenges. The recent economic recession and the federal government's actions to stabilize financial markets and promote economic recovery continued to significantly affect the federal government's financial condition. The accrual-based consolidated financial statements for fiscal year 2010 include, as they did for fiscal year 2009, substantial assets and liabilities resulting from these actions. The valuation of certain assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions. As such, there will be differences between the estimated values as of September 30, 2010, and the actual results, and such differences may be material. These differences will also affect the ultimate cost of the federal government's market stabilization and economic recovery actions. Going forward, a great amount of attention will need to continue to be devoted to ensuring (1) that sufficient internal controls and transparency are established and maintained for all financial stabilization and economic recovery initiatives; and (2) that all related financial transactions are reported on time, accurately, and completely. Further, sound decisions on the current and future direction of all vital federal government programs and policies are more difficult without reliable, useful, and timely financial and performance information. In this regard, for DOD, the challenges are many. We are encouraged by DOD's efforts toward addressing its long-standing financial management weaknesses and its efforts to achieve auditability. Consistent and diligent top management oversight toward achieving financial management capabilities, including audit readiness, will be critical going forward. Moreover, the civilian CFO Act agencies must continue to strive toward routinely producing not only annual financial statements that can pass the scrutiny of a financial audit, but also quarterly financial statements and other meaningful financial and performance data to help guide decision makers on a day-to-day basis. Federal entities' improvement of financial management systems will be essential to achieve this goal. Moreover, of utmost concern are the federal government's long-term fiscal challenges that result from large and growing structural deficits that are driven on the spending side primarily by rising health care costs and known demographic trends. This unsustainable path must be addressed soon by policymakers. Finally, I want to emphasize the value of sustained congressional interest in these issues, as demonstrated by this Subcommittee's leadership. It will be key that, going forward, the appropriations, budget, authorizing, and oversight committees hold the top leadership of federal entities accountable for resolving the remaining problems and that they support improvement efforts. Mr. Chairman and Ranking Member Towns, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For further information regarding this testimony, please contact Jeanette M. Franzel, Managing Director, or Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-2600. Key contributions to this testimony were also made by staff on the Consolidated Financial Statement audit team.
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GAO annually audits the consolidated financial statements of the U.S. government. Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies. Over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities. This testimony presents the results of GAO's audit for fiscal year 2010 and discusses certain of the federal government's significant long-term fiscal challenges. Three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) federal entities' inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition to the material weaknesses underlying these major impediments, GAO noted material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. With regard to the Statement of Social Insurance (SOSI), GAO was unable to, and did not, express an opinion on the 2010 SOSI because of significant uncertainties discussed by management in the consolidated financial statements, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 SOSI. GAO was, however, able to render unqualified opinions on the 2009, 2008, and 2007 SOSIs. Since the enactment of key financial management reforms in the 1990s, the federal government has made significant progress in improving financial management activities and practices. For fiscal year 2010, 20 of 24 Chief Financial Officers (CFO) Act agencies were able to attain unqualified audit opinions on their accrual-based financial statements within an accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal year 1996. Also, accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. Further, the preparation and audit of financial statements has identified numerous deficiencies, leading to actions to strengthen controls and systems. Much work remains, however, to improve federal financial management. For example, it is essential that the Department of Defense, the Department of the Treasury, and the Office of Management and Budget, along with other federal entities, address the major impediments discussed above. Also, it is important for the individual federal departments and agencies to remain committed to maintain the progress that has been achieved in obtaining positive audit results and to build upon that progress to make needed improvements. The 2010 Financial Report of the United States Government (Financial Report) introduces the first sustainability statement required under a new financial reporting standard, which presents comprehensive long-term fiscal projections for the U.S. government. Such reporting provides a much needed perspective on the federal government's long-term fiscal position and outlook. The Financial Report, like the latest Congressional Budget Office long-term budget outlook and GAO simulations, shows that the federal government is on an unsustainable long-term fiscal path. Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address our recommendations.
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To respond to your request, we performed work primarily at RHS, FSA, and Agriculture's Office of the Chief Financial Officer. We also performed work at Treasury and conducted interviews with agency officials at RHS and FSA who are responsible for taking corrective actions to ensure that all eligible delinquent debt is promptly referred to Treasury for collection action. We conducted interviews with Agriculture's CFO and members of his staff regarding Agriculture's implementation of AWG. To corroborate information we obtained from interviews, we obtained and reviewed pertinent agency documents including action plans and implementation schedules. We did not verify the reliability of certain information that was provided to us by agencies such as delinquent debt referred to Treasury. We also did not assess the technical adequacy of the specific systems enhancements that have been deemed by the agencies as necessary for addressing the DCIA implementation problems that we identified and discussed. We conducted interviews with Treasury officials who were knowledgeable about the debt collection improvement account provision of DCIA and the status of the account at Treasury. We performed our work from July through September 2002 in accordance with U.S. generally accepted government auditing standards. In December 2001, we testified that, as of September 30, 2000, RHS reported it had referred to Treasury's offset program $201 million of direct Single Family Housing (SFH) loans but had not referred any amounts to Treasury for cross-servicing, primarily due to RHS's systems limitations. RHS officials told us that since implementing a new automated centralized loan servicing system in fiscal year 1997, RHS had been unable to readily identify direct SFH loans that are eligible for referral to Treasury for cross- servicing. Essentially, the system did not contain sufficient data to differentiate loans eligible for cross-servicing from those that were not. For example, the system needed to be capable of determining the status of any collateral, because all collateral must be liquidated prior to a loan's referral to Treasury for cross-servicing. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of RHS to complete development of the software enhancements that will allow automated identification of loans eligible for cross-servicing and promptly refer all such loans to Treasury. RHS has completed and implemented the system enhancements necessary for automated identification of direct SFH loans eligible for cross-servicing and the prompt referral of such loans. In April 2002, RHS made its first automated referral of direct SFH loans to Treasury for cross-servicing. This referral involved about 10,900 loans totaling about $165.6 million. RHS is currently using its enhanced system to identify loans eligible for cross- servicing and electronically refer them to Treasury on a monthly basis. According to RHS documents and Treasury officials, RHS has referred all of the loans that it has reported as eligible for cross-servicing. Moreover, an RHS document indicates and Treasury officials told us that there have been no significant problems regarding eligibility for cross-servicing for the loans that RHS has referred since April 2002. As we stated at the December 2001 hearing, when we attempted to independently verify specific debts that RHS had excluded from referral to Treasury's offset program as of September 30, 2000, we were told by RHS officials that the supporting documentation for the $182 million of direct SFH loans excluded from referral had not been saved. We subsequently recommended that the Secretary of Agriculture direct the Administrator of RHS to maintain supporting documentation, in an appropriate level of detail that can be made readily available for independent verification, for all SFH debts reported and certified to Treasury as excluded from referral for collection action. At a minimum, the documentation should include, for each exclusion category, such as foreclosure, the total amount reported as excluded on the certified Treasury Report on Receivables Due from the Public (TROR) and a listing of the identities and dollar amounts of the specific loans excluded. Such documentation would facilitate an efficient independent review to determine whether RHS's exclusions meet relevant legislative and regulatory criteria. The Comptroller General's Standards for Internal Control in the Federal Government states that all transactions and other significant events need to be clearly documented and that the documentation should be readily available for examination. During our follow-up review, RHS provided us a detailed listing of specific direct SFH loans and the loans' corresponding dollar amounts that had been reported as excluded from referral to Treasury on the TROR as of September 30, 2001, the last period for which certified data were available. Although we were not requested to and did not test the specific loans excluded to determine whether they met relevant legislative and regulatory criteria, RHS's ability to provide such listings should facilitate future independent verifications of the validity of its reported exclusions, and is critical for the oversight of the agency's DCIA implementation. Treasury is the sole operator of a governmentwide centralized debt collection center. As such, it is critical that Treasury obtain accurate information from federal agencies on the status of their nontax debt, particularly the debt over 180 days delinquent, for which DCIA was designed in large part to help agencies collect through centralized collection. During the December 2001 hearing, we stressed that RHS was only reporting the delinquent installment portion of its direct SFH loans as delinquent in its TROR. It was not reporting, as required by Treasury, the accelerated loan balance, which is the total debt due and payable. In the report we issued after our testimony, we stated that, as a result of such reporting, RHS may have underreported to Treasury direct SFH loan amounts delinquent over 180 days by about $849 million and direct SFH loan amounts eligible for Treasury's offset program by about $348 million as of September 30, 2000. We recommended that the Secretary of Agriculture direct the Administrator of RHS to work with Treasury to resolve any inconsistencies between RHS's reporting of delinquent debts on its TROR and Treasury's instructions for such reporting. In addition, we recommended that absent any modifications to Treasury's instructions for preparing the TROR, RHS report the entire accelerated balance of delinquent direct SFH loans to Treasury as delinquent debt and, absent any allowable exclusions, as debt eligible for referral to Treasury for collection action. After we made our recommendations, Agriculture and Treasury officials met to address the inconsistency that existed between RHS's reporting of delinquent direct SFH loans on the TROR and Treasury's instructions for such reporting. In a September 2002 letter, Treasury informed Rural Development that RHS should report the entire unpaid principal balances as delinquent on the TROR, and requested that such reporting begin with the TROR for the fourth quarter of fiscal year 2002. Treasury stated in the letter that once an acceleration notice is sent to the borrower, which has been RHS's ongoing practice, the entire debt is due and payable and should be reflected as such on the TROR. Treasury also stated that its decision was based on consultation with its legal counsel and recent discussions with Agriculture officials including its CFO. According to RHS officials, the agency will report the entire unpaid principal balances for its direct SFH loans that have been accelerated beginning with the TROR for the fourth quarter of fiscal year 2002. At the December 2001 hearing, we stated that RHS had not referred losses on its guaranteed SFH loans to Treasury for collection action. RHS officials told us that the agency could not pursue recovery from the debtor or utilize DCIA debt collection tools because under the SFH guaranteed loan program, no contract existed between the debtor and RHS. Consequently, RHS did not recognize the losses that it paid to guaranteed lenders as federal debt and could not apply DCIA debt collection remedies to them. We were particularly concerned about DCIA debt collection remedies not being available for RHS's guaranteed SFH losses because, according to RHS, through September 30, 2000, such losses totaled about $132 million. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of RHS to finalize and implement necessary regulatory changes and modifications to lender agreements so that losses on guaranteed SFH loans could be treated as federal debt and referred to Treasury for collection action. RHS is currently working on making the regulatory changes that are needed to refer losses on guaranteed SFH loans to Treasury's offset program; however, the agency will not be able to refer such losses until regulatory action is completed and guaranteed loan applications are modified. According to a RHS official, to expedite the regulatory recognition of losses on guaranteed SFH loans as federal debt, Agriculture is currently incorporating the regulatory changes that are needed into the draft final rule for the Section 502 Guaranteed Rural Housing Program. It is important to note, however, that the Office of Management and Budget (OMB) has determined that the final rule for this program will constitute a "significant regulatory action." As such, the rule will be subject to a more lengthy clearance process that will involve OMB review in the final rulemaking stages. According to a schedule provided by Agriculture, which includes internal agency review as well as OMB review, publication of the final rule for the Section 502 Guaranteed Rural Housing Program is expected by about August 2003. Given that the aforementioned regulation is not expected to be finalized for a considerable time, it is important to note that, as of our fieldwork completion date, RHS also had not modified the guaranteed loan applications for the SFH guaranteed loan program that are needed to establish a contractual relationship between the debtor and RHS so that losses stemming from SFH guaranteed loans can be recognized as federal debt and be subject to the debt collection provisions of DCIA. Initially, an RHS official stated that RHS planned to make changes to the applications when the final rule for the guaranteed loan program is issued. However, we pointed out that that approach could possibly delay RHS's ability to recognize guaranteed loan losses as federal debt, and we suggested that RHS change the guaranteed loan applications as soon as practicable so that once the rule goes into effect, it may be able to be applied retroactively to cover as many guaranteed loans as possible. As a result, according to an RHS official, RHS consulted with its Office of General Counsel and obtained approval for changing the guaranteed loan applications prior to the issuance of the final rule. Currently, RHS is in the process of revising its guaranteed loan application form to include an acknowledgement that any claim paid by RHS on a guaranteed loan would be subject to provisions of the DCIA. Once the regulations are finalized and RHS makes the necessary modifications to the guaranteed loan application, the agency will need to be able to promptly refer guaranteed losses to Treasury's offset program. Given the fact that the SFH guaranteed loan program continues to grow significantly, thereby increasing the number of loss claims being processed each year, automated tracking of guaranteed loan losses and referring them to Treasury will be critically important. RHS has initiated a project to automate the tracking of SFH loss claims from lenders and payments made to lenders to cover such claims, which it plans to complete in April 2003. It is important to note, however, that the project does not cover the process for the automated referral of guaranteed losses to Treasury. According to RHS officials, this automated referral process will not be covered until RHS initiates the second phase of the current project after April 2003, and which is estimated to take an additional 9 to 12 months to complete. However, RHS currently tracks guaranteed losses, and RHS officials stated that referrals to Treasury could be done manually if the automated enhancements needed to make such referrals are not complete. At the December 2001 hearing, we stated that FSA did not have a process or sufficient controls in place to adequately identify direct farm loans eligible for referral to Treasury. We emphasized that, as a result, amounts of direct farm loans FSA reported to Treasury as eligible for referral were not accurate and, for certain loans, not only distorted the TROR for debt management and credit policy purposes but also distorted key financial indicators such as receivables, total delinquencies, and loan loss data. Specifically, FSA automatically excluded from referral all judgment debts without any review to identify and refer deficiency judgments, which are eligible for Treasury's offset program and should be referred. We emphasized that, as of September 30, 2000, FSA's judgment debts totaled $295 million, and our inquiries prompted the agency to initiate a manual process to identify deficiency judgments eligible for referral. Moreover, FSA's Program Loan Accounting System did not contain current information from the detailed loan files located at the numerous FSA county field offices that would be key to determining a farm loan's eligibility for referral to Treasury. In addition, there were no monitoring or review procedures in place to help ensure that FSA personnel routinely updated the detailed loan files that are the source of such key information. The severity of this problem was reflected in the results of our statistical sample of loans that had been excluded by FSA in four large states. Based on our review of this sample, we estimated that about one-half of the excluded loans in the four states had been inappropriately placed in exclusion categories by FSA as of September 30, 2000. One of the most frequently identified inappropriate exclusions pertained to amounts that had been discharged in bankruptcy. Such exclusions involved debts that FSA should have written off and closed out, in many instances, several years prior to our test date. In addition, the written-off and closed-out amounts for such debts should have been reported to IRS as income to the debtor in accordance with the Federal Claims Collection Standards and OMB Circular A-129. After the hearing, to address these problems, we recommended that the Secretary of Agriculture direct the Administrator of FSA to develop and implement (1) automated system enhancements to make the Program Loan Accounting System capable of identifying all judgment debts eligible for referral to Treasury for collection action, (2) oversight procedures to ensure that FSA field offices timely and routinely update the Program Loan Accounting System to accurately reflect the status of delinquent debts, including whether the debts are eligible for referral to Treasury for collection action, and (3) oversight procedures to ensure that all debts discharged through bankruptcy are promptly closed out and reported to the IRS as income to the debtor in accordance with the Federal Claims Collection Standards and OMB Circular A-129. We also recommended that FSA continue to manually identify deficiency judgments eligible for referral until the system enhancements for automated identification were completed and implemented. FSA has developed an action plan to improve its process and controls for identifying and referring eligible debts to Treasury and, based upon our review of documents provided by FSA, the agency has made progress toward implementing such improvements. As of our fieldwork completion date, FSA was using its Program Loan Accounting System and system- generated reports to better track the status of FSA's delinquent debts, including judgment debts, for the purpose of meeting the DCIA referral requirements. Specifically, FSA was generating an enhanced debt report to include various types of debts under FSA's farm loan programs, including judgment debts, to facilitate field office review of debts to determine eligibility for referral to Treasury. In September 2002, FSA provided its field offices the initial enhanced debt report and directed the field offices to review the debts for accuracy. FSA plans to routinely use the enhanced debt report in such field office reviews in the future. In addition, actions are being taken to improve field office oversight for DCIA implementation. Beginning in August 2002, county field offices must provide their respective state offices with documentation for loans that they determine are ineligible for Treasury's offset program because of bankruptcy, foreclosure, or litigation. The state offices, in turn, are responsible for making the final decision regarding the loans' eligibility for referral and for actually excluding the loans from referral. In addition, FSA has amended its National Internal Review Guide to include specific procedures that are designed to help ensure that state offices, among other things, establish monitoring systems to accurately track borrowers in foreclosure, bankruptcy, and litigation. The procedures are intended to facilitate the timely and routine updating of information in the Program Loan Accounting System to accurately reflect the status of delinquent debts, including whether the debts are eligible for referral to Treasury for collection action, and that all debts discharged through bankruptcy are promptly closed out and reported to IRS. FSA's policy is to perform its national internal reviews at state offices not less than every 2 years, and the new procedures should improve FSA's implementation of DCIA's delinquent debt referral requirements. It is important to note, however, that specific actions in FSA's action plan that are needed to (1) ensure field offices are routinely reviewing accounts for Treasury's offset program and cross- servicing referral eligibility; (2) ensure that field offices routinely monitor the status of accounts and properly code them for foreclosure, bankruptcy, and litigation; and (3) ensure discharged bankruptcy accounts are promptly closed out, removed from the farm loan debt portfolio, and appropriately reported to the IRS as discharged debts, have target completion dates of September 2003. We stated at the December 2001 hearing that even though FSA reported having referred $934 million of direct farm loans to Treasury's offset program as of September 30, 2000, the agency has lost opportunities for maximizing collections on this debt because it does not refer codebtors. We emphasized that the vast majority of direct farm loans have codebtors and pointed out that FSA's Program Loan Accounting System did not have the capacity to record more than one debtor and that the necessary system modifications to record more than one taxpayer identification number had not been made. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of FSA to monitor planned system enhancements to the Program Loan Accounting System to ensure that capacity to record and use codebtor information is available and implemented by December 2002. FSA has acknowledged the need to refer codebtors. Its action plan includes time frames for developing and testing the systems enhancements deemed necessary for recording and reviewing relevant information needed for referring debts to Treasury's offset program, including the codebtor's name, address, and taxpayer identification number. Based on our review of documents provided by FSA, the agency has established a codebtor code for its system and has begun to input codebtor information. According to FSA, as of our fieldwork completion date, 254 loans with codebtors totaling about $8.3 million had been identified for initiating the due process required for referral to Treasury's offset program in December 2002. Given that the vast majority of the agency's direct farm loans have codebtors, FSA has a substantial challenge ahead to obtain the required information to refer all eligible debt for codebtors to Treasury's offset program. As we noted at the December 2001 hearing, data provided by FSA officials showed that about $400 million of new delinquent debt became eligible for Treasury's offset program during calendar year 2000. Although FSA officials acknowledged that debts became eligible relatively evenly throughout the year, debts eligible for offset were being referred to Treasury only once annually, during December. As a result, a large portion of the $400 million of debt likely was not promptly referred when it became eligible. FSA agreed that quarterly referrals could enhance possible collection of delinquent debts by getting them to Treasury earlier. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of FSA to monitor effective completion of the planned automated system modifications to refer eligible debt to Treasury's offset program on a quarterly, rather than annual, basis. FSA plans to make quarterly referrals to Treasury's offset program and intends to make the first such referral in December 2002. In August 2002, FSA issued guidance to the field offices for review of eligible debts for the December 2002 referral. In September 2002, FSA informed its field offices that quarterly referrals are now required, and the agency has determined that the same due process notification and referral process that has been used annually will be used quarterly, except under a shorter time frame. At the December 2001 hearing, we pointed out that FSA had paid out about $293 million in losses for guaranteed farm loans since fiscal year 1996, but like RHS, FSA had missed opportunities to potentially collect millions of dollars related to guaranteed loan losses because they were not treated as federal debt. We also noted while performing work at FSA that the agency had revised its guaranteed loan application applicable to guaranteed loans made after July 20, 2001, to include a section specifying that amounts FSA pays to a lender as a result of a loss on a guaranteed loan constitute a federal debt. After the hearing, because FSA needed to make revisions to its Guaranteed Loan Accounting System to classify guaranteed farm loan losses as federal debt, we recommended that the Secretary of Agriculture direct the Administrator of FSA to monitor planned system enhancements to the Guaranteed Loan Accounting System to ensure that the software needed to implement the revisions to the lender agreement to establish guaranteed loan losses as federal debt is completed. In addition, we recommended that once FSA establishes guaranteed loan losses as federal debt and deems them to be eligible for referral to Treasury, FSA timely refer such debt to Treasury for collection action in accordance with DCIA. FSA has issued the final regulations for recognizing claims paid on guaranteed farm loans as federal debt and is currently making needed systems modifications to refer such losses to Treasury's offset program. According to FSA officials, the July 2002 regulations apply to guaranteed farm loans made after July 20, 2001, the date of the revised guaranteed loan application. FSA has established December 2002 as the milestone date for completing the automated systems capability to refer eligible losses to Treasury's offset program and, according to FSA officials, the agency is on schedule. According to FSA officials, as of our fieldwork completion date, the agency has not paid any loss claims associated with guaranteed farm loans made under the July 20, 2001, revision of the guaranteed loan application, and does not expect to experience such losses in the near future because the loans are relatively new. However, it is important to note that if FSA experiences such losses, it has procedures for the manual referral of guaranteed loan loss debt to Treasury's offset program. At the December 2001 hearing, we stated that Agriculture and eight other agencies we surveyed still had not utilized AWG as authorized by DCIA to collect delinquent nontax debt even though experts had previously testified before this Subcommittee that AWG could potentially be an extremely powerful debt collection tool. We noted that the agencies, including Agriculture, needed to develop the required regulations to implement AWG. In addition, we emphasized that Agriculture had not established specific dates for implementing AWG and was among five surveyed agencies that said they intended to implement AWG in the future but had no written implementation plan for doing so. After the hearing, we recommended, among other things, that the Secretary of Agriculture direct the CFO to complete and finalize regulations for conducting AWG and prepare a comprehensive written implementation plan that clearly defines, at a minimum, the types of debt that will be subject to AWG, the policies and procedures for administering AWG, and the process for conducting hearings, which are required by Treasury. We also recommended that, when practicable, (1) AWG be used in conjunction with other debt collection tools and (2) debts be referred to Treasury prior to 180 days delinquent when relying on Treasury to perform AWG. Agriculture agrees that AWG has the potential to be a powerful tool for collecting delinquent federal debts and has taken actions to develop needed regulations and has completed a departmentwide AWG implementation plan. As of our fieldwork completion date, Agriculture had drafted AWG regulations and incorporated them into the overall debt collection regulations for the department, which are currently being revised. Agriculture also plans to work with OMB to determine whether Agriculture's regulatory revisions for debt collection should be considered a "significant regulatory action." According to Agriculture's implementation plan, if the regulatory revisions are determined to be a "significant regulatory action," they will require a more lengthy review process resulting in a target date of May 2003 for final publication. In addition, Agriculture's implementation plan contains other milestone dates that need to be met and key elements that are needed to implement AWG. In accordance with the implementation plan, the CFO's office has obtained from component agencies their best estimates of the number of AWG cases they are likely to have each year for loans and administrative debt along with a corresponding estimate for the number of requests for hearings. Agriculture plans to have the Department of Veterans Affairs conduct AWG hearings on Agriculture's behalf and has had discussions with Veterans Affairs regarding such services. To actually perform AWG, Agriculture plans to rely upon Treasury's cross- servicing program for the vast majority of its debt types for specific debts of $100 or more. Agriculture believes that Treasury's private collection agency contractors already have the knowledge, expertise, and resources to seek out debtors, verify employment sources, and pursue debt collection through AWG. Because of Agriculture's reliance upon Treasury to perform AWG as part of cross-servicing, the CFO's office plans to incorporate into Agriculture's due process notifications to delinquent debtors, which are mailed prior to debt referrals to Treasury, the potential use of AWG as part of cross-servicing. In addition, the CFO's office plans to work with Agriculture's component agencies to refer debts for cross-servicing prior to the 180-day threshold, when practicable. These steps could serve to accelerate collections of delinquent debt. Although Agriculture has completed its departmentwide AWG implementation plan, components of the plan still need to be carried out. For example, the CFO plans to obtain individual AWG implementation plans from Agriculture's agencies that include each agency's timetable for implementation, written policies and procedures, and types of debt subject to AWG. In addition, Agriculture still needs to work with its agencies to provide Treasury with authorization to use AWG as part of cross-servicing and to complete the agreement with Veterans Affairs to conduct AWG hearings on Agriculture's behalf. DCIA includes a voluntary "gainsharing" provision that allows agencies to deposit a limited and defined portion of their debt collections into a special fund account maintained and managed by Treasury. The law provides that deposits into the special fund are available to the Secretary of the Treasury for gainsharing purposes only in amounts provided in advance in appropriations acts. The Secretary may make payments from amounts appropriated to agencies for purposes related to credit management, debt collection, and debt recovery. However, because collections are routinely deposited into the general fund of the Treasury, appropriations would be required in order to implement this incentive provision. Treasury has established a debt collection improvement account that can be activated if its appropriations authorize the expenditure. To date, only the Small Business Administration (SBA) has requested funding for gainsharing through Treasury's debt collection improvement account. Based on SBA's requests, Treasury's appropriation requests for fiscal years 1998 and 1999 included language for funding the debt collection improvement account for up to $384,000 and $3 million, respectively. However, the Congress made no amounts available in Treasury's appropriations to fund the account. According to Treasury, because the debt collection improvement account has never been utilized, it is difficult to assess how effective the account could be in enhancing federal agencies' debt collection or what changes, if any, should be made in the financial incentive area to improve debt collection governmentwide. Although the effectiveness of DCIA's gainsharing provision cannot be fairly assessed at this time, it is important that the provision be kept in proper perspective relative to the overall effectiveness of DCIA in improving the federal government's debt collection efforts. DCIA contains specific requirements for federal agencies to improve collection of their nontax debts, namely referral of certain delinquent debts to Treasury for centralized collection. While the pace of implementation has been slow, and collection opportunities have been lost, progress is being made. 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.
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In December 2001, GAO testified at a hearing, before the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform, that the Department of Agriculture, primarily the Rural Housing Service (RHS) and the Farm Service Agency (FSA), faced challenges in implementing key provisions of the Debt Collection Improvement Act of 1996 (DCIA). The testimony focused on RHS's and FSA's progress in referring delinquent debt for administrative offset and cross-servicing and Agriculture's implementation of administrative wage garnishment (AWG). During the hearing, Agriculture pledged to place a higher priority on delinquent debt collection and to substantially improve its implementation of DCIA by December 31, 2002. After the hearing, GAO made recommendations The Subcommittee requested GAO to review and provide an update on actions Agriculture has taken to resolve these problems. In addition, the Subcommittee requested that GAO report on the status of Treasury's implementation of a debt collection improvement account, a vehicle authorized by DCIA to give agencies financial incentives to improve their debt collection efforts. Recent actions taken by Agriculture demonstrate increased commitment to DCIA implementation. However, it will take sustained commitment and priority by top management to fully address the problems we identified. RHS has worked to address systems limitations that hampered it from promptly referring debts to Treasury for cross-servicing and is now referring all reported eligible debt. RHS will begin reporting certain loans' entire unpaid principal balances on accelerated debt as delinquent, beginning with its report for the fourth quarter of fiscal year 2002. RHS is working on making regulatory changes needed for it to refer losses on guaranteed loans to Treasury's offset program, but the changes are not expected to be completed until about August 2003. FSA has developed an action plan to improve its process and controls for identifying and referring eligible debts to Treasury. GAO's review of documents related to the plan indicates that FSA has made progress toward implementing the improvements. In addition, by December 2002, FSA expects to be able to begin reporting information for some codebtors when referring delinquent debts for collection action; to begin referring debts quarterly, rather than annually; and to be able to refer eligible losses on guaranteed loans. Agriculture has taken steps toward departmentwide implementation of AWG. Agriculture has completed its AWG implementation plan but still needs to carry out certain elements of the plan, including obtaining from its component agencies specific information on the types of debt subject to AWG and finalizing an agreement with the Department of Veterans Affairs to conduct AWG hearings on Agriculture's behalf. Agriculture has also drafted regulations necessary for implementing AWG, which may not be published until May 2003. Treasury has established a debt collection improvement account but, to date, it has not been activated because no amounts have been made available in Treasury's appropriations to fund the account. Agencies would be allowed to contribute a portion of their debt collections into the account, and amounts could be used to reimburse agencies for certain expenses related to credit management and debt collection and recovery. Because the account has not been activated, it is difficult to assess how effective it might be in improving federal debt collection beyond the debt collection improvements that have resulted directly from DCIA's major debt collection requirements for federal agencies.
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Established under title XIX of the Social Security Act as a joint federal- state health financing program, Medicaid is one of the largest programs in the federal and state budgets. States, in administering their Medicaid programs, must comply with federal requirements. States pay qualified health providers for a broad range of covered services provided to eligible beneficiaries. The federal government then reimburses states for a share of their expenditures. The federal share of each state's program expenditures is calculated according to a formula specified in the Medicaid statute, which allows the federal share to range from 50 to 83 percent. With Medicaid as payer of last resort, states are responsible for having plans in place to identify Medicaid beneficiaries' other sources of health coverage, determine the extent of the liability of such third parties, avoid payment of third-party claims, and recover reimbursement from third parties after Medicaid payment if the state can reasonably expect to recover more than it spends in seeking reimbursement. Individuals eligible for Medicaid assign their right to third-party payments to the state's Medicaid agency, which allows the state to claim payments for medical care directly from third parties. In general, state Medicaid agencies are required whenever possible to avoid paying for services for which the state agency has reason to believe another party is legally liable. Whenever states are reimbursed by third parties, they must ensure that the federal government is given its share of the reimbursement. Third parties that may be liable for payment of services furnished to Medicaid beneficiaries can include private insurers and health plans of employers who self-insure. Private health coverage can be delivered through managed care plans--plans in which enrollees, or their employers, pay a monthly payment in exchange for health care services through affiliated physicians, hospitals, and other providers. In addition, private insurers and health plans often contract with other entities, such as plan administrators or pharmacy benefit managers, to administer part or all of their health care plans. Plan administrators process claims and manage the day-to-day operations of the associated health plan. Pharmacy benefit managers negotiate drug prices with pharmacies and drug manufacturers on behalf of health plans and, in addition to other administrative, clinical, and cost-containment services, process prescription drug claims for the health plans. When a Medicaid beneficiary has pharmacy coverage administered through a pharmacy benefit manager, the state generally bills the pharmacy benefit manager directly for reimbursement instead of billing the insurer or the employer. For states to avoid paying costs for which a third party may be liable, or to recover from a liable third party payments the state may already have made, states need to verify when Medicaid beneficiaries have other health coverage, as well as the services that are covered and the period of eligibility. States obtain information on other health coverage in two common ways: When initially applying for enrollment in a state's Medicaid program, applicants are asked to report to the state any other sources of health coverage they may have. States then verify the applicant's coverage with the source of the health coverage, including coverage dates, type, benefits, and limits. State Medicaid programs often have staff who, on receiving information suggesting that a Medicaid applicant has other health coverage, contact the sources of such coverage by phone, mail, or other means to obtain specific coverage information. States also often independently identify and verify health coverage of Medicaid beneficiaries by electronically matching the states' coverage files with those of the other coverage sources. This type of verification is important because information provided by Medicaid applicants may be incomplete. Applicants may not report other sources of health coverage, or they may not know if they have such coverage; for example, a custodial parent may not realize that his or her child has health coverage through the noncustodial parent's employment-based health plan. Additionally, Medicaid beneficiaries who do not have other coverage when they first enroll in Medicaid may obtain it later. States may have agreements, called data-matching agreements, through which insurers, health plans, and other potential third parties periodically provide states with an electronic copy of their coverage files or with access to company databases. Third parties that are willing to work with states to electronically share their coverage files facilitate appropriate billings and reduce the administrative burden, on states and on third parties, associated with verifying coverage on a case-by-case basis. Once verification of any available private health coverage occurs, the state can redirect health care providers' claims to a responsible third party (a process known as cost avoidance), and it can seek reimbursement from the third party for payments it has already made (a process known as "pay and chase"). Identifying and verifying coverage early is important, because it is administratively more costly and time-consuming for states to seek reimbursement for payments that have already been made. If third parties do not readily pay claims for which the state Medicaid agency is seeking payment, it is often not cost-effective for states to spend resources pursuing payment on a claim-by-claim basis, even though substantial total dollars could be involved. For example, the states might not have the resources to further pursue payment through legal action. Conversely, success in verifying coverage, avoiding Medicaid payments for those beneficiaries with private health coverage, and collecting on previously paid claims from third parties can result in substantial Medicaid savings. Of the $5.5 billion that states reported in third-party-related savings in fiscal year 2004, states reported more than $4.9 billion in Medicaid payments avoided and more than $524 million in third-party recoveries. On the basis of self-reported health coverage information from the Census Bureau's annual CPS covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. Individual state estimates ranged from 9 percent in Alabama, Arizona, and California to 22 percent in Iowa and South Dakota and 23 percent in Wyoming (see table 1). Most often, the source of private health coverage was an employer or union. Nationwide, an estimated 11 percent of Medicaid beneficiaries reported having employment-based health coverage (ranging from about 7 percent in Arizona and Alabama to about 17 percent in Colorado, Michigan, New Hampshire, and Wyoming), whereas about 2 percent reported having individual health coverage (ranging from about 1 percent in 11 states to about 8 percent in Iowa). States also identify and collect information on private health coverage as part of administering their own Medicaid programs, but this information cannot be used to assess Medicaid beneficiaries' private health coverage on a nationwide basis. State Medicaid agencies capture from their automated systems information on private health coverage they have identified for their Medicaid beneficiaries. According to CMS, however, this information is not reliable for measuring the extent of beneficiaries' private health coverage nationwide, for comparing among states, or for comparing states' identified coverage with that identified by CPS. Certain states may, for example, capture information only for those beneficiaries whose coverage has been verified, while other states may capture coverage even though the state has not yet verified the services that are covered or the period of eligibility. Problems states face in ensuring that Medicaid is the payer of last resort fall into two broad categories: problems verifying whether beneficiaries have private health coverage and problems collecting payments (or "paying and chasing") when such coverage exists. Third-party liability provisions in the Deficit Reduction Act could help address some of these problems, although two issues require resolution in order to aid states as they implement the act. In particular, federal guidance is needed to clarify the time by which states must comply with the relevant provisions and also to clarify the entities covered by requirements to provide states with information regarding third-party coverage. Verification of available private health coverage for Medicaid beneficiaries is key to ensuring that states are able to appropriately avoid paying claims or to collect from those that are liable. Nevertheless, state officials often told us, one of the top three problems they faced in ensuring that Medicaid was the payer of last resort was related to verifying beneficiaries' other coverage. Some state officials reported their problem broadly, stating, for example, that third parties would not cooperate in providing eligibility or coverage information. Others cited specific problems related to the verification process, stating, for example, that third parties would not assist with the state's verification process by sharing coverage files electronically. Officials from 27 of the 39 responding states reported one or more different types of problems with verifying the services that were covered and the period of eligibility, which we summarized in two categories (see table 2): (1) verifying coverage information and (2) accessing electronic coverage files. Although most states' officials were not able to estimate the losses to the Medicaid program due to these verification problems, officials in 10 states did provide an estimate. The estimated loss for these 10 states totaled $54 million-$60 million (the loss is stated as a range because some states estimated their losses as a range rather than as a single dollar estimate). Problems verifying coverage information. Officials in 23 states reported problems verifying coverage information; of these, officials in 8 states were able to estimate their annual losses due to third parties' failure to provide coverage information, for a total of $47 million-$52 million. State officials reported a range of problems they experienced in verifying coverage information. For example, officials in 12 states indicated that certain third parties or their contractors, such as self-insured plans, pharmacy benefit managers, or plan administrators, ignored the state's requests for verification information about Medicaid beneficiaries or declined to verify coverage. Four states reported that third parties cited privacy provisions in the Health Insurance Portability and Accountability Act of 1996 as one reason they could not share coverage information with state Medicaid offices. Additionally, an official in 1 state reported that some third parties would not verify coverage for seasonal workers and that some insurance companies limited the number of verifications they were willing to provide during a single phone call. Problems accessing electronic coverage files. Officials in five states reported verification problems specifically related to accessing the electronic coverage files of third parties and their contractors; officials in two of these states were able to estimate their annual losses due to lack of access to electronic coverage files, for a total of $7 million-$8 million. The systematic cross-checking of state and third-party health coverage data, which access to electronic files makes possible, improves states' ability to identify beneficiaries with third-party health coverage. Officials in two states commented, for example, that data-matching agreements would enhance their discovery of private health coverage or would greatly improve their billing capabilities. Officials in five states reported that third parties would not participate in data-matching agreements or that electronic coverage files were not made available to the states. The potential losses to Medicaid because of lack of verification information, both electronic and other, may be sizable. Officials from the private consulting firm we contacted estimated that its recoveries from a major pharmacy benefit manager increased by more than 200 percent after the pharmacy benefit manager shared coverage information with the consulting firm. Given such an increase from this one-time sharing of information, the consulting firm estimated that recoveries from the four largest pharmacy benefit managers could potentially rise by more than $300 million a year if such information sharing occurred regularly. If a state has not established the existence of third-party coverage at the time a claim is submitted, it must pay the claim and collect its payment from the liable party later, after that coverage has been verified. Officials in 35 of the 39 reporting states listed problems with such "pay-and-chase" scenarios among their top three problems faced in ensuring that Medicaid is the last payer. We summarize these problems in five categories: (1) time limits for filing claims, (2) restrictions imposed by managed care and health plans, (3) inconsistent claiming requirements imposed by third parties, (4) lack of response or cooperation from third parties, and (5) weak or problematic state or federal legislation. Although officials in most states were unable to estimate their losses due to problems associated with collecting payments from third parties, officials in 14 states estimated a total annual loss of $184 million-$196 million (see table 3). (The loss is stated as a range because some states estimated their losses as a range rather than as a single dollar figure.) Problems with time limits for filing claims. Officials in 15 states reported problems related to timely filing of claims; officials in 10 states were able to estimate their annual losses in this category, for a total of $76 million-$77 million. State officials reported that some third parties and their contractors have established specific time limits for filing claims. That is, a third party or its contractor might process a claim only if it is filed within a certain time period after services are provided--such as within 60 or 90 days from the date of service. If a state does not submit its claim for services provided to a Medicaid beneficiary within the specified time, some third parties deny payment of the claim. According to state officials, time limits--such as 60 or 90 days from the date of service--pose a particular problem because of how long it can take to verify Medicaid beneficiaries' private health coverage. An official in 1 state, for example, estimated that in 1 year (November 2004 through October 2005), third- parties rejected more than $32 million in claims from the state because the state did not submit the claims within the third-parties' established time frames. Problems with restrictions imposed by managed care and health plans. Officials in 17 states reported problems imposed by managed care and health plan restrictions; officials in 10 of these states were able to estimate their annual losses in this category, for a total of $74 million. State officials reported a range of issues relating to restrictions the plans imposed as to when services are covered or to whom reimbursements for claims can be made. For example, officials in 9 states reported that some third parties or their contractors would not reimburse the state for services provided to covered Medicaid beneficiaries if the Medicaid beneficiaries did not follow requirements established in the third parties' managed care plans, such as obtaining prior authorization for services. One state official estimated an annual loss to the state's Medicaid program of more than $11 million per year because of managed care plans' requirements that the Medicaid beneficiaries also covered under the managed care plan obtain preauthorization for services; if such authorization was not obtained by the beneficiary, the managed care plans would not reimburse the state Medicaid program. Another type of restriction that states reported related to requirements for whom the health plan would reimburse. For example, officials in 2 states reported problems with health plans whose coverage provisions did not allow them to pay state Medicaid programs directly but instead required that payments be made to the Medicaid beneficiaries themselves. An official in 1 state remarked that it was labor intensive and often impossible to recoup such payments from beneficiaries. Problems with inconsistent claims requirements among third parties and limited state capacity to bill electronically. Officials in 13 states reported problems related to third parties' or their contractors' inconsistent requirements for claims or problems related to limits in the states' capacity to bill electronically; officials in 3 states were able to estimate their annual losses in this category, for a total of $13 million. Some third parties or their contractors, for example, required claims to be submitted electronically, while others could not accept electronic claims. Third parties or their contractors also rejected claims because they were not in a format acceptable to the third party or did not contain specific pieces of information. For example, an official in 1 state told us that third parties may require information on their claim forms that Medicaid does not require or collect, such as a unique provider number, and a state can have difficulty obtaining such information after the fact. The official in this state estimated a loss of $600,000 in a single year because of such problems. Administrative problems like these are compounded because states submit claims to many different third parties, each with their own formats and requirements. Problems with lack of response or cooperation from third parties or their contractors. Officials in 12 states reported problems related to third parties' lack of response to or cooperation with claims filed for payment; of these, 3 states were able to estimate their annual losses in this category, for a total of $4 million-$6 million. Some problems arose, for example, when third parties' contractors, such as pharmacy benefit managers, were not specifically authorized by the third parties to process or pay the claims on the third parties' behalf when the claims originated from state Medicaid programs. According to CMS, one problem involves Medicaid beneficiaries who have pharmacy coverage administered through a pharmacy benefit manager that has not been specifically authorized by its contracting health plan or insurer to process Medicaid claims from the state. If the beneficiary provides a pharmacist with information on his or her Medicaid coverage, rather than information on the pharmacy benefit manager, the pharmacist may receive payment from the state Medicaid program, which must then seek reimbursement for its payment from the pharmacy benefit manager ("pay and chase"). Often, the pharmacy benefit manager returns these claims unpaid to the state and suggests that the state bill the third party directly. This situation creates an administrative problem for the state, since beneficiaries' health plan cards generally identify only the pharmacy benefit manager and not the contracting insurer or health plan. An official in 1 state also commented that third parties created inappropriate denial reasons, such as the state's failure to submit a copy of a Medicaid beneficiary's health insurance card with the state's claim. Officials in 3 states reported that third parties would not respond to their claims. An official in another state observed that third parties can ignore claims submitted to them because no penalty or requirement exists for third parties to reimburse Medicaid. Weak or problematic state or federal legislation. Officials in seven states--responding to our information request before the 2006 enactment of the Deficit Reduction Act--reported that weak or problematic state or federal legislation hindered their efforts to ensure that Medicaid was the payer of last resort; officials in two of these states were able to estimate their annual losses in this category, for a total of $17 million-$26 million. Officials suggested the need for stronger state or federal legislation, which would require third parties to pay Medicaid claims, participate in electronic data matching of coverage information, or extend the time frames for states to file claims. One state official, for example, indicated that stronger legislation, with more comprehensive requirements that third parties doing business in the state reimburse the state, would be helpful. Two other state officials indicated that an existing provision in Medicaid legislation, which requires the states to pay claims under certain circumstances even when the state is aware of other coverage, was problematic. Specifically, this requirement--intended to prevent delays in care for pregnant women and for children--requires states to pay and chase when claims are for prenatal care and preventive pediatric services and when services are provided to a minor for whom the state is enforcing a child-support order against a noncustodial parent. The President's fiscal year 2007 budget included a legislative proposal to change this requirement. Under the proposal, states would be allowed to avoid costs, rather than pay and chase, for claims for prenatal and preventive pediatric services when a third party is responsible through a noncustodial parent's obligation to provide coverage, if the states ensure protection for providers and beneficiaries. Although in most cases--21 of 35 states that reported problems collecting from third parties or their contractors--state officials we contacted were unable to estimate the losses to Medicaid due to problems collecting from third parties, the total losses could be sizable. The private consulting firm that works with states reported collecting $60 million for states in 2005 by rebilling third parties for previously unprocessed claims. According to state officials and CMS, many states do not have the resources to follow up repeatedly on claims that have been rejected or otherwise unpaid and so potentially suffer annual losses in the millions of dollars. The Deficit Reduction Act addresses some of the problems reported by state officials. For example, the new law adds to the existing list of entities that may be considered third parties certain entities that were previously not specifically listed, including "self-insured plans"; "managed care organizations"; "pharmacy benefit managers"; and "other parties that are, by statute, contract, or agreement, legally responsible for payment of a claim for a health care item or service." In addition, the law requires states to have in effect laws requiring certain specified entities, as a condition of doing business in their state, to provide the state, upon request, with coverage and other data, including information on the nature of coverage and the periods of time during which individuals or their spouses or dependents were covered; accept the states' right of recovery for services and assignment of a Medicaid enrollee's right to payment by those entities or organizations; respond to inquiries by the state regarding a claim for payment submitted within 3 years after the date a service was provided; and agree not to deny a claim submitted by the state solely on the basis of the date of submission of the claim, the type or format of the claim form, or failure to provide proper documentation at the time of service, as long as the claim is submitted by the state within 3 years of the service date and the state enforces its rights with respect to the claim within 6 years of submitting it. Officials from some states and the private consulting firm that works with states told us that the act's requirements may help alleviate states' reported problems with verifying coverage information, time limits for filing claims, and certain third parties' lack of response or cooperation with claims submitted for payment--three of the problems most often reported by states responding to our questions. Losses due to these problems can be substantial: in response to our information request, 30 states estimated such losses at collectively more than $120 million annually. The private consulting firm reported that, after discussing with pharmacy benefit managers the new Deficit Reduction Act provision related to time limits for filing claims, the firm agreed to loosen its own time frames for filing, resulting in an estimated $2 million dollars in savings for outstanding claims. Because the Deficit Reduction Act requires states to have legislation in effect to implement the new provisions, it is too soon to assess the extent to which the act will address the problems that states reported to us. Further, we identified two issues that require resolution in order to aid states in complying with the act's requirements: First, the time frame by which states must have their laws in effect is uncertain because of an apparent inconsistency within the Deficit Reduction Act concerning the effective date of that provision. Specifically, the section of the law that determines the date by which states must have these laws in effect references a section of the law that does not exist. In June 2006, CMS officials said they had not determined how to interpret the apparently inconsistent language and whether legislation would be necessary to resolve it. Until this determination is made, states may be uncertain as to the date by which they must comply with this requirement of the Deficit Reduction Act. Some state legislatures, for example, may act upon new Medicaid requirements such as this one only upon notification of a specific implementation date. Second, there is also some disagreement in the industry as to whether the statutory provisions regarding the requirement to provide states with coverage and other information apply to certain entities. According to CMS and officials from the private consulting firm, some entities, such as certain pharmacy benefit managers and plan administrators, have indicated that the requirement that states have laws in effect to require reporting of coverage and related information does not apply to them. For example, private insurers and health plans may hire pharmacy benefit managers and plan administrators to process the claims--that is, to pay the claims on their behalf--and the pharmacy benefit managers and plan administrators may not view themselves as "legally responsible for payment of a claim for a health care item or service." Without cooperation from these contracted entities in sharing coverage information and in paying claims, states may continue to have many of the problems they reported. CMS officials said that they had met with trade associations representing pharmacy benefit managers and plan administrators to discuss and obtain input about these entities' responsibilities under the Deficit Reduction Act. With regard to both provisions, in June 2006, CMS officials said that they were determining how best to help states implement the new requirements. The agency was reviewing how to interpret the law to address both the effective date for the requirement to have state legislation in effect and which entities are covered by requirements to provide states with information on coverage and other matters. The effectiveness of the Deficit Reduction Act's third-party liability provisions in addressing the problems that states identified may depend on the guidance CMS issues and in what manner states carry out the new law's provisions. In an era of fiscal pressure on both federal and state budgets, it is important to ensure that Medicaid is administered as efficiently and effectively as possible. States have a key role in Medicaid's successful administration, including efforts to ensure, as Congress intended, that Medicaid does not pay for services when other sources of health care coverage are available. With an estimated 13 percent of Medicaid beneficiaries having private health coverage available to them, significant savings can accrue to both the federal government and the states when states are able to avoid costs and recover payments from liable third parties. We found, however, that states often encounter problems in identifying beneficiaries' private health coverage and in collecting payments from liable third parties. The Deficit Reduction Act includes provisions related to some of the states' concerns, and CMS could facilitate states' efforts to implement the act's requirements by providing guidance to states as to the time frame under which states must have their laws in effect and the types of entities to which the law applies. To resolve issues that are critical to the implementation of the Deficit Reduction Act's third-party provisions and to assist states in their efforts to ensure that Medicaid is the payer of last resort, we recommend that the Administrator of CMS take the following two actions: Determine and provide guidance to states with regard to the time frames by which states must have in effect laws that implement relevant third- party requirements of the Deficit Reduction Act. Determine and provide guidance to states with regard to the entities covered by the Deficit Reduction Act's requirements to provide states with coverage and other information. We provided a draft of this report to CMS for comment and received a written response from the agency (reproduced in app. II). The agency acknowledged that our report identified many of the challenges state Medicaid agencies face in attempting to ensure that Medicaid is the payer of last resort. CMS concurred with both recommendations and said that the agency planned to issue a decision with respect to the effective implementation date of, and the entities covered under, the Deficit Reduction Act. CMS also provided technical comments, including a comment that the report should clarify discussions regarding the provision of both coverage and eligibility data. We clarified our text to indicate that in this report we refer collectively to the process of determining the eligibility period and the services that are covered as "verifying health coverage." We made a corresponding clarification to our recommendation. Other technical comments were incorporated as appropriate. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issue 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 upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7118 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are acknowledged in appendix III. ppendix I: GAO's Analysis of the Current urvey Conducted by the U.S. To assess the extent to which Medicaid beneficiaries have private health coverage, we analyzed the Annual Social and Economic Supplement of the Current Population Survey (CPS), conducted by the U.S. Census Bureau for the Bureau of Labor Statistics. This appendix describes CPS, our analysis of CPS, and our results. CPS is designed to represent a cross section of the nation's civilian noninstitutionalized population. The sample provides estimates for the nation as a whole and serves as part of model-based estimates for individual states and other geographic areas. The supplement is designed to estimate family characteristics, including health coverage, during the previous year. In 2005, about 84,700 households were included in the sample for the Annual Social and Economic Supplement, with a total response rate of about 83 percent. In 2004 about 84,500 households were included with a total response rate of 84 percent. The totals for 2003 were approximately 81,000 and 85 percent, respectively. Each March, CPS gathers information about health coverage that respondents had at any time during the previous calendar year, including government health coverage such as Medicaid and private health coverage such as coverage provided through an employer or union (employment- based health coverage) and coverage directly purchased by the beneficiary (individual health coverage). CPS also asks for the number of months that beneficiaries had Medicaid coverage during that same year. Research has shown that health coverage is underreported in CPS for a variety of reasons; for example, many people may be unaware that a health insurance program covers them or their children if they have not recently used covered services. In addition, CPS underreports Medicaid coverage compared with enrollment and participation data from the Centers for Medicare & Medicaid Services. We analyzed data from the Annual Social and Economic Supplement to CPS from 2003 through 2005, which asked about health coverage during the prior year (2002 through 2004). To prepare official statistics from CPS on type of health insurance coverage, CPS identifies Medicaid beneficiaries by analyzing responses from multiple questions about whether the respondent had Medicaid at any time during the prior year. One of these questions has a related field allowing respondents to report the number of months that Medicaid coverage was provided. To identify individuals who had Medicaid and private health coverage concurrently in the same year, we focused our analysis on individuals who responded positively to the one Medicaid question and also reported having Medicaid coverage in all 12 months of the year. Specifically, we selected individuals who reported that they were covered by Medicaid for the entire prior year and determined the percentage of these Medicaid beneficiaries who reported that they also had employment-based health coverage or individual health coverage at some point in the prior year. To assess the reliability of the CPS data, we discussed with officials from the Census Bureau's Poverty and Health Statistics Branch the use of this definition of Medicaid beneficiaries, and we reviewed the Census Bureau's data quality-control procedures and related documentation. We determined that the data were sufficiently reliable for the purposes of this report. For additional information on Census efforts to ensure the reliability of CPS data--including adjustment for nonresponse, controls on nonsampling error, computing composite weights, estimation of variance, and derivation of independent population controls--see U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, U.S. Census Bureau, Current Population Survey: Design and Methodology, Technical Paper 63RV (Washington, D.C.: March 2002), http://www.bls.census.gov/cps/tp/tp63.htm (downloaded April 13, 2006). Updated survey information is available on the Web at http://www.bls.census.gov/cps. Because CPS is a probability-based sample, estimates derived from it are subject to sampling error: slightly different estimates can result from different samples. We expressed our confidence in the precision of the particular samples' results as 95 percent confidence intervals (i.e., plus or minus 4 percentage points). This confidence interval is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn. We used CPS's general variance methodology in the technical documentation to estimate this sampling error for our 3-year average, reported as confidence intervals. All CPS percentage estimates contained in this report have 95 percent confidence intervals within plus or minus 7 percentage points of the estimate itself. In addition to the contact mentioned above, Katherine M. Iritani, Assistant Director; Ellen W. Chu; Kevin Dietz; Kevin Milne; Jill M. Peterson; and Terry Saiki made key contributions to this report.
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Medicaid, jointly funded by the federal government and the states, finances health care for about 56 million low-income people at an estimated total cost of about $298 billion in fiscal year 2004. Congress intended Medicaid to be the payer of last resort: if Medicaid beneficiaries have another source of health care coverage--such as private health insurance or a health plan purchased individually or provided through an employer--that source, to the extent of its liability, should pay before Medicaid does. This concept is referred to as "third-party liability." When such coverage is used, savings accrue to the federal government and the states. Using data from the U.S. Census Bureau and the states, GAO examined (1) the extent to which Medicaid beneficiaries have private health coverage and (2) problems states face in ensuring that Medicaid is the payer of last resort, including the extent to which the Deficit Reduction Act of 2005 may help address these problems. On the basis of self-reported health coverage information from the Census Bureau's annual Current Population Surveys covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. This coverage most often was obtained through employment rather than purchased by individuals directly from an insurer: employment-based coverage averaged 11 percent nationwide, while individual coverage averaged 2 percent. Problems states have faced in ensuring that Medicaid is the payer of last resort fall into two general categories: verifying Medicaid beneficiaries' private health coverage and collecting payments from third parties. Officials from 27 of 39 states responding to GAO's request for information about the top three problems they faced reported problems in verifying beneficiaries' private health coverage--a key step states must take to avoid paying claims for which a third party is liable. In cases where states have paid claims before identifying that other coverage was available, states must seek payment for the claims they have already paid. Officials from 35 responding states had problems collecting such payments. Provisions in the Deficit Reduction Act of 2005 require states to have laws in effect that could help address some of the reported problems, but it is too soon to assess the extent to which the problems will be addressed. Further, GAO identified two issues that require resolution in order to aid states in complying with the Deficit Reduction Act's requirements, specifically, (1) the time frame by which states must have their laws in effect, and (2) which entities are subject to certain of the act's requirements. Regarding both issues, officials from the Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, said in June 2006 that they were considering how to interpret the law and how to best provide guidance to states to help them implement the requirements.
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The Bureau has less than two years until Census Day. To ensure a successful census, sound risk management will be crucial, particularly given its scope, magnitude, and immutable deadlines of the census. The size of the decennial operation means that small problems can magnify quickly, and big problems could be overwhelming. For example, 60 seconds might seem like an inconsequential amount of time, but in 2000, if enumerators had spent just 1 minute more at each household during nonresponse follow-up, almost $10 million would have been added to the cost of the census. Further, sound risk management is important to a successful census because many risks are interrelated, and a shortcoming in one operation could cause other operations to spiral downward. For instance, a low mail response rate would drive up the follow-up workload, which in turn would increase staffing needs and costs. Of course, the reverse is also true, where a success in one operation could positively affect downstream operations. Nevertheless, rigorous up-front planning and testing, as well as risk mitigation plans, are the best ways to stave off problems. Finally, the census is conducted against a backdrop of immutable deadlines; the census' elaborate chain of interrelated pre- and post-Census Day activities is predicated upon those dates. To meet legally mandated reporting requirements, including delivery of population counts to the President on December 31, 2010, census activities need to take place at specific times and in the proper sequence. On May 8, 2008 the Bureau issued its plans for conducting the 2010 Census paper-based nonresponse follow-up operation outlining key operational decisions. Among these is the need to develop an information system to manage the workload for a paper-based nonresponse follow-up operation and for additional field infrastructure, such as more telephones and computers to support this operation, to restructure the replacement mailing and the removal of late mail returns from the nonresponse follow- up workload, as well as the need for cognitive testing of the enumerator questionnaire used to collect data from nonrespondents. The contractor carrying out the FDCA program will develop the operations control system, which is designed to manage field operations that rely on paper as well as those that rely upon the handheld computers. The Bureau is particularly concerned about this system because when it was tested as part of earlier dress rehearsal operations--for example, during group quarters validation--it was found to be unreliable. As a result, the workload for these operations had to be supplemented with additional paper-based efforts by local census office staff, instead of electronically as intended. The operations control system is critical because it is intended to provide managers with essential real-time information such as enumerator productivity and the status of workload such as interviews conducted and remaining. Bureau officials said that the manual workaround was manageable for the dress rehearsal with just two local census offices; however, such a manual workaround would be nearly impossible to do when operations are carried out nationwide next year. Officials said that they expect to review computer screen shots of the operations control system reports it will use to manage the nonresponse follow-up operation in January 2009; however, the Bureau has not yet determined when and how testing of the operations control system before nonresponse follow-up, which begins in April 2010, will occur. The Bureau will be using newly developed systems for integrating responses and managing nonresponse follow-up workload that have not yet been fully tested in a census-like environment. The Bureau's contract for the Decennial Response Integration System, designed to help identify households that have not yet returned census forms and to collect the results from enumerators conducting nonresponse follow-up interviews, will process each mail return and enumerator questionnaire and transmit to the FDCA program the number of questionnaires received. In turn, FDCA will manage the nonresponse follow-up workload, in part by removing initial late mail returns from the list of housing units requiring follow-up visits. Consequently, depending on time and cost considerations, Bureau officials believe that the Bureau must conduct, at a minimum, a small scale simulation of the integration and communication between the Decennial Response Integration System and FDCA for such aspects as load testing for a paper-based operation, and interfaces such as when the paper is processed by the Decennial Response Integration System and when the check-in status is transmitted to individual local census offices through management reports processed by the FDCA program. When or how these tests will be completed is not clear. The Bureau's plans for nonresponse follow-up will also require changes in local census office infrastructure. The Bureau expects it will need additional hardware, including printing and scanning equipment, computers, and telephones. Further, the Bureau expects to scale the FDCA network to support a system for keying in large volumes of data related to hiring and payroll for over 700,000 field workers it plans to hire for the nonresponse follow-up operation. Previously, the Bureau expected to maintain field worker time reporting using the handheld computer. Also, the Bureau expected to hire fewer field workers. The Bureau's redesign has also changed the replacement mailing strategy which will be used in 2010. The replacement mailing is a second mailing sent to nonresponding households. Testing has shown that a second mailing increases the overall response rate and reduces costs by increasing the number of returns that come in by mail, decreasing the need for census field workers to collect census data in person. Prior to the redesign, the Bureau planned to send second mailings to all nonresponding households that initially received the census form in the mail. However these plans changed, in part because, according to the Bureau, without using handheld computers for nonresponse follow-up, it would not be able to dynamically remove late mail returns--including those resulting from the replacement mailing--from the enumerator assignments on a daily basis. The Bureau had to devise a way to balance the time available to print replacement questionnaires with the time available to remove late mail returns from the paper-based nonresponse follow-up workload. The Bureau now plans a multi-part approach. First, it will send approximately 25-30 million blanket replacement mailings to census tracts with low response rates, based on historical response rate data from 1990 and 2000 Census and the American Community Survey. As a result, all housing units in these selected census tracts would receive a second census form, regardless of whether or not they returned the initial form. Similarly, the Bureau plans to target a second mailing to an additional 15 million households in census tracts that are in the middle-range of mail response rates. Finally, the Bureau will not send a replacement mailing to households located in census tracts that previously had high mail response rates. This combination "blanket" and "targeted" mailing strategy is a new approach that will not be tested prior to the 2010 Census. If the replacement mailing does not function as planned, this strategy could confuse respondents in the blanket mailing areas and result in multiple responses from the same household that return both forms. It is instructive to consider that the Bureau's previous experience with a blanket second "replacement" questionnaire sent to all housing units located in the 1998 dress rehearsal sites caused a significant number of households with multiple responses. As a result, the replacement mailing was dropped from the 2000 Census design because the Bureau was concerned that it would have been overwhelming to process multiple census responses during the actual census. Moreover, without the benefit of implementing nonresponse follow-up during the dress rehearsal, the Bureau will not know how well its new system for removal of late mail returns will work. While the Bureau encourages respondents to mail back their census forms quickly, some are not returned until the middle of April or later, after the nonresponse follow-up operation has begun. To reduce the cost of nonresponse follow- up and to minimize respondent burden, it is beneficial to the Bureau to remove these late mail returns from the nonresponse follow-up universe. Because nonresponse follow-up will be paper-based rather than conducted with handheld computers, the Bureau will remove late mail returns with the FDCA program prior to April 20 and manually thereafter; however, the recent Bureau plans provide only timelines for removing late mail returns and the Bureau has not yet finalized the workload estimates or how it will manage this work. Not having an opportunity to rehearse its strategy for removing late mail returns makes difficult any estimate of resulting workload. In addition, Bureau officials said that it will be important to conduct cognitive testing of the questionnaire used by enumerators for nonresponse follow-up. With the change from using handheld computers, a paper questionnaire will be used by census enumerators in the 2010 nonresponse follow-up when making personal visits to housing units to collect census data. When developing this questionnaire, the Bureau plans to draw upon its extensive research and testing of interviewer-conducted questionnaires developed for other censuses and surveys as well as lessons learned in Census 2000. According to its May 8, 2008 plans for conducting the paper-based nonresponse follow-up, the Bureau will conduct this cognitive and usability testing in early summer 2008 and the testing will address both respondent interactions and ease of use for the census enumerators. The Bureau expects the questionnaire will have space for up to six people as in Census 2000 and will link other household members to the address via a continuation form; include coverage questions; meet the Decennial Response Integration System data capture specifications; and collect data on the outcome of the enumeration. Not being able to test the paper-based nonresponse follow-up in the 2008 Dress Rehearsal introduces risk because the dress rehearsal will no longer be a dry-run of the decennial census. While the Bureau has carried out a paper-based follow-up operation in the past, there are now new procedures and system interfaces that, as a result of its exclusion from the dress rehearsal, will not be tested under census-like conditions. We discussed the nonresponse follow-up plan with Bureau officials and they acknowledge the importance of testing new and changed activities of nonresponse follow-up as well as system interfaces to reduce risk. However, because plans have changed for many aspects of the nonresponse follow-up operation, Bureau officials are uncertain about testing and are still trying to determine which activities and interfaces will be tested and when that testing will occur. It is important to note that the Bureau has taken some important initial steps to manage the replannning effort. For example, the Bureau has added temporary "action officers" to its 2010 governance structure. As of April 17, 2008, six action officers had been identified to achieve the six objectives in its Recovery Plan--nonresponse follow-up replan, reduce FDCA risk, improve communications, document decennial program testing, improve program management, and baseline an integrated schedule. Each action officer is assigned to one of the objectives. These action officers are intended to be catalysts, liaisons, and facilitators responsible for ensuring that the tasks and milestones for each objective are met. Also, the action officers meet with the Associate and Assistant Directors to facilitate quick decision-making and on a regular basis provide updates on the status of plans. Weekly, the Bureau's Director meets with the Department of Commerce's Deputy Secretary to discuss the status of the replan for the 2010 Census. The Bureau has also issued documents that describe actions it will take to identify and manage risk. The Bureau's 2010 Census Program Management Plan, issued May 5, 2008, contains information about the risk management process and notes that 24 program-level or high level-risks have been identified, were currently being validated, and that each of these 24 risks would have either mitigation or contingency plans associated with them. However, according to Bureau officials, these 24 risks were associated with an automated operation and the Bureau had not yet developed risks related to the paper-based nonresponse follow-up operation. We requested information on these 24 risks, and on June 4, 2008, the Bureau provided us with an updated program-level risk document. The update now includes 25 program-level risks and identifies several risks related to the redesign including late design changes and testing. However, the Bureau has not updated project-level risks--which are risks specific to an operation or system--for nonresponse follow-up since the change to paper was announced. Once the Bureau provides project-level risk documents, we will assess the Bureau's actions to identify, prioritize, and manage risk for the replanned nonresponse follow-up operation. The Bureau has taken steps to strengthen the FDCA program office leadership and expertise. The Bureau has recently assigned an experienced Bureau manager to manage the FDCA program office. According to the Bureau, the manager has extensive experience in directing major IT projects. The Bureau has also hired an outside IT expert, to provide advice and guidance to the FDCA program office. The Bureau has also implemented key activities to help improve management and transparency of contractor activities. Bureau officials have established a schedule for daily assessment meetings with contractor personnel; are conducting weekly status assessment and resolution meetings with the Deputy Director and Director; and are holding regular meetings with the Department of Commerce. The Bureau has obtained cost estimates for FDCA from both Harris and MITRE, based on the recent changes to the scope of the program. In particular, these cost estimates include the January 16, 2008 requirements and the decision for a paper-based nonresponse follow-up operation. Harris is estimating that the revised FDCA program will cost roughly $1.3 billion; however, this cost estimate is preliminary and expected to be further refined. At the direction of the Bureau, MITRE developed an independent government cost estimate in April 2008. MITRE's estimate is about $726 million, which is nearly $600 million less than the contractor's rough order of magnitude estimate. A comparison of the two estimates reveals significant differences in two areas: software development and common support. In particular, Harris is estimating that software development will be about $200 million greater than MITRE's independent estimate; and that common support will be about $300 million greater than MITRE's estimate. Software development ($200 million difference): MITRE officials noted that these differences could be attributed to different assumptions based on abnormal software development (such as starts and stops due to budget instability), labor rates used, amount of additional staff needed in order to maintain the schedule and to address quality and testing issues, as well as cost contingency reserves. Common support ($300 million difference): Although this program element contains the largest cost difference, MITRE officials noted that they could not identify the primary cost drivers that caused the gap. However, possible explanations could be cost contingency reserves that may have been built into the Harris estimate, labor rates used, unexpected high level of change management personnel resulting from budget and requirements changes, and other potential impacts on management resulting from program instability. Harris had originally planned to deliver the cost estimate by August 20, 2008. However, the Bureau requested that this estimate be delivered sooner and Harris recently agreed to deliver this cost estimate by July 15, 2008. The Bureau and contractor plan to reconcile and agree to a final estimate by August 15, 2008. We plan to analyze the independent cost estimate and the Harris final estimate for the program. As part of this analysis, we intend to evaluate the methodology, as well as underlying assumptions, used to develop each estimate. The Bureau needs to act swiftly to finalize the FDCA program's cost estimate and renegotiate the contract. In particular, it will need to have a final cost estimate from Harris in mid-July, and will need to reconcile this estimate with MITRE's independent estimate thoroughly and quickly to have a final cost estimate by August 15, 2008. Our body of work on the lessons learned on other major IT acquisitions, highlights the importance of establishing realistic cost estimates (through reconciliation of program and independent cost estimates), using fixed price contract techniques for low risk procurement areas, where appropriate, and establishing management reserve funds for unexpected costs. In moving forward, it is important that the Bureau exercise diligence in finalizing the contract terms to ensure that the FDCA program is conducted in a timely and efficient manner for the 2010 decennial. The Bureau designed its 2010 Census Integrated Schedule, dated May 22, 2008, to provide information on its schedule framework and activity-level design as well as to describe the program complexity and methods that the Bureau will use to manage the 44 interdependent operations, incorporating over 11,000 unique activities, to conduct the 2010 Census. The Bureau briefed committee staff and us on this final integrated schedule last week. Based on this briefing and our preliminary review of the schedule, we can offer some observations. The integrated schedule does identify activities that need to be accomplished for the decennial and the Bureau establishes milestones for completing tasks. However, the schedule does not link those activities with associated risks nor does it capture the cost of operations. We previously recommended to manage the 2010 Census and contain costs, the Bureau develop a comprehensive, integrated project plan for the 2010 Census that should include risk and mitigation plans, updated cost estimates, and detailed milestones that identify all significant relationships. We also observed that testing the handheld computer that will be used in the address canvassing operation--an activity we have previously identified as important in mitigating risks associated with use of new technology--overlapped with its deployment. Specifically, in describing the testing and integrating of handheld computers for the address canvassing operation, the schedule indicates that this activity will begin in December 2008 and be completed in late March 2009; however, the deployment of the handheld device for address canvassing will actually start in February 2009, before the completion of testing and integration. It would appear uncertain that the testing and integration milestones would permit modification to technology or operations prior to the onset of operations. Further, the Bureau's integrated schedule does not specifically define testing (e.g., system, integration, and end-to-end). Separately, the Bureau on June 6, 200 produced a testing plan for the address canvassing operation. On May 22, 2008, the Bureau also issued the 2010 Census Key Operational Milestone Schedule. This represents a higher level summary of key operations and is linked to the more exhaustive integrated schedule. The Bureau identified about 175 activities that it considers key and that are used by senior management to oversee the 2010 Census. However, there are several notable exceptions to this schedule of key operational milestones. For example, there is no key milestone for identification of program and project risks in light of the significant change in planned operations, nor for developing necessary mitigation or contingency plans. Including key milestones for risk identification and mitigation in its high- level schedule will enable the Bureau to stay focused on activities which can directly impact the quality or cost of the 2010 Census. Nor does the schedule include a milestone for when testing of key activities related to nonresponse follow-up will take place. This is despite the fact that this represents the single largest field operation and will not be part of a dress rehearsal. The Bureau does recognize that it could include in its high-level summary schedule a key milestone for nonresponse follow-up testing activities. Further testing schedules for address canvassing and the operations control system also do not appear as key milestones, though they do appear in the detailed integrated schedule. Including these critical activities as part of the list of key milestones could ensure greater management attention, as well as help in focus oversight. We are currently reviewing in greater detail the summary and integrated schedule of milestones and the recently revised program-level risk document provided on June 4, 2008. In summary, the Bureau has taken some important steps toward managing the changes it plans for conducting the 2010 Census. Yet much remains uncertain and in the absence of a full dress rehearsal, the risks to a successful decennial census are substantial. Risks are especially high for the 2010 Census nonresponse follow-up operation both because the Bureau will not reap the benefits of having a dress rehearsal for this key operation but also because it is changing its approach late in the decade. These make even more compelling the need for the Bureau to specify what tests it plans to conduct in the absence of a dress rehearsal and when such testing will take place. The Bureau will also need to take several next steps to finalize the FDCA program's cost estimate. In particular, it will need to have a final cost estimate from Harris, as soon as possible, in order to have a sufficient amount of time to complete modifications to the contract by the end of the fiscal year. Our body of work on the lessons learned on other major IT acquisitions, highlights the importance of establishing realistic cost estimates (through reconciliation of program and independent cost estimates), using fixed price contract techniques for low risk procurement areas, such as hardware, and establishing management reserve funds for unexpected costs. In moving forward, it is important that the Bureau exercise diligence in finalizing the contract terms to ensure that the FDCA program can be conducted in a timely and efficient manner. Finally, the Bureau has developed a detailed integrated schedule of activities that need to be conducted during the 2010 Census and established milestones for completing them. It will be important for the Bureau to ensure that among the key milestones and activities that are highlighted for management and oversight are those that represent the greatest impact on the ultimate cost and quality of the 2010 Census. Mr. Chairmen and members of the committee and subcommittee, this concludes our statement. We would be happy to respond to any questions that you or members of the subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact Mathew J. Scire at (202) 512-6806 or David A. Powner at (202) 512- 9286 or by email at [email protected] or [email protected]. Other key contributors to this testimony include Carol Cha, Betty Clark, Vijay D'Souza, Sarah Farkas, Richard Hung, Andrea Levine, Catherine Myrick, Lisa Pearson, Cynthia Scott, and Niti Tandon. 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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On April 3, 2008, the Secretary of Commerce announced significant changes to how the Census Bureau (Bureau) would conduct nonresponse follow-up, its largest field operation, in which census workers interview households that do not return initial census forms for the 2010 decennial census, and to its Field Data Collection Automation (FDCA) contract. The Bureau has since issued a redesigned plan to conduct a paper-based follow-up operation, an integrated 2010 Census project schedule, and is working on revising the FDCA contract. These are major changes late in the decennial census cycle. This testimony discusses (1) the Bureau's plans for conducting a paper-based nonresponse follow-up operation, (2) management of the FDCA contract and its latest cost estimates, and (3) the status of the Bureau's integrated 2010 project schedule. This testimony is based on past work, recent interviews with Bureau officials, and a review of redesign documents. The Bureau has taken important steps to plan for a paper-based nonresponse follow-up operation, but several aspects remain uncertain. On May 8, 2008, the Bureau issued a paper-based nonresponse follow-up plan that details key components of the operation and describes processes for managing it and other operations. However, the plan envisions using an information system to manage the field operation workload, which experienced significant problems when tested earlier in the dress rehearsal. These problems make it more critical to test the system's capabilities for supporting the nonresponse follow-up operation. The Bureau will also institute new strategies--through second mailings and a new approach to remove late mail returns--but has only tested some aspects of these operations and will be unable to test them in a dress rehearsal, making it difficult to estimate their impact on operations in 2010. Ideally, the dress rehearsal should test almost all of the operations and procedures planned for the decennial under as close to census-like conditions as possible. Bureau officials expect that some small-scale testing will occur, particularly integration testing for its operations control system and cognitive testing of the forms used by enumerators for nonresponse follow-up, but what will be tested and when is not yet certain. The Bureau has taken several positive steps to address FDCA program management and oversight, but cost estimates need reconciling. The Bureau has taken actions to strengthen the FDCA program office leadership and expertise. To lead the program office, the Bureau has assigned an experienced Census program manager and hired an outside information technology expert to provide executive level guidance. The Bureau has also taken actions to improve communications and transparency of contractor activities. Further, the Bureau has obtained an independent government cost estimate based on the changes to the FDCA program's scope, which is nearly $600 million less than the contractor's rough order of magnitude estimate. After the contractor develops its detailed cost estimate, then the Bureau will need to reconcile the two cost estimates and renegotiate the contract. The Bureau will need to ensure that the final contract modifications and terms allow for FDCA program activities to be conducted in a timely and accurate manner for the 2010 decennial census. The Bureau's integrated schedule, dated May 22, 2008, identifies over 11,000 activities and milestones for the census. There is overlap in the testing and deployment schedule for the handheld device that will be used to collect address data in the field. Further, the Bureau's summary of key milestones does not include a milestone for when testing of key activities related to nonresponse follow-up will take place. Such milestones are important because nonresponse follow-up is the single largest field operation and will not be part of a dress rehearsal. The Bureau recognizes that it could include a key milestone for nonresponse follow-up testing activities. GAO is reviewing in greater detail the summary and integrated schedule of milestones and a summary of program risks provided on June 4th.
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Historically, the U.S. government has granted federal recognition through treaties, congressional acts, or administrative decisions within the executive branch--principally by the Department of the Interior. In a 1977 report to the Congress, the American Indian Policy Review Commission criticized the department's tribal recognition policy. Specifically, the report stated that the department's criteria for assessing whether a group should be recognized as a tribe were not clear and concluded that a large part of the department's policy depended on which official responded to the group's inquiries. Nevertheless, until the 1960s, the limited number of requests for federal recognition gave the department the flexibility to assess a group's status on a case-by-case basis without formal guidelines. However, in response to an increase in the number of requests for federal recognition, the department determined that it needed a uniform and objective approach to evaluate these requests. In 1978, it established a regulatory process for recognizing tribes whose relationship with the United States had either lapsed or never been established--although tribes may also seek recognition through other avenues, such as legislation or Department of the Interior administrative decisions, which are unconnected to the regulatory process. In addition, not all tribes are eligible for the regulatory process. For example, tribes whose political relationship with the United States has been terminated by the Congress, or tribes whose members are officially part of an already recognized tribe, are ineligible to be recognized through the regulatory process and must seek recognition through other avenues. The 1978 regulations lay out seven criteria that a group must meet before it can become a federally recognized tribe. Essentially, these criteria require the petitioner to show that it is descended from a historic tribe and is a distinct community that has continuously existed as a political entity since a time when the federal government broadly acknowledged a political relationship with all Indian tribes. The burden of proof is on petitioners to provide documentation to satisfy the seven criteria. The technical staff within Interior's Office of Federal Acknowledgment, consisting of historians, anthropologists, and genealogists, reviews the submitted documentation and makes recommendations on a proposed finding either for or against recognition. Staff recommendations are subject to review by Interior's Office of the Solicitor and senior officials within the Office of the Assistant Secretary for Indian Affairs. The Assistant Secretary for Indian Affairs makes the final decision regarding the proposed finding, which is then published in the Federal Register, and a period of public comment, document submission, and response is allowed. The technical staff reviews the comments, documentation, and responses and makes recommendations on a final determination that are subject to the same levels of review as a proposed finding. The process culminates in a final determination by the Assistant Secretary who, depending on the nature of further evidence submitted, may or may not rule the same way as the proposed finding. Petitioners and others may file requests for reconsideration with the Interior Board of Indian Appeals. Congressional policymakers have struggled with the tribal recognition issue for decades. Since 1977, 28 bills have been introduced to add a statutory framework for the tribal recognition process (see table 1). Of the House bills, only H.R. 4462 from the 103rd Congress was passed by the full House (on October 3, 1994). None of the Senate bills have been passed by the full Senate. Additional bills have also been introduced to recognize specific tribes; provide grants to local communities or Indian groups involved in the tribal recognition process; or, more recently, address the timeliness of the recognition process. For example, H.R. 4933 and H.R. 5134, introduced in the 108th Congress, and H.R. 512, which was introduced last week, have focused on the timeliness of the recognition process. BIA's regulations outline a process for active consideration of a completed petition that should take about 2 years. However, because of limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, we reported in 2001 that the length of time needed to rule on tribal petitions for federal recognition was substantial. At that time, the workload of the BIA staff assigned to evaluate recognition decisions had increased while resources had declined. There was a large influx of completed petitions ready to be reviewed in the mid- 1990s. The chief of the branch responsible for evaluating petitions told us that based solely on the historic rate at which BIA had issued final determinations, it could take 15 years to resolve all the completed petitions then awaiting active consideration. Compounding the backlog of petitions awaiting evaluation in 2001 was the increased burden of related administrative responsibilities that reduced the proportion of time available to BIA's technical staff to evaluate petitions. Although they could not provide precise data, members of the staff told us that this burden had increased substantially over the years and estimated that they spent up to 40 percent of their time fulfilling administrative responsibilities. In particular, there were substantial numbers of Freedom of Information Act (FOIA) requests related to petitions. Also, petitioners and third parties frequently filed requests for reconsideration of recognition decisions that needed to be reviewed by the Interior Board of Indian Appeals, requiring the staff to prepare the record and respond to issues referred to the Board. Finally, the regulatory process had been subject to an increasing number of lawsuits from dissatisfied parties--those petitioners who had completed the process and had been denied recognition, as well as by petitioners who were dissatisfied with the amount of time it was taking to process their petitions. Technical staff represented the vast majority of resources used by BIA to evaluate petitions and perform related administrative duties. Despite the increased workload faced by BIA's technical staff, the available staff resources to complete the workload had decreased. The number of BIA staff assigned to evaluate petitions peaked in 1993 at 17. However, from 1996 through 2000, the number of staff averaged less than 11, a decrease of more than 35 percent. While resources were not keeping pace with workload, the recognition process also lacked effective procedures for addressing the workload in a timely manner. Although the regulations established timelines for processing petitions that, if met, would result in a final decision in approximately 2 years, these timelines were routinely extended, either because of BIA resource constraints or at the request of petitioners and third parties (upon showing good cause). As a result, only 12 of the 32 petitions that BIA had finished reviewing by 2001 were completed within 2 years or less, and all but 2 of the 13 petitions under review in 2001 had already been under review for more than 2 years. While BIA could extend the timelines, it had no mechanism to balance the need for a thorough review of a petition with the need to complete the decision process. As a result, the decision process lacked effective timelines that would have created a sense of urgency to offset the desire to consider all information from all interested parties in the process. In fiscal year 2000, BIA dropped its long-term goal of reducing the number of petitions actively being considered from its annual performance plan because the addition of new petitions would have made this goal impossible to achieve. We also found that as third parties, such as local municipalities and other Indian tribes, became more active in the recognition process--for example, initiating inquiries and providing information--the procedures for responding to their increased interest had not kept pace. Third parties told us they wanted more detailed information earlier in the process so that they could fully understand a petition and effectively comment on its merits. However, in 2001 there were no procedures for regularly providing third parties more detailed information. For example, while third parties were allowed to comment on the merits of a petition before a proposed finding, there was no mechanism to provide any information to third parties before the proposed finding. As a result, third parties were making FOIA requests for information on petitions much earlier in the process and often more than once in an attempt to obtain the latest documentation submitted. Since BIA had no procedures for efficiently responding to FOIA requests, staff members hired as historians, genealogists, and anthropologists were pressed into service to copy the voluminous records of petitions to respond to FOIA requests. In light of these problems, we recommended in our November 2001 report that the Secretary of the Interior direct BIA to develop a strategy to improve the responsiveness of the process for federal recognition. Such a strategy was to include a systematic assessment of the resources available and needed that could lead to the development of a budget commensurate with the workload. The department generally agreed with this recommendation. In response to our report, Interior's Office of Federal Acknowledgment has hired additional staff and taken a number of other important steps to improve the responsiveness of the tribal recognition process. However, it still could take 4 or more years, at current staff levels, to work through the existing backlog of petitions currently under review, as well as those ready and waiting for consideration. In response to our report, two vacancies within Interior's Office of Federal Acknowledgment were filled, resulting in a professional staff of three research teams, each consisting of a cultural anthropologist, historian, and genealogist. In September 2002, the Assistant Secretary for Indian Affairs estimated that three research teams could issue three proposed findings and three final determinations per year and eliminate the backlog of petitions in approximately 6 years, or by September 2008. Through additional appropriations in fiscal years 2003 and 2004, the Office of Federal Acknowledgment was also able to utilize two sets of contractors to assist with the tribal recognition process. The first set of contractors included two FOIA specialists/record managers. The second set of contractors included three research assistants who worked with a computer database system scanning and indexing documents to help expedite the professional research staff evaluation of a petition. Both sets of contractors helped make the process more accessible to petitioners and interested parties, while increasing the productivity of the professional staff by freeing them of administrative duties. In addition, the September 2002 Strategic Plan, issued by the Assistant Secretary for Indian Affairs in response to our report, has been almost completely implemented by the Office of Federal Acknowledgment. Among other things, the Office of Federal Acknowledgment has developed a CD-ROM compilation of prior acknowledgment decisions and related documents that is a valuable tool for petitions and practitioners involved in the tribal recognition process. The main impediment to completely implementing the Strategic Plan and to making all of the information that has been compiled more accessible to the public is the fact that BIA continues to be disconnected from the Internet because of ongoing computer security concerns involving Indian trust funds. Even though Interior's Office of Federal Acknowledgment has increased staff resources for processing petitions and taken other actions that we recommended, as of February 4, 2005, there were 7 petitions in active status and 12 petitions in ready and waiting for active consideration status. Eight of the 12 petitions have been waiting for 7 years or more, while the 4 other petitions have been ready and waiting for active consideration since 2003. In conclusion, although Interior's recognition process is only one way by which groups can receive federal recognition, it is the only avenue to federal recognition that has established criteria and a public process for determining whether groups meet the criteria. However, in the past, limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties resulted in substantial wait times for Indian groups seeking federal recognition. While Interior's Office of Federal Acknowledgment has taken a number of actions during the past 3 years to improve the timeliness of the process, it will still take years to work through the existing backlog of tribal recognition petitions. 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, please contact Robin M. Nazzaro on (202) 512- 3841. Individuals making key contributions to this testimony and the report on which it was based are Charles Egan, Mark Gaffigan, and Jeffery Malcolm. 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 Bureau of Indian Affairs' (BIA) regulatory process for recognizing tribes was established in 1978. The process requires groups that are petitioning for recognition to submit evidence that they meet certain criteria--basically that the petitioner has continuously existed as an Indian tribe since historic times. Critics of the process claim that it produces inconsistent decisions and takes too long. Congressional policymakers have struggled with the tribal recognition issue for over 27 years. H.R. 4933 and H.R. 5134, introduced in the 108th Congress, and H.R. 512, which was introduced last week, have focused on the timeliness of the recognition process. This testimony is based in part on GAO's report, Indian Issues: Improvements Needed in Tribal Recognition Process ( GAO-02-49 , November 2, 2001). Specifically, this testimony addresses (1) the timeliness of the recognition process as GAO reported in November 2001 and (2) the actions the Department of the Interior's Office of Federal Acknowledgment has taken since 2001 to improve the timeliness of the recognition process. In November 2001, GAO reported that BIA's tribal recognition process was ill equipped to provide timely responses to tribal petitions for federal recognition. BIA's regulations outline a process for evaluating a petition that was designed to take about 2 years. However, the process was being hampered by limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, such as local municipalities and other Indian tribes. As a result, there were a growing number of completed petitions waiting to be considered. In 2001, BIA officials estimated that it could take up to 15 years for all the completed petitions to be resolved. To correct these problems, we recommended that BIA develop a strategy that identified how to improve the responsiveness of the process for federal recognition. Such a strategy was to include a systematic assessment of the resources available and needed that could lead to the development of a budget commensurate with the workload. While Interior's Office of Federal Acknowledgment has taken a number of important steps to improve the responsiveness of the tribal recognition process, it still could take 4 or more years, at current staff levels, to work through the existing backlog of petitions currently under review, as well as those that are ready and waiting for consideration. In response to GAO's 2001 report, two vacancies within the Office of Federal Acknowledgment were filled, resulting in a professional staff of three research teams, each consisting of a cultural anthropologist, historian, and genealogist. In addition, the September 2002 Strategic Plan, issued by the Assistant Secretary for Indian Affairs in response to GAO's report, has been almost completely implemented by the Office of Federal Acknowledgment. The main impediment to completely implementing the Strategic Plan and to making all of the information that has been compiled more accessible to the public is the fact that BIA continues to be disconnected from the Internet because of ongoing computer security concerns involving Indian trust funds.
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The EIC is a refundable tax credit available to low-income working taxpayers. Congress established the EIC in 1975 to offset the impact of Social Security taxes on low-income families and to encourage low-income individuals with families to seek employment rather than welfare. EIC coverage and benefit amounts have expanded significantly since 1975. For example, provisions in the Omnibus Budget Reconciliation Act of 1993 (1) raised the maximum credit for families with two or more EIC-qualifying children to $2,528 for tax year 1994 and (2) made certain taxpayers without qualifying children eligible for the credit starting in tax year 1994. For tax year 1994, about 18.9 million taxpayers received about $20.8 billion in EIC benefits. Almost all of those benefits ($20.1 billion) went to families with EIC-qualifying children. Other families who qualify for the EIC may not be claiming it. In that regard, researchers have estimated that between 75 and 86 percent of all eligible families actually claimed the EIC in 1990. IRS data show high noncompliance rates associated with EIC claims. Some noncompliance involves mathematical errors and other obvious mistakes made by taxpayers or their representatives in preparing the returns. Staff in IRS' 10 service centers are to review each paper return when it is received to make sure it is accurate and complete (e.g., includes required supporting schedules) and, for returns claiming the EIC, contains basic eligibility information, such as the age of qualifying children. Information is then entered into computers. The computers check for math and qualifying errors, some of which could affect EIC eligibility or the size of the EIC claim. EIC claims have for years been the source of many errors identified during processing. In 1995, for example, IRS identified 1.6 million EIC-related errors involving about 8 percent of all returns with EIC claims. Of the 1.6 million errors, about 600,000 involved situations where the taxpayer claimed the EIC but was found not to qualify and about 1 million involved cases where the taxpayer erred in computing the EIC. Other noncompliance involves mistakes that can be detected only through an audit of the return. In the past, IRS measured this kind of noncompliance through its Taxpayer Compliance Measurement Program (TCMP). The last TCMP, involving audits of tax year 1988 returns, found that about 42 percent of EIC recipients were not entitled to some or all of the credit that they claimed--representing about 34 percent of the EIC dollars paid that year. However, these TCMP results may not represent current compliance levels because the EIC has changed substantially since 1988. For example, changes enacted in 1990 included a major redesign and simplification of the EIC eligibility rules that had accounted for many of the errors found in the 1988 TCMP. More recently, IRS sampled EIC returns filed electronically during a 2-week period in January 1994. Although the results can be generalized only to returns filed in that 2-week period, IRS' analysis of this limited EIC data showed that 39 percent of the returns involved overstated EIC claims that represented 26 percent of the dollars claimed. IRS conducted a broader, more statistically reliable study of EIC returns filed electronically and on paper in 1995. As of August 26, 1996, IRS had not released the results of that study. The most serious form of noncompliance involves deliberate attempts to defraud the government through, for example, phony refund claims. The Questionable Refund Program, established in the 1970s, is IRS' primary effort to identify fraudulent refund claims, including those involving the EIC. An IRS computer program analyzes all returns to identify those that are potentially fraudulent. Then, fraud detection teams in the 10 service centers perform more in-depth reviews and, if a return is considered fraudulent, attempt to stop any refund before it is issued. The number of returns identified by IRS as containing fraudulent refund claims and the total dollar amount of stopped refunds have increased significantly since 1990. From January 1 through December 31, 1995, the fraud detection teams had identified about 62,000 fraudulent returns and stopped about $83 million in refunds. About 72 percent of the returns had EIC claims. We do not know whether that large percentage reflects (1) the level of EIC-related fraud compared with other types of fraud, (2) IRS' emphasis on EIC-related fraud, or (3) the comparative ease of identifying EIC-related fraud versus other types of fraud. Over the past few years, more attention has been placed on determining whether the EIC is being paid to ineligible taxpayers. In 1995, IRS expanded its efforts to identify and stop incorrect refunds. Much of what IRS did involved verifying SSNs, with an emphasis on returns claiming the EIC. IRS was looking for SSNs that did not match the Social Security Administration's records or that had been used on another return filed that year, and returns that were missing one or more required SSNs. IRS warned taxpayers that their refunds could be delayed if they submitted a return with a missing or incorrect SSN. On the cover of the instructions accompanying Form 1040, for example, IRS warned taxpayers to check their SSNs and explained that "incorrect or missing SSNs for you, your spouse, or dependents may delay your refund." IRS also issued several public service announcements to alert taxpayers to the need for correct SSNs. Another important step IRS took in preparing for the 1995 filing season was to eliminate the direct deposit indicator. In conjunction with the electronic filing program, the private sector offers what is commonly referred to as a refund anticipation loan (RAL). These loans enable taxpayers, for a fee, to get their money more quickly than if they were to wait for IRS to issue their refunds. A taxpayer repays the loan by arranging to have the refund deposited directly to an account specified for repayment of the loan. Although RALs are contracts between the financial institution and the borrower, IRS facilitated the process in the past by providing the direct deposit indicator to the electronic return transmitter after the return was received, acknowledging that the taxpayer's direct deposit request would be honored. IRS would not honor a request if the taxpayer had a debt, such as unpaid child support or unpaid federal taxes, that would be offset against the taxpayer's refund. Because the opportunity to get money quickly through RALs was seen as encouraging electronic filing fraud and because a large number of EIC fraud schemes identified by IRS in the past involved RALs, IRS did not provide the direct deposit indicator in 1995. Our objective was to provide information on and our analysis of IRS' efforts to reduce EIC noncompliance in 1995. To achieve our objective, we reviewed studies on EIC noncompliance, reviewed IRS' initiatives and procedures for preventing and detecting EIC analyzed IRS data on the results of its efforts to reduce EIC noncompliance, interviewed IRS National Office officials responsible for various EIC compliance initiatives, and interviewed Cincinnati and Fresno Service Center officials responsible for EIC-related studies or investigations. IRS took several steps in 1995 to address a growing problem with refund fraud in general. In March 1996, we reported on those efforts. Unlike that report, this report focuses, to the extent possible, on IRS' efforts and results as they relate specifically to EIC noncompliance. As discussed later, our attempt to focus specifically on EIC-related results was limited by the nature of IRS' data. We relied on data provided in IRS' reports and did not verify the data. We did our work from January 1995 through June 1996 in accordance with generally accepted government auditing standards. You also asked us to determine the extent of EIC noncompliance. Although this letter contains some data on noncompliance, a critical piece of information needed to respond to that portion of your request--the results of IRS' study of EIC returns filed in 1995--was unavailable at the time we prepared this report. That study was designed to provide current and projectable data on the extent of EIC noncompliance. IRS said that it would provide a report on the results of this study after completing its analysis of the data. After we receive the report, we will analyze the results and issue a separate product. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On July 30, 1996, we met with the Assistant Commissioner for Criminal Investigations and other IRS officials, who provided us with oral comments. Those comments were generally reiterated and expanded upon in an August 12, 1996, letter from the Acting Chief Compliance Officer. IRS' comments are summarized and evaluated beginning on page 12 and the Acting Chief's letter is reprinted in the appendix. IRS took several steps in 1995 to combat a growing problem with refund fraud in general and, more specifically, EIC noncompliance. Most significantly, IRS (1) expanded the up-front controls in its Electronic Filing System, (2) placed increased emphasis on its efforts to verify SSNs on paper returns, and (3) held up the refunds on millions of EIC returns with valid SSNs to allow IRS time to check for duplicate SSN usage. IRS' efforts had some positive results (e.g., over $800 million in reduced refunds and additional tax assessments) but also had some problems (e.g., an inability to follow through on plans to check for duplicate SSNs) that limited their effectiveness. IRS' efforts and the publicity surrounding them also may have had a sizable deterrent effect. For example, they may have contributed to the receipt of many fewer EIC claims in 1995 than IRS had expected. For the past several years, IRS has included up-front controls (filters) in its Electronic Filing System to identify submissions that had data problems, such as missing or invalid SSNs or an SSN that had already been used on another return filed for the same tax year. If a problem was identified, IRS refused to accept the electronic submission until the problem was corrected. In 1994, IRS' electronic filters identified about 1 million SSN problems, about 600,000 of which involved the EIC. In 1995, IRS added more electronic filters to prevent multiple use of an SSN on a return or EIC schedule and identified 4.1 million SSN problems, of which about 1.3 million involved the EIC. Those EIC-related problems included instances where the SSN, name, and date of birth for an EIC-qualifying child did not match Social Security Administration records and instances where the SSN had been previously used on another return claiming an EIC-qualifying child. There is no way of knowing how many of those problems involved intentional noncompliance, as opposed to honest mistakes or IRS database problems. Also, IRS does not routinely track electronic filing rejections and thus does not know whether the problems were eventually resolved or whether the rejected returns were ever resubmitted (either electronically or on paper). However, evidence suggests that some taxpayers whose electronic submissions were rejected because of an SSN problem were able to avoid the problem by filing on paper. IRS reviewed 395 electronic submissions that were rejected because of duplicate SSNs and found that in 113 cases (29 percent) the taxpayers subsequently filed on paper, using the same problem SSNs, and received their refunds. The results of this test, which involved cases from two of the five IRS service centers that receive electronic returns, are not projectable to all electronic filers. IRS also set up controls to better identify noncompliance on paper returns. Starting in 1994, IRS identified certain returns that had missing or invalid SSNs for EIC-qualifying children and delayed refunds to give Examination staff in IRS' 10 service centers enough time to validate EIC eligibility. Those validation efforts in 1994 showed that about 300,000 of the EIC claimants were ineligible for some portion of the credit. IRS expanded its SSN validation efforts in 1995 to include dependents with a problem SSN and identified 3.3 million paper returns with 1 or more missing or invalid SSNs for EIC-qualifying children and/or dependents.About 3 million of those returns involved requests for refunds. Examination had enough resources to review only about 1 million of the questionable returns. In those 1 million cases, IRS sent notices to taxpayers telling them (1) that a problem had been identified with their returns; (2) what they had to do to resolve the problem; and (3) that their refund, if they had claimed one, was being delayed while IRS checked for noncompliance. For the other 2.3 million returns, all of which involved refunds, IRS delayed the refunds but did not refer the returns to Examination for follow-up. The taxpayers were told that their refunds were being delayed but were not told that IRS had identified a problem on their returns. IRS subsequently released the refunds after holding them for several weeks. Information on the results of Examination's review of the 1 million cases was not readily available from IRS. Although IRS routinely reports on the disposition of such reviews, the data are not reported in a way that aligns results with specific tax years. Instead, results are reported on the basis of the fiscal year a case is closed. Thus, data reported for fiscal year 1995 represented the results of all cases closed in 1995, no matter what the tax year. While that kind of reporting has value, it was not useful for assessing the results of IRS' expanded SSN-verification procedures in 1995 because the results of that year's cases were commingled with the results of prior years' cases. To determine the results of IRS' fiscal year 1995 efforts, we requested a special breakdown of Examination's case closure data that aligned results by tax year. We analyzed the data and provided a copy to IRS' Office of Refund Fraud. We concluded, and officials of the Office of Refund Fraud agreed, that tax year results are helpful in assessing program initiatives. According to IRS officials, these data could be provided on a regular basis at minimal cost. Our analysis of the special breakdown of Examination's case closure data showed that 986,000 of the 1 million tax year 1994 cases had been closed as of June 30, 1996. Of the closed cases, 500,000 (51 percent) were closed with no change to the reported tax liability or refund because the taxpayers were able to prove that they were entitled to claim the dependent or the EIC. The other 486,000 cases were closed with changes (either in reduced refunds or additional taxes assessed) amounting to about $808 million. Even with our special breakdown, we do not know how much of this money related to EIC claims because IRS' data did not distinguish between cases involving dependents and those involving EIC-qualifying children. According to data reported in IRS' Data Book for fiscal years 1993 and 1994 (the most recent reported data), the 51-percent no-change rate for cases with missing or invalid SSNs for EIC-qualifying children or dependents was more than double the 24 percent no-change rate for all service center audits done in fiscal year 1994. The high no-change rate can be attributed to IRS procedures that, according to IRS' Internal Audit Division, did not adequately ensure selection of the most productive cases and thus resulted in an inefficient use of Examination resources and an undue burden on thousands of taxpayers. IRS changed its procedures for 1996 in an attempt to target its resources on the most egregious cases and minimize the burden on taxpayers. Because IRS studies have shown a high risk of noncompliance with returns claiming the EIC, IRS decided to delay about 4 million EIC refunds in 1995 even though IRS had identified no missing or invalid SSNs on those returns.The 4 million returns included returns filed electronically and on paper with EIC claims above a certain dollar amount. IRS stated that one of its goals in doing so was to allow additional time to identify any returns that might be filed later using one or more of the same SSNs as the delayed returns, with the expectation that Examination staff would research the duplicate SSN usage and stop inappropriate refunds. IRS was not able to realize this potential because it did not have enough resources to research many questionable cases. After holding the refunds for several weeks, IRS released almost all of them without checking for duplicate SSNs. For the 1996 filing season, IRS revised its procedures so as not to delay refunds on returns with valid SSNs. An April 1996 report by IRS' Internal Audit Division provided some indication of the level of noncompliance associated with the duplicate use of SSNs on EIC claims. In that report, Internal Audit estimated that the number of duplicate SSN occurrences on returns filed in 1995 ranged from 233,000 to 449,000 and that the revenue impact ranged from $283 million to $545 million. IRS' efforts to better control EIC noncompliance in 1995 and the publicity surrounding them may have had a significant deterrent effect. The number of EIC claims filed by persons with qualifying children had increased steadily over the past 10 years. For 1995, IRS' Research Division had estimated that the number of such claims would increase by about 2.2 million. IRS data showed, instead, that persons with qualifying children made about 100,000 fewer EIC claims in 1995 than in 1994. In that regard, the Congressional Budget Office, in its August 1995 Economic and Budget Outlook update, decreased anticipated EIC outlays by $2 billion to $3 billion a year. In doing so, it stated that EIC spending "has been lower than expected this year, possibly as a result of a recent crackdown by the Internal Revenue Service on fraudulent claims." According to the Director of IRS' Office of Refund Fraud, another indication of the deterrent effect of IRS' efforts in 1995 was the drop in identified fraud by IRS' fraud detection teams. In calendar year 1995, the detection teams identified $132 million in fraudulent refunds on 62,309 returns compared with $161 million on 77,781 returns in 1994. Likewise, about 73 percent of the fraudulent returns identified in 1995 involved EIC claims, down from 91 percent in 1994. Although the numbers went down, there is no way of knowing, from available data, whether the decrease reflects a decline in the incidence of fraud or just a decrease in the amount of fraud identified by IRS. For example, elimination of the direct deposit indicator, which the Director said was one of the most effective actions taken by IRS for 1995, may have contributed to a decrease in fraud. But such a direct cause and effect relationship is difficult, if not impossible, to prove. EIC noncompliance has been an ongoing concern of Congress and IRS. To meet the challenge, IRS expanded its controls in 1995 to better prevent taxpayers from receiving EIC benefits to which they were not entitled. A successful compliance program requires that IRS effectively balance taxpayer burden against the program's revenue protection benefits. In implementing its fiscal year 1995 controls, however, IRS delayed significantly more EIC refunds than it was able to review and did not select the most productive cases to review. While we agree that IRS needs to delay EIC refunds in order to follow up with taxpayers on questionable claims, we believe that IRS would have achieved better results if it had better targeted its efforts to those cases most in need of review. For the 1996 filing season, IRS decided to delay only those cases that it had the time and resources to review and revised its procedures in an attempt to select the most egregious cases to review. Although IRS data indicated that its controls for 1995 identified and prevented some noncompliance, including that associated with the EIC, IRS did not compile data in such a manner as to allow for a meaningful analysis of those controls. The results of IRS' SSN validation efforts on paper returns were reported in a way that (1) did not distinguish between dependent claims and EIC claims and (2) commingled the results of IRS' efforts in 1995 with the results of efforts in prior years. The ultimate impact of the up-front filters in the Electronic Filing System is unknown because IRS does not track the resolution of problems identified by the filters. If IRS does not have adequate data to assess its efforts, it is less likely to make informed decisions about continuing, expanding, or revising those efforts. Some of the data discussed in this report, such as the disaggregation of Examination results by tax year, would seem inexpensive to compile. Other data, such as the tracking of electronic rejections, might be more costly. Only IRS knows what such efforts would cost and whether compilation of the data is feasible given the cost and the level of effort IRS expects to devote to EIC noncompliance in the future. We recommend that IRS consider cost-effective ways to compile the kind of data needed to better assess the effectiveness and direction of its efforts to combat EIC noncompliance. In doing so, IRS should consider (1) routinely reporting data, by tax year, on the results of Examination efforts to validate eligibility for benefits; (2) tracking what happens to returns rejected by the Electronic Filing System; and (3) distinguishing the results relating to EIC-qualifying children from the results relating to dependents. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On July 30, 1996, we met with the Assistant Commissioner for Criminal Investigations and other IRS officials, who provided us with oral comments. Those comments were generally reiterated and expanded upon in an August 12, 1996, letter from the Acting Chief Compliance Officer (see app.). In response to our suggestion that IRS consider reporting Examination's results by tax year, IRS agreed that such information is important in assessing program effectiveness and said that it is available when needed by querying an automated management information system. Our report acknowledges that such information exists. However, it is important not only to have the information available but also to use it. As we pointed out earlier, IRS was not using tax-year specific data to assess program results until we specifically asked for it. To clarify our intent, as discussed with IRS officials at our July 30 meeting, we reworded our recommendation to say that IRS should consider routinely "reporting" data by tax year. IRS also said that while it seems reasonable to track what happens to returns rejected by the Electronic Filing System, certain legal ramifications have to be explored first. Those ramifications center on the question of whether any files of rejected electronically filed returns that IRS might have to compile for tracking purposes would constitute a system of records under the Freedom of Information Act. The officials said that the legal issues had been referred to IRS' Office of Chief Counsel. We agree that any possible legal issues should be resolved before designing and implementing a system to track rejected returns. With respect to our suggestion that IRS consider distinguishing the results relating to EIC-qualifying children from the results relating to dependents, IRS said that it wanted to defer any decision while two pieces of legislation, that would have a bearing on how IRS handles missing/invalid SSN conditions in the future, were pending. According to IRS, the new procedures called for in the legislation would not automatically provide the sort of data we envisioned and that complicated systems programming would be required to capture the data systemically. IRS said that until its fiscal year 1997 appropriation is approved, it is unable to determine if resources will be available to make the programming changes. We agree with IRS' position. We are sending copies of this report to the Ranking Minority Member of the Senate Finance Committee, the Chairman and Ranking Minority Member of the House Committee on Ways and Means, various other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Director of the Office of Management and Budget, and other interested parties. Copies will be made available to others upon request. If you have any questions, please contact me on (202) 512-5594. Major contributors to this report were David J. Attianese, Assistant Director, and William H. Bricking, Evaluator-in-Charge. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) efforts to reduce Earned Income Credit (EIC) noncompliance in calendar year 1995. GAO found that: (1) the up-front controls used by IRS in its Electronic Filing System helped IRS reduce some EIC noncompliance and identify about 1.3 million social security number (SSN) problems on electronically filed tax returns in 1995; (2) IRS placed increased emphasis on validating SSN on paper returns, since it identified about 3.3 million returns with missing or invalid SSN for EIC-qualifying children; (3) although IRS identified 3.3 million returns with problems, IRS only had the resources to follow up on 1 million cases; (4) IRS delayed refunds on about 4 million EIC returns that did not have any SSN problems to check for the use of duplicate SSN, but released almost all of those refunds without checking for duplicate SSN; (5) IRS has taken steps to better utilize its resources in 1996, such as attempting to identify more productive cases and limiting the number of delayed refunds; and (6) the overall impact on IRS efforts to reduce EIC noncompliance cannot be assessed because IRS commingled 1995 data with data from previous years.
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A federal loan guarantee is a binding agreement between an agency and a lender. If a borrower defaults on a guaranteed loan, the lender is to be reimbursed by the agency for the balance of the guaranteed portion of the loan. The guaranteed portion of a loan may vary across federal loan guarantee programs. A loan guarantee gives lenders an incentive to make loans that, due to the perceived risk of default, they otherwise might not make without requiring, for example, higher interest rates or additional collateral. For each of their loan guarantee portfolios, agencies are required to estimate the long-term cost to the government, which is referred to as the credit subsidy cost. The credit subsidy cost for each loan guarantee is equal to the amount of the estimated losses or gains to the federal government over the life of the loan. As part of the agreement, lenders may be required to pay fees to the agency to offset administrative expenses and credit subsidy costs. Part of EDA's mission is to support economic development by promoting innovation, global competitiveness, and regional collaboration. In addition to developing the ITM program, EDA's activities include providing funding through a number of investment programs, as well as offering a variety of services that include technical assistance, postdisaster recovery assistance, trade adjustment support, strategic planning, and research and evaluation. EDA does not currently administer any loan guarantee programs besides the pending ITM program. In directing the establishment of the ITM program, COMPETES 2010 provided for three types of eligible projects--ones that reequip, expand, or establish a manufacturing facility in the United States to use an innovative technology or an innovative process in manufacture an innovative technology product or an integral component of such a product; or commercialize an innovative product, process, or idea that was developed by research funded in whole or in part by a grant from the federal government. As it has designed the ITM program, EDA has drafted the following definitions to help determine project eligibility: innovative--defined as representing a significant improvement in function, performance, reliability, or quality of a product or service in comparison to commercial technologies currently in use, and technological--defined as relying on the principles of one of the following sciences: engineering, physical sciences, computer sciences, or biological sciences. The ITM program will provide a guarantee for up to 80 percent of a loan, with a maximum loan size of $10 million, or up to $15 million in certain circumstances, according to EDA officials. Through fiscal year 2015, Congress has appropriated $19 million for the ITM program. Credit subsidy costs are based on the assumption that the government will only need to reimburse lenders for a percentage of the loan guarantees made. In this case, according to EDA estimates, the agency will need to reserve about 7 percent of the value of loans guaranteed to cover the cost of future defaults. The program may support a total of up to $70 million in guaranteed loans for each $5 million in appropriations. This $5 million can be used to support $70 million in guaranteed loans because costs to the government are only incurred when a borrower defaults on a loan. Although Commerce's EDA was given the task of implementing the ITM program, COMPETES 2010 stated that Commerce may use its NIST MEP centers to provide information about the ITM program and conduct outreach to potential borrowers. NIST MEP's goals are to enhance U.S. productivity and technological performance, as well as to strengthen the global competitiveness of manufacturing firms. Under the program, NIST partners with 60 nonfederal organizations called MEP centers, which are located in each of the 50 states and Puerto Rico. MEP centers provide services aimed at helping small and medium-sized U.S.-based firms grow and enhance their competitiveness. Since our 2013 report on the ITM program, EDA has made progress on implementing the program, but several key tasks remain to be completed before EDA can issue loan guarantees. EDA has made progress on a number of tasks. For example, to help develop the program, EDA hired a contractor--FI Consulting. With FI Consulting's assistance, EDA developed a credit subsidy model and drafted program regulations and forms, among other efforts. As of November 2015, key tasks remain in developing the program, and EDA officials expect they could begin issuing loan guarantees for the ITM program as early as July 2016. This was delayed from December 2015, EDA officials said, because of the complexity of building a loan guarantee program and promulgating regulations. EDA officials stated that the most significant of the remaining key tasks are finalizing the ITM program regulations, manuals, and forms. According to EDA's project plan, they expect to have program manuals and draft program regulations completed in March 2016; the regulations are to be sent to OMB for review and revised by EDA in June 2016. Other remaining key tasks include finalizing the requirements for the ITM program information technology support systems, which will be used for functions such as accounting and credit subsidy cost estimation, as well as developing marketing materials and conducting outreach. Table 1 shows the status of key tasks for the ITM program. EDA has coordinated with other federal agencies to learn from their experiences with loan guarantee programs, but as currently designed, EDA has not clearly differentiated the ITM program from other comparable programs that we identified. EDA officials said they reached out to officials from SBA, USDA, and DOE--agencies that have loan guarantee programs comparable to the ITM program--to learn from their experiences and identify practices that could be incorporated into the ITM program. In particular, EDA officials highlighted the information they learned about SBA's loan guarantee programs. Based on what they learned, EDA officials said they decided to largely model the ITM program after the 7(a) program. Specifically, EDA has adapted or plans to adapt SBA's application forms, loan performance data, staff position descriptions, regulations, and manuals to fit ITM program parameters and statutory requirements. EDA also hired contractor FI Consulting, which told us its consultants previously worked on the 7(a) program. In addition, EDA officials said they coordinated with USDA and DOE officials to gather information to help design the ITM program. Table 2 provides examples of practices suggested by other agencies with loan guarantee programs and how EDA plans to use those practices. EDA's coordination with other agencies has helped avoid duplication of the effort those agencies have already expended in designing loan guarantee programs. However, as currently designed, the ITM program does not clearly differentiate its potential applicants from those of the comparable federal loan guarantee programs we identified. SBA's 7(a) program, USDA's Business and Industry Loans program, USDA's Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance program, and DOE's Federal Loan Guarantees for Innovative Energy Technologies program already provide loan guarantees to a similar pool of borrowers as those eligible for the ITM program, with roughly equivalent limitations. Areas of overlap between these four programs and the ITM program include the following: Business size. As required by COMPETES 2010, small and medium- sized manufacturers are to be eligible for the ITM program. Those businesses are also eligible for three of the four comparable programs. One program, SBA 7(a), is available only to small businesses. Business type. EDA officials expect that the ITM program will be open to only manufacturers producing, using, or commercializing innovative technologies. All four comparable programs allow such manufacturers to participate, and two of the programs--the USDA Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance program and the DOE Loan Guarantees for Innovative Energy Technologies program--are intended to support specific types of innovative technologies. According to an EDA analysis of SBA 7(a) loan data, roughly 11 percent of the loans made under SBA's 7(a) program from October 1991 through March 2014 were to manufacturers in subsectors identified as innovative. USDA officials estimated that about 25 percent of the agency's Business and Industry program loan guarantees are issued to manufacturers. Maximum allowable loan amount. According to EDA officials, the ITM program will guarantee loans of up to $15 million. Three of the four comparable programs are able to guarantee loans of at least $15 million. Maximum guaranteed portion of loan. The maximum loan guarantee percentage allowed under the ITM program is 80 percent. Each of the four comparable programs also allows for a loan guarantee percentage of 80 percent, but the percentages can vary depending on loan amounts or total project costs. Permitted uses of funds. The ITM program, according to EDA officials and program documents, will allow funds to be used to purchase land, buildings, and equipment, just like the four comparable programs we examined, but permissible uses of funds vary somewhat across programs. All four of the other programs also allow funds to be used for working capital or startup costs, though the ITM program will not, according to EDA officials and program documents. Table 3 provides a more detailed comparison of the ITM program, as currently designed, and the SBA 7(a) program on which the ITM program is largely modelled. Appendix I provides a comparison of the ITM program to all four comparable programs we examined. EDA officials acknowledged that the ITM program is potentially duplicative with other federal loan guarantee programs in a number of respects. In addition, EDA officials said that it is possible that loan guarantees ultimately issued under the ITM program could be similar to those issued by another agency, such as SBA or USDA. However, as discussed, COMPETES 2010 directs the Secretary of Commerce to ensure, to the maximum extent practicable, that the activities carried out under the ITM program are coordinated with, and do not duplicate, the efforts of other federal loan guarantee programs. GAO's fragmentation, overlap, and duplication analysis guide states that one way to help minimize duplication among government programs is to identify and target service gaps that the programs could fill. Targeting can be accomplished by using program eligibility parameters and marketing and outreach to aim the program at more specific segments of a potentially eligible population in need of access to capital that might not be served or are underserved by other federal programs. While EDA officials coordinated with other agencies to design the ITM program, they did not work with agencies specifically to target service gaps--in this case, capital access gaps--because they have not yet developed a marketing and outreach strategy for the program. A 2011 study commissioned by MEP about the capital access needs of small and medium-sized manufacturers identified several capital access gaps resulting in potentially underserved populations for federal loan guarantees. Specifically, the report, which NIST provided to EDA, identified gaps in capital access based on several characteristics, for example, as follows: Size: The report specifically identifies gaps in the availability of capital for manufacturers with less than 200 employees, restricting their ability to grow and compete. In addition, MEP reported that there are 38 federal government programs that specifically target manufacturing, but many are not fully accessible to small manufacturers or do not target funds directly for small and medium- sized companies. The MEP report further identified a gap in small manufacturers' awareness of sources of capital. Growth stage: According to the MEP report, early-stage companies may experience larger gaps in capital access than businesses in advanced stages of growth, hindering their ability to fund activities such as product design and improvement. One reason early-stage companies may have a harder time obtaining funding is that lenders and investors see them as more risky. For example, early-stage companies may not be able to demonstrate financial strength by providing a consistent history of profitability. SBA officials stated that EDA did not specifically seek information from them on how to target the ITM program so as not to duplicate the efforts of SBA's loan guarantee programs. As a result, EDA has not taken full advantage of SBA officials' expertise regarding the types of small manufacturers that receive support through the 7(a) program and those that do not, to help identify potential capital access gaps. SBA officials said that they spend a significant amount of time trying to determine potential applicants not being served by their loan guarantee programs. Officials said they use internal SBA data and information gathered from industry representatives to inform discussions on the topic. SBA officials said that new and early-stage businesses are the most challenged in terms of capital access. EDA also coordinated with NIST on some aspects of the ITM program, but its coordination was not focused on targeting capital access gaps. According to a NIST official, EDA officials coordinated with NIST about relevant topics such as the optimal loan sizes and loan guarantee percentages to support small and medium-sized manufacturers. In addition, a NIST official said that he discussed how to define innovative technologies with EDA officials. EDA officials said they reviewed the MEP report in order to determine demand for the ITM program and inform its design. However, EDA did not specifically coordinate with NIST about how to help address the capital access gaps identified in the report, according to a NIST MEP official. EDA officials stated that they intend to work with NIST by using its MEP centers to conduct ITM program marketing and outreach to borrowers and manufacturers. However, according to a NIST MEP program official, as of November 2015, EDA had not worked with NIST to develop marketing materials or an outreach strategy, or discussed other ways to ensure that the ITM program addresses capital access gaps. As a result, EDA has not taken full advantage of NIST's and its MEP centers' expertise regarding the capital needs of small and medium-sized manufacturers. Coordinating more extensively on targeting marketing materials and outreach efforts to potential applicants in need of access to capital could give EDA greater assurance that ITM program loan guarantees will not duplicate the efforts of other federal loan guarantee programs. Technological innovation drives the development of new products and improved processes, allows the U.S. manufacturing sector to remain competitive in the global marketplace, and stimulates economic growth. COMPETES 2010 directed the establishment of the ITM program to help small and medium-sized manufacturers gain access to the capital they need for the use or production of innovative technologies. While EDA has taken a number of steps to implement the program, key tasks remain before loan guarantees can be issued, such as finalizing program regulations and developing marketing materials and outreach plans. EDA has coordinated with several agencies on program design, but coordination on targeting the program through, for example, developing marketing materials and a strategy to conduct outreach to potential applicants in need of access to capital has been limited. The result is that, as currently designed, the ITM program does not clearly differentiate its potential applicants from those already served by other federal loan guarantee programs. Working with SBA and NIST to examine how the ITM program could fill capital access gaps not filled by other federal programs, and then marketing the program to target those gaps could help EDA ensure, as COMPETES 2010 directs, that ITM program activities do not duplicate the efforts of other federal loan guarantee programs. To better ensure that the activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs, such as SBA's 7(a) program, the Secretary of Commerce should direct EDA to work with SBA and NIST to further identify any gaps in capital access that may be present that the program could fill, and then develop marketing materials and conduct outreach to help target those gaps. We provided a draft of this report for review and comment to the Secretaries of Agriculture, Commerce, and Energy; Director of the Office of Management and Budget; and Administrator of the Small Business Administration. In its written comments, reproduced in appendix II, Commerce concurred with our recommendation and said that EDA will work with SBA and NIST to further identify capital access gaps that can be filled by the ITM program. Commerce also noted that there can be no assurance that loan guarantees provided by the ITM program will never duplicate the efforts of other agencies' programs. However, our recommendation to work with SBA and NIST to identify capital access gaps and then target those gaps in marketing the program would better ensure that the activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs, not eliminate the possibility of duplication completely. In addition to Commerce's written comments, EDA provided technical comments, which we incorporated as appropriate. EDA also included a more general comment suggesting that GAO emphasize that EDA has taken significant steps to implement the program. In our report, we note that EDA has taken a number of steps to implement the program. However, as outlined in table 1, several key steps remain before EDA can provide loan guarantees. DOE and SBA also provided technical comments that we incorporated, as appropriate. USDA and OMB indicated they had no comments on the report. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, and Energy; the Director of the Office of Management and Budget; and the Administrator of the Small Business Administration. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to the report are listed in appendix III. Table 4 below shows how the Economic Development Administration's Innovative Technologies in Manufacturing loan guarantee program compares to the four comparable programs we examined. In addition to the individual named above, Chris Murray (Assistant Director), Natalie Block, Kevin Bray, Mark Braza, Marcia Carlsen, Emily Eischen, Ellen Fried, Cole Haase, Steve Komadina, Gerald Leverich, Cody Raysinger, and Jack Wang made key contributions to this report.
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To help small and medium-sized manufacturers obtain the capital they need to develop innovative technologies and remain competitive, COMPETES 2010 directed the Secretary of Commerce to establish the ITM program. When implemented, the program is to provide loan guarantees to small and medium-sized manufacturers for the use or production of innovative technologies. Under COMPETES 2010, Commerce must ensure that activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs. Commerce's EDA is responsible for implementing the program. COMPETES 2010 also included a provision for GAO to biennially review the program. This report assesses (1) the status of EDA's implementation of the ITM program and (2) the extent to which EDA has coordinated with other agencies to ensure that ITM program activities do not duplicate the efforts of other federal loan guarantee programs. GAO analyzed applicable laws and program documents, interviewed EDA officials and contractor staff, and interviewed officials from agencies with comparable loan guarantee programs or with other expertise about the needs of small and medium-sized manufacturers. The Department of Commerce's Economic Development Administration (EDA) has taken a number of steps to implement the Federal Loan Guarantees for Innovative Technologies in Manufacturing (ITM) program, but several key tasks remain before EDA can issue loan guarantees. EDA hired a contractor to assist with developing the program, drafted program documents and published them in the Federal Register for comment, and submitted documents to the Office of Management and Budget for review, as required when creating new federal credit programs. EDA officials said the most significant of the remaining key tasks are finalizing the ITM program regulations, manuals, and forms. Other key tasks remaining include hiring additional staff, finalizing the requirements for the program's information technology systems, developing marketing materials, and conducting outreach. As of November 2015, EDA officials expected they could begin issuing ITM program loan guarantees as early as July 2016. EDA has coordinated with other federal agencies to learn from their experiences with loan guarantee programs, but EDA has not clearly differentiated ITM from other programs, which may result in duplication. Coordination. EDA officials said they reached out to officials from the Departments of Energy and Agriculture, and the Small Business Administration (SBA)--agencies that have loan guarantee programs comparable to the ITM program--to learn from their experiences. EDA officials decided to largely model the ITM program after an SBA program that provides loan guarantees to small businesses, and they adapted or plan to adapt the SBA program's application forms, and regulations, among other things. EDA's coordination has helped avoid duplication of the effort those agencies have already expended in designing loan guarantee programs. Potential duplication. As currently designed, the ITM program is not clearly differentiated from SBA's program or from other programs that already provide loan guarantees to a similar pool of borrowers. EDA officials acknowledged that the ITM program is potentially duplicative with other programs in a number of respects. However, the America COMPETES Reauthorization Act of 2010 (COMPETES 2010) directs the Secretary of Commerce to ensure that the activities carried out under the ITM program are coordinated with, and do not duplicate the efforts of other federal loan guarantee programs. GAO's fragmentation, overlap, and duplication analysis guide states that one way to help minimize duplication among government programs is to identify and target service gaps that the programs could fill. In 2011, the National Institute of Standards and Technology (NIST) identified several gaps in capital access for small and medium-sized manufacturers, including gaps companies face in early stages of growth. However, in coordinating with SBA and NIST, EDA did not seek information on how the ITM program could target these capital access gaps to minimize duplication with other programs. Coordinating more extensively with SBA and NIST on targeting the ITM program could provide EDA with greater assurance that ITM loan guarantees will not duplicate the efforts of other federal loan guarantee programs. GAO recommends that EDA work with SBA and NIST to further identify any gaps in capital access that the program could fill, and conduct outreach to help target those gaps. Commerce agreed with GAO's recommendation.
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The federal government may consider a wide selection of contract types when purchasing products and services. One of those types is an IDIQ contract. An IDIQ contract provides flexibility in cases where the government cannot determine the exact quantities and required timing of a product or service. Under an IDIQ contract, the government must order, and the contractor must provide, a minimum agreed-upon quantity of products or services, also known as a minimum guarantee. In addition, the contractor must provide any other quantities ordered by the government up to a stated maximum. A contracting officer determines whether, for a specific solicitation, to award multiple IDIQ contracts or only one. The FAR establishes a preference for "multiple-award contracts." For purposes of this report, we describe these two approaches as "single-award IDIQ contracts" and "multiple-award IDIQ contracts." "Single-award IDIQ contracts" refers to situations when only one contract is awarded under a solicitation. These contracts may have been competed or may have been awarded on a non-competitive basis. If a contract is awarded without competition, it must follow certain procedures, for example, a justification and approval document must be prepared and approved. In addition, if a single- award IDIQ contract is expected to exceed a certain threshold--raised from $103 million to $112 million on October 1, 2015--a written determination by the head of an agency is required. Single-award IDIQs are used under certain circumstances, such as when only one contractor is capable of providing the products or services. "Multiple-award IDIQ contracts" refers to situations when contracts are awarded to two or more contractors under a single solicitation. These contracts allow agencies to establish a group of prequalified contractors to compete for future orders under streamlined ordering procedures once agencies determine their specific needs. Contracting officers must avoid situations in which contractors specialize in one or a few areas of the work, creating the likelihood that orders would be awarded noncompetitively. An order, which is placed when a concrete need arises, obligates funds and authorizes work. Orders must be within the scope, period of performance, and maximum value and or quantities agreed to in the contract. The ordering processes for a multiple-award IDIQ contract and single-award IDIQ contract differ somewhat. For orders under single award IDIQ contracts, once a requirement is known, contracting officials can place an order following the procedures outlined in the contract. When multiple-award IDIQ contracts have been awarded, and a need arises, the requirement must be generally competed, through "fair opportunity", among all of the IDIQ contract holders. The specific procedures required to provide fair opportunity differ based on the dollar value of the orders. Contracting officers must provide each contractor a fair opportunity to be considered for each order unless exceptions apply. Exceptions to fair opportunity requirements for orders are permitted in certain circumstances, such as when only one source is capable of providing the particular products or services sought. Beyond the requirement to meet a minimum guarantee, contractors can choose to submit offers or not. The FAR requires that before purchasing supplies and services, contracting officers must determine that the prices proposed by contractors are fair and reasonable. The FAR states that adequate price competition normally establishes a fair and reasonable price, but in some situations contracting officers may need to, or be required to, obtain other types of data to help establish pricing. Generally, the information that is used by contracting officers to determine the reasonableness of price depends on a series of circumstances, including whether the particular product or service procured is for a commercial or noncommercial item, and whether the requirement is being competed or awarded noncompetitively. The data examined could be cost data, such as the cost of materials, labor, and overhead, or pricing information, such as invoices for the same or similar items sold to commercial customers. When required, contracting officers must ask contractors for certified cost and pricing data. Once contracting officers obtain the data needed, there are several techniques they can use--singly or in combination--to determine price reasonableness, such as comparing proposed prices to historical prices paid, or comparing prices to an independent government cost estimate. About one-third of all federal government contract obligations from fiscal years 2011 through 2015 were through IDIQ contracts. Obligations on IDIQ contracts were more than $130 billion annually during these years, with DOD accounting for more than two-thirds of all IDIQ obligations. IDIQs were used more often for services than products across government agencies and most IDIQ contracts and orders were competed. While the FAR states a preference for multiple-award IDIQs, federal agencies obligated more dollars through single-award IDIQs than through multiple-award IDIQs. Most single-award IDIQ contracts were competed. DOD contracting officials cited various reasons for the wide use of IDIQ contracts, including flexibility and administrative ease. From fiscal years 2011 through 2015, the proportion of IDIQ obligations relative to total government contract obligations remained relatively constant, accounting for about a third of total obligations (see figure 1). Total IDIQ obligations ranged from about $180 billion in fiscal year 2011 to about $130 billion in fiscal year 2015. Overall, total contract obligations declined from fiscal year 2011 through 2015, and the changes in IDIQ obligations during this time frame were consistent with this decline. From fiscal years 2011 through 2015, DOD accounted for more than two- thirds of total IDIQ obligations annually, while all civilian agencies combined accounted for less than one-third (see figure 2). The three civilian agencies with the highest amounts of IDIQ obligations were the Departments of Homeland Security (DHS), Health and Human Services (HHS) and Veterans Affairs--(VA). From fiscal years 2011 through 2015, these agencies combined accounted for about 8 to 13 percent of government-wide IDIQ obligations each year. For example, in 2015, DHS, HHS, and VA each accounted for about 4 percent of IDIQ obligations, as shown in figure 3. From fiscal years 2011 through 2015 about two-thirds of government- wide IDIQ obligations were for services, while about one-third were for products. For example, in fiscal year 2015, government-wide IDIQ obligations for services accounted for about 70 percent of total IDIQ obligations. However, the proportion of IDIQ obligations on services versus products differed between DOD and civilian agencies--with IDIQ obligations on services accounting for 62 percent of total 2015 IDIQ obligations at DOD, but 85 percent at the civilian agencies. Figure 4 shows the annual breakdown of products and services by civilian agencies and DOD from fiscal years 2011 through 2015. While the FAR states a preference for multiple-award IDIQs, the majority of all government-wide IDIQ contract dollars were obligated through single-award IDIQ contracts from fiscal years 2011 through 2015. Specifically, across the government, approximately 60 percent of IDIQ obligations were awarded through single-award IDIQs and 40 percent through multiple-award IDIQs. Approximately eighty percent of all single- award IDIQ obligations were at DOD. See figure 5 for a breakdown of single- and multiple-award IDIQs by DOD and civilian agencies. From fiscal years 2011 through 2015, IDIQ contract and order obligations were generally competed. About 70 percent of all single-award contract obligations were competed from fiscal years 2011 through 2015, and that percentage was fairly consistent across DOD and civilian agencies, as shown in figure 6. For multiple-award IDIQ orders government-wide--more than 85 percent of all order obligations were competed from fiscal years 2011 through 2015. In each year, a higher percentage of order obligations were competed at DOD than at civilian agencies, as shown in figure 7. Based on FPDS-NG data, agencies identified a variety of exceptions to fair opportunity for multiple-award IDIQ orders, for example, that only one contractor was capable of providing the products or services required, a noncompetitive order was needed to satisfy a contract's minimum guarantee, or that there was an urgent need. Our review of DOD contracts revealed several reasons for the use of IDIQ contracts. Contracting officials noted it was easier and faster to place an order under an IDIQ contract than to solicit and award a separate contract each time a need arose. Price and technical approach can still be evaluated at the time of placing an order, but the overall turnaround time, they said, is significantly less than for a new contract. Contracting officials also stated that IDIQ contracts were easier to administer. First, they noted that it was more efficient to track funds and requirements for different customers through orders, rather than making modifications to stand- alone contracts for the same purpose. Second, officials told us that the close-out of orders from IDIQ contracts was much faster, as each order can be closed-out individually when the last payment is made rather than waiting until the entire contract was complete. According to DOD contracting officials, IDIQ contracts also provide more funding flexibility as funds are obligated as needed through orders and not at contract award--as may be required for some other types of contracts. Once the minimum guarantee is satisfied on an IDIQ contract, there is no further government obligation to procure additional products and services under an IDIQ contract. For example, on an Air Force IDIQ contract for roofing services, contracting officials established a pricing structure that allowed for repairs to different types of roofing. The Air Force placed an order only when a specific need arose. These needs may vary--such as when repairs are needed due to wear and tear. This contract allows work to be performed on an as needed basis, which may help the Air Force begin or continue work in an uncertain funding environment. In addition, DOD officials told us that the contracts they used served a broader customer base, for example, multiple commands, other federal agencies, and foreign military sales. By not needing to specify an exact quantity or timing of delivery at the time of contract award, program offices can accommodate unforeseen needs on an ongoing basis through issuance of orders. For example, an Army contract for Aerial Target Systems training and testing is intended for use by all military departments as well as foreign military partners. Since the need for testing and training varies depending on the customer, these requirements were less defined at contract award, and will be more clearly specified at the time of order. DOD can award IDIQ contracts on a competitive or noncompetitive basis. Ten of the 18 single-award IDIQ contracts we reviewed were not competed, generally because only one contractor could meet the need. The remaining single-award IDIQ contracts reviewed were competed. For these contracts, a single-award contract was used for a variety of reasons; for example, orders under the contract were to be for integrally related tasks and therefore there was a need to build knowledge with each order. Orders under multiple-award contracts also can be awarded on a competitive or noncompetitive basis. The orders we reviewed that were not competed cited a variety of reasons, such as that there was an urgent need, there was only one contractor capable of completing the work, or the order was a follow-on to other work. Some orders we reviewed were competed, but only one contract holder chose to submit an offer. In most cases, the competitive orders for which the government received one offer were either in compliance with DOD's policy that solicitations for competitive actions be open for at least 30 days, or the order met one of the exceptions to that policy. DOD awarded single-award IDIQ contracts--which are awarded to one contractor on a competitive or noncompetitive basis--for a variety of reasons. Of the 18 single-award IDIQ contracts we reviewed at DOD, we found that 10 contracts were awarded noncompetitively because only one contractor was capable of fulfilling the need. Eight single-award IDIQ contracts in our sample were competed (see figure 8). For the 10 single-award IDIQ contracts that were not competed, contract files contained the required justification and approval memorandums in all cases. In terms of the reasons why DOD chose not to compete the contract, in 8 of the 10 contracts we found that the government determined that it did not possess the data rights to proprietary technologies or processes needed to perform a service, for example: The Navy awarded a noncompeted single-award IDIQ contract with a value of up to $15 million per year for the deactivation of Tomahawk missiles, missile testing, and engineering services. Officials stated that they used an IDIQ because they could not determine the number or types of missiles that would be selected for deactivation and added that the manufacturer of the missiles was the only source capable of providing this service as the government lacked the data rights and certified facilities needed to perform this service. The Army awarded a noncompeted single-award IDIQ contract with a value of up to $1.7 billion to procure engines and associated data for several types of helicopters, including the Army's UH-60 helicopter. The Army anticipates an ongoing need for these products and services over 5 years, but could not pinpoint the exact schedule for these deliveries. In addition, according to DOD, it does not own the manufacturing drawings, specialized processes, or technical data that would be required for production of the engines. For the 8 single-award IDIQ contracts we reviewed that were competed, contracting officials cited various reasons for using a single-award IDIQ contract, such as that orders were being used for interrelated tasks and therefore there was a need to build knowledge over time. For example: The Air Force competitively awarded several single-award IDIQ contracts under its program to procure research and development efforts to improve aviation engine technology. We reviewed one of the single-award IDIQs with a value of up to $75 million. The single-award IDIQ contract we reviewed was part of a larger research and development effort that included several government agencies, including DOD, the National Aeronautics and Space Administration, and the Department of Energy. In this case, the Air Force awarded single-award IDIQs using a broad agency announcement--a general announcement of an agency's research interest used to procure and advance broad scientific knowledge or understanding, rather than focusing on unique research required to develop a specific system or hardware solution. Contracting officials told us that single-award IDIQs were used rather than multiple-award contracts because each of the contractors had specialized expertise in a specific propulsion research area such as fuel efficiency. Additionally, each order would be built upon prior research; therefore, orders could not be competed among multiple contractors. The Army competitively awarded a single-award IDIQ contract with a value of up to $38 million to procure a suite of seven different aircraft maintenance and repair toolkits. Officials cited the need for commonality among the tool kits and manuals, and the requirement that replacement tools match previous purchases. Nine of 18 single-award IDIQ contracts that we reviewed required a determination and findings document due to an estimated value of over $103 million. All 9 IDIQ contracts met the requirement. To understand the reasons why competition was not obtained, we reviewed 23 multiple-award IDIQ orders where DOD received only one offer. Specifically, we found for 9 of the 23 orders reviewed, contracting officers did not provide IDIQ contractors a chance to compete and cited exceptions to fair opportunity. We found that the remaining 14 orders were all competed, but only one contractor chose to submit an offer. Figure 9 depicts whether or not one-offer orders we reviewed were competed, and the reasons cited for exceptions to fair opportunity. For the 9 orders that were not competed, contracting officers obtained the required justification and approvals that provided reasons for using an exception to fair opportunity. The reasons included: urgent need, only one contractor was capable of completing the work, the order was a logical follow-on to other work, or there was a need to satisfy a minimum order guarantee. We reviewed two contracts awarded by the Navy to procure land- based and sea-based Unmanned Aircraft System (UAS) Intelligence, Surveillance, and Reconnaissance services. Specifically, we reviewed three noncompeted orders that were awarded under these two contracts to provide support for overseas contingency operations. Urgency was the primary factor in not providing fair opportunity in two of the orders. Contracting officials cited the need for flight clearances, explaining that only two of their three contractors possessed this capability. The remaining contractors did not have enough capability at the time to perform the work, and the contracting officer decided to split the work between the two contractors. For the third order, only one contractor was capable of providing the needed services. The Army awarded multiple-award IDIQ contracts that included two contracts for the procurement of aviation systems modifications. We reviewed one order which was for the installation of threat detection systems for the UH-60 helicopters. The contracting officer cited urgency as the reason for not providing fair opportunity. The Army placed the order, describing the threat detection system as survivability equipment, and explained that failure to install the modifications would likely interfere with troop deployments. The Air Force awarded multiple-award IDIQ contracts that included 34 contracts to provide roofing maintenance services across the United States. We reviewed one order with a value of $1,000 to participate in a post-award orientation, which satisfied the IDIQ contract minimum guarantee. According to contracting officials, all 34 contractors were awarded orders to meet the minimum guarantee. As shown in figure 9 above, 14 orders under multiple-award contracts we reviewed, where DOD received only one offer, were competed. In addition, only one offer was received because only one contractor chose to submit an offer. DOD regulations generally require that, when only one offer is received in response to a competitive solicitation, certain steps need to be taken if the solicitation was not open for at least 30 days, including allowing for an additional solicitation period of at least 30 days. DOD allows exceptions to this requirement in certain instances, such as when a contract or order is part of a broad agency announcement, or is a small business set- aside. Of the 14 orders we reviewed that were competed but DOD received only one offer, 7 of them had solicitations that were open for less than 30 days. Of these, 1 order was exempted because it was a broad agency announcement, 3 orders were exempted because they were small business set-asides, and 3 orders did not comply with DOD regulation. These 3 orders were all awarded under the same multiple- award IDIQ vehicle. The contracting officer acknowledged that although the orders did not meet any of the exceptions listed in the DFARS, he did not revise the solicitations or allow for an additional solicitation period. The contracting officer further stated that the orders were not resolicited due his lack of familiarity with the DFARS requirement. The contracting officer added that, apart from delaying award, he did not believe that a 30-day extension would have had any effect on competition. After we discussed our findings and the DFARS requirements with this contracting officer, he stated that he now understands the requirement and will comply with the provision when placing future orders. For the contracts we reviewed, prices for well-defined products and services were typically established at the IDIQ contract level. For less defined products and services, prices were established at the order level. In situations where an IDIQ contract had both well-defined and less defined items, some price elements were established in the IDIQ contract and some were established in the order. Contracting officials use a variety of data and methods to help establish pricing, such as comparing historical prices for similar items, and obtaining certified cost and pricing data, among others. IDIQ prices can be established at the time of contract award, at the time of order award, or both. We reviewed 31 contracts. For 5 of the IDIQ contracts, all of the pricing was established upfront and agreed to at contract award. For 8 contracts pricing was established only at the time of the order. And for 18 IDIQ contracts, pricing was established in both, with some price elements established at IDIQ contract award and some at order award (see figure 10). For the 5 DOD IDIQ contracts for which pricing was established upfront in the IDIQ contract, all had well-defined requirements at the time of contract award. Once prices are established at contract award, those prices were referred to when placing an order, for instance: The pricing for a noncompeted Navy single-award IDIQ contract with a value of up to $420 million to procure commercial radios used in fixed wing aircraft was established in the IDIQ contract. The radio is a well-defined product and has been a requirement for many years. With known requirements and historical knowledge of the need, Navy contracting officials were able to establish prices before contract award. To establish prices, contracting officials compared commercial pricing of the product to the contractor's proposal, reviewed published prices obtained from federal supply schedules, and reviewed historical prices paid in previous contracts. The 3 orders we reviewed followed the pricing established in the contract. The Navy awarded a competed single-award IDIQ contract with a value of up to approximately $789 million to procure six different variants of sonobouys, devices used to detect and identify underwater objects. Sonobouys are well-defined products that have been used by the Navy since the 1940s. Contracting officials established prices for each variant. The government's estimate was based on certified cost or pricing data submitted by contractors. In addition, contracting officials also enlisted support from the Defense Contract Audit Agency, and the Defense Contract Management Agency, both of which helped examine and determine if labor rates were reasonable. In addition to reviewing the contract, we reviewed three orders placed under this IDIQ and found that the prices paid for in the orders were consistent with what was agreed to in the IDIQ contract. The Army competitively awarded a single-award IDIQ contract with a value of up to $38 million to procure a suite of seven different aircraft maintenance and repair toolkits. All pricing for this contract was established before contract award as this requirement was well defined. Contracting officials relied on competition to establish pricing. This contract was awarded to the contractor who had the lowest price and whose proposal was deemed technically acceptable. DOD contracting officials established prices at the order level when they were not established at the contract level, primarily for services and undefined products. Within our selected sample of 31 DOD contracts, there were 8 contracts where prices were determined at the order level only, and the contracts only included a ceiling value. Six of these 8 contracts were primarily for research and development efforts. The following are examples where prices were established at the order level. The Air Force awarded a competed single-award IDIQ contract for up to $24.9 million that, according to a program official, was to procure research and development for cybersecurity and malware detection. No prices were established at the time of IDIQ contract award because specific requirements were not known at the time of contract award. The orders we reviewed were for the development of software and hardware to detect malware and other cybersecurity threats within medical equipment. Once a well-defined requirement arose pricing was established at the order level. To establish the pricing on the orders we reviewed, the program office performed a technical evaluation to determine if the proposed labor mix was appropriate. Subsequently, contracting officials collected and analyzed certified cost and pricing data or other cost data provided by the contractor. We reviewed two multiple-award IDIQ contracts awarded by the Navy to procure UAS imagery services. Though it was known that imagery services would be procured, it was not known where, when or for how long these services would be needed until an actual mission need arose. We reviewed 3 orders awarded under these IDIQ contracts. All three orders were noncompeted and were for deployment of personnel to provide imagery services from specific platforms such as ship or ground in specific locations. Since the platforms, locations, and timeframes for the missions could not be known at time of IDIQ contract award, the prices were established at the order level once the scope and location of each mission need was known. To establish pricing for one of the orders, we found that contracting officials compared the contractor's proposal with historical pricing, as well as verified labor rate information provided by the contractor. Eighteen DOD IDIQ contracts, which include both multiple- and single- award, in our selected sample had some price elements established at the time of contract award and some price elements established at the time of order award. This arrangement occurred in situations where some elements of the requirement were well defined and pricing could be established upfront at the contract level, while other requirements were less defined and the prices were established when the order was placed. For instance, in DOD's multiple-award IDIQ contracts, some pricing elements may be negotiated upfront at contract award, such as not-to- exceed labor rates; however, since further competition is expected at the order level contractors may offer labor rates below the not-to-exceed rates. Therefore, actual labor rates were determined when an order was placed, for instance: The Air Force established a multiple-award IDIQ vehicle for roofing repairs with a ceiling of $325 million. According to officials, each IDIQ contract has a not-to-exceed price for 11 different roofing scenarios. When a need arises, the contracting officer solicits offers from the multiple-award IDIQ contract holders. According to contracting officials, these contractors submit proposals and base their pricing on defined requirements such as the type of roof, extent of repair, and location. The proposal with the lowest price that is technically acceptable--which cannot exceed a contractor's not-to-exceed pricing--is awarded the order. A Navy noncompeted single-award IDIQ contract was awarded for the deactivation and disposal of Tomahawk missiles with a value of up to $15 million per year. Pricing for the deactivation of the missiles was established upfront in the IDIQ contract; however, some elements of the contract, such as unscheduled maintenance and testing, were not defined at contract award and therefore no price was established. We found that in one of the orders we reviewed, the contractor was to provide software for missile testing. In order to establish pricing on this order, contracting officials conducted a cost analysis of the proposed offer. They asked the Defense Contract Management Agency to review the labor pricing that was submitted and pricing for similar labor categories the government paid on a different contract. The Army awarded a noncompeted single-award IDIQ contract with a value of up to $42 million that, according to a contracting official, is for a broad range of efficiency management services, such as determining ways to improve the function and efficiency of logistical processes. Not-to-exceed values for labor rates and the fee were determined for the IDIQ contract, but actual prices are determined at the order level. To establish the not-to-exceed rates in the IDIQ contract, contracting officials used certified cost and pricing data and support from the Defense Contract Management Agency to determine reasonable rates. For the 3 orders we reviewed under this IDIQ, a technical evaluation was conducted to ensure that the labor mix was acceptable, and contracting officials compared proposed labor rates with those not-to-exceed rates agreed to in the IDIQ contract. We provided a draft of this report to DOD for review and comment. DOD had no comments. We are sending copies of this report to the Secretary of Defense and interested congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact William T. Woods at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. This report addresses (1) federal agencies' use of indefinite delivery / indefinite quantity (IDIQ) contracts from fiscal years 2011 through 2015, the latest year for which complete data were available; (2) the role of competition when awarding and using selected IDIQ contracts and orders at the Department of Defense (DOD); and (3) when and how DOD contracting officials established prices for these contracts and orders. To examine the use of IDIQ contracts by federal agencies, we analyzed government-wide Federal Procurement Data System-Next Generation (FPDS-NG) data on IDIQ obligations from fiscal year 2011 through 2015 to identify information such as overall agency obligations on IDIQ contracts, obligations for products and services, obligations for single-and multiple-award IDIQ contracts, and extent of competition for single-award IDIQ contracts and multiple-award orders. Data that were adjusted for inflation were adjusted to fiscal year 2015 dollars using the Fiscal Year Gross Domestic Product Price Index. To assess the reliability of the FPDS-NG data we used, we electronically tested for missing data, outliers, and inconsistent coding, and we compared data on selected IDIQ contracts to contract documentation we obtained. Based on these steps, we determined the data were sufficiently reliable to present IDIQ contract obligations for fiscal years 2011 through 2015. To provide context on agency use of IDIQ contracts, we also interviewed DOD contracting officials. For our second and third objectives, we focused our review on DOD since DOD was the largest user of IDIQ contracts. Within DOD, we focused on the four DOD components with the highest obligations on IDIQ contracts--the Army, Navy, Air Force, and Defense Logistics Agency. From these components, we selected a nongeneralizable sample of 31 IDIQ contracts, 53 single-award IDIQ orders, and 23 multiple-award IDIQ orders. The 53 single award IDIQ orders were placed under 18 single- award IDIQ contracts, while the 23 multiple-award IDIQ orders were placed under 13 multiple-award IDIQ contracts (see table 1). Only one offer was received on each of the 23 multiple-award orders selected, either because DOD only solicited one contractor or because only one contractor submitted an offer. We selected orders where only one offer was received so as to understand reasons why competition did not take place. We selected these contracts and orders based on factors such as obtaining a mix of products and services and whether the contracts were competed or noncompeted. The selection process for the components, commands, contracts and orders is described in detail below. To address the role of competition when awarding and using selected IDIQ contracts and orders at DOD, we collected and analyzed contract documentation, including acquisition plans, justification and approval documents, and other pertinent information, for contracts in our sample of IDIQ contracts and orders. In addition, we conducted interviews with DOD contracting and program officials to further discuss the reasons why single-award IDIQ contracts were needed, and why the government received only one offer on multiple-award IDIQ orders. To address when and how DOD contracting officials established prices for contracts and orders in our sample, we collected and analyzed contract documentation, including contract and order award documents, price negotiation memoranda, and other pertinent pricing information. In addition, we conducted interviews with contracting and program officials for the selected contracts and orders to discuss changes, if any, to pricing since award and to clarify information found in contract documentation. Furthermore, for orders where prices were established in the contract, we ensured that the orders followed the pricing agreed to in the contract. We selected the following four components within DOD--the Army, Navy, Air Force and the Defense Logistics Agency--because they had the highest obligation dollars on IDIQ contracts within the department from fiscal years 2011 through 2015. Within these components, we selected one command and location for review taking into consideration factors such as the total obligations at the command/location for single-award IDIQs from fiscal years 2011 through 2015, the proportion of contracts for products and for services, and the extent to which contracts at the command/location were competed or noncompeted. With consideration of these factors, we selected the following commands for review--the Army Materiel Command in Redstone Arsenal, Alabama; Navy Air Systems Command in Patuxent River, Maryland; Air Force Materiel Command in Dayton, Ohio; and the Defense Logistics Agency (Energy) in Fort Belvoir, Virginia. Within commands and locations listed above, we selected single-award IDIQ contracts awarded from fiscal years 2011 through 2015, ensuring our selections included a mix of products and services contracts, and competed and noncompeted contracts. We further selected orders from each of the single-award IDIQ contracts that were awarded in fiscal years 2014 and 2015, and were among those with the highest obligations. In addition, within the selected commands and locations, we selected multiple-award IDIQ orders where the government only received one offer and were placed in fiscal years 2014 and 2015. We also selected the multiple-award IDIQ contracts associated with these orders. We conducted this performance audit from January 2016 to April 2017 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 based on our audit objectives. In addition to the contact named above, Janet McKelvey, Assistant Director, Guisseli Reyes-Turnell, Analyst-in-Charge, Karen Cassidy, Lorraine Ettaro, Kurt Gurka, Stephanie Gustafson, Julia Kennon, Victoria Klepacz, Carol Petersen, Roxanna Sun, and Alyssa Weir made key contributions to this report.
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Over the past 5 years, the federal government obligated over a hundred billion dollars annually through the use of IDIQ contracts. IDIQ contracts are awarded to one or more contractors when the exact quantities and timing for products or services are not known at the time of award. DOD uses IDIQ contracts more than all other agencies combined. The FAR establishes a preference for awarding multiple-award IDIQ contracts under a single solicitation such that a number of contract holders compete for subsequent orders. GAO was requested to examine federal agencies' use of IDIQ contracts. This report addresses (1) federal agencies' use of IDIQ contracts from fiscal years 2011 through 2015, the latest year for which complete data were available; (2) the role of competition when awarding selected IDIQ contracts and placing orders at DOD; and (3) when and how DOD contracting officers established prices for these contracts and orders. GAO analyzed Federal Procurement Data System-Next Generation data on civilian and DOD obligations for fiscal years 2011 through 2015; reviewed and analyzed a nongeneralizable sample of 31 IDIQ contracts and 76 IDIQ orders selected across four DOD components--Army, Navy, Air Force and Defense Logistics Agency; and interviewed DOD contracting and program officials. From fiscal years 2011 through 2015, the proportion of spending by federal agencies on indefinite delivery/ indefinite quantity (IDIQ) contracts remained stable and accounted for about a third of total government contract obligations. Agencies obligated more than $130 billion annually on these types of contracts, as shown in the figure. The Departments of Defense (DOD), Homeland Security, Health and Human Services, and Veterans Affairs were the main users of IDIQ contracts, with DOD accounting for about 68 percent of all IDIQ obligations from 2011 through 2015. About two-thirds of government-wide IDIQ obligations were for services, with the remainder for products. Although the Federal Acquisition Regulation (FAR) states a preference for multiple-award IDIQs, the majority of dollars government-wide, approximately 60 percent, were obligated through single-award IDIQs. About 70 percent of single-award IDIQ obligations and more than 85 percent of order obligations under multiple-award contracts were competed. Contracting officials at DOD cited flexibility as the main advantage for using IDIQ contracts, noting that it was easier and faster to place an order under an existing IDIQ contract than to award a separate contract when a specific need arose. Ten of the 18 single-award IDIQ contracts GAO reviewed at DOD were not competed, generally because only one contractor could meet the need. For the competed single-award contracts, contracting officials cited various reasons for choosing a single-award IDIQ approach, such as the need to build and maintain knowledge as orders were awarded over time. For about one-third of the multiple-award IDIQ orders GAO reviewed, DOD did not provide an opportunity for all contract holders to compete due to urgency or other reasons. Prices on IDIQ contracts and orders at DOD were established at different points, depending on how well-defined the requirements were at the time of contract award. For example, for a Navy contract to buy commercial radios used in fixed-wing aircraft, the pricing was established upfront in the contract since the radios were defined products that have been used for many years. In contrast, for an Air Force contract to buy research and development services for cybersecurity and malware detection, all pricing was established at the order level since specific research needs were not known when the contract was awarded. GAO is not making any recommendations at this time. DOD had no comments on a draft of this report.
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Our reports on cost-benefit analysis in the rulemaking process, rule development and regulatory reviews, and OMB's role in reviews of agencies' rules under Executive Order 12866 illustrate specific actions that, if taken, would increase the transparency of the rulemaking process. In our 2014 report on cost-benefit analysis in agencies' rulemaking processes, we found that OIRA's reviews of agencies' rules sometimes resulted in changes, but also concluded that the transparency of the review process could be improved. We found that in the majority of the 109 significant rules that we reviewed, the rulemaking process was not as transparent as it could be. For example, in 72 percent of these rules, there was no explanation for why the rule was designated as significant, thus triggering additional oversight required by Executive Order 12866. We made two recommendations based on our review of the cost benefit analyses included in selected rules. We recommended that (1) OMB work with agencies to clearly communicate the reasons for designating a regulation as a significant regulatory action, and explain its reason for any changes to an agency's initial assessment of a regulation's significance; and (2) OMB encourage agencies to clearly state in the preamble of significant regulations the section of Executive Order 12866's definition of a significant regulatory action that applies to the regulation. While OMB staff did not state whether they agreed or disagreed with the recommendations, they took action in 2015 to implement the first recommendation. In our 2009 report on the regulatory review process, we found that OIRA's reviews of agencies' draft rules often resulted in changes. Of the 12 case-study rules subject to OIRA review that we examined, 10 reviews resulted in changes, about half of which included changes to the regulatory text. Agencies used various methods to document OIRA's reviews which generally met disclosure requirements. However, we found that the transparency of this documentation could be improved. In particular, there was uneven attribution of changes made during the OIRA review period and differing interpretations regarding which changes were "substantive" and thus required documentation. Both of these issues had been identified in our earlier work. We made four recommendations that OMB provide guidance to agencies to improve transparency and documentation of the OIRA review process, specifically that OIRA (1) define what types of changes made as a result of the review process are substantive and need to be publicly identified; (2) direct agencies to clearly state in final rules whether they made substantive changes as a result of OIRA reviews; (3) standardize how agencies label documentation of these changes in public rulemaking dockets; and (4) instruct agencies to clearly attribute those changes made at the suggestion or recommendation of OIRA. While OMB staff generally agreed with these four recommendations, to date, they have not implemented them. In 2003, we examined 85 rules from nine health, safety, or environmental agencies and found that the OIRA review process had significantly affected 25 of those 85 rules. OIRA's suggestions appeared to have at least some effect on almost all of the 25 rules' potential costs and benefits or the agencies' estimates of those costs and benefits. The agencies' docket files did not always provide clear and complete documentation of the changes made during OIRA's review or at OIRA's suggestion, as required by the executive order, even though a few agencies exhibited exemplary transparency practices. We made eight recommendations in 2003 targeting aspects of the OIRA review process that remained unclear and where improvements could allow the public to better understand the effects of OIRA's review, including that the Director of OMB: 1. instruct agencies to document the changes made to rules submitted for OIRA review in public rulemaking dockets and within a reasonable time after the rules have been published; 2. define the types of substantive changes made during the review process that agencies should disclose; 3. disclose the reasons for withdrawal of a rule from OIRA review; 4. reexamine OIRA policy that only documents exchanged by agencies with OIRA branch chiefs and above during the review process need to be disclosed; 5. differentiate in OIRA's database which rules were substantively changed at OIRA's suggestion or recommendation and which were changed in other ways and for other reasons; 6. define transparency requirements to also include the informal review period when OIRA says it can have its most important impact on agencies' rules; 7. encourage agencies to use best practice methods of documentation that clearly describe changes; and 8. disclose in OIRA's logs of meetings with outside parties which regulatory action was being discussed and the affiliation of the meeting participants. OMB staff disagreed with the first seven of these eight recommendations but did implement the eighth. Improvements made to the transparency of the regulatory process benefit the public and aid congressional oversight. Four relevant reports covering the topics of regulatory guidance, retrospective regulatory review processes, and exceptions for expediting the rulemaking process illustrate additional opportunities to enhance transparency of federal regulations. OMB plays an important role in these activities through oversight and by providing guidance to regulatory agencies about how to comply with various requirements. Regulatory guidance, while not legally binding, provides agencies with flexibility to interpret their regulations, clarify policies, and address new issues more quickly than may be possible using rulemaking. However, concerns have been raised about the level of oversight for agencies' guidance, whether agencies seek feedback from affected parties on guidance, and how to ensure that agencies do not issue guidance when they should undertake rulemaking. Given both the importance of guidance and the concerns about its use, in 2007 OMB recognized the need for good guidance practices. OMB established review processes for the guidance documents with the broadest and most substantial impact. In 2015, we reviewed guidance development processes at four departments--Agriculture (USDA), Education (Education), Health and Human Services (HHS), and Labor (DOL)--and 25 of their components. All four departments identified standard practices to follow when developing guidance and addressed OMB's requirements for significant guidance to varying degrees. Education and USDA had written departmental procedures for approval of significant guidance as required by OMB. DOL's procedures were not available to staff and required updating. HHS had no written procedures. Ensuring these procedures are available could better ensure that components consistently follow OMB's requirements. We have long advocated the potential usefulness to Congress, agencies, and the public of conducting retrospective regulatory analyses. Retrospective analysis can help agencies evaluate how well existing regulations work in practice and determine whether they should be modified or repealed. In 2007, we found that agencies had conducted more retrospective reviews of the costs and benefits of existing regulation than was readily apparent, especially to the public. We made seven recommendations to improve the effectiveness and transparency of retrospective regulatory review. These included that OMB develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance that govern regulatory review activities the following elements: 1. consideration of whether and how they will measure the performance 2. prioritization of review activities based upon defined selection criteria; 3. specific review factors to be applied to the conduct of agencies' analyses that include, but are not limited to, public input; 4. minimum standards for documenting and reporting all completed review results and, for reviews that included analysis, making the analysis publicly available; 5. mechanisms to assess their current means of communicating review results to the public and identifying steps that could improve this communication; and 6. steps to promote sustained management attention and support to help ensure progress in institutionalizing agency regulatory review initiatives. We also recommended that OMB 7. work with regulatory agencies to identify opportunities for Congress to revise the timing and scope of existing regulatory review requirements and/or consolidate existing requirements. In 2011 and 2012, the administration issued new directives to agencies on how they should plan and conduct analyses of existing regulations that addressed each of our seven recommendations. In a 2014 report on reexamining regulations, we found that agencies often changed regulations in response to completed retrospective analyses, but could improve the reporting of progress and strengthen links between those analyses and the agencies' performance goals. We also concluded that OMB could do more to enhance the transparency and usefulness of the information provided to the public. Although we found that agencies posted their retrospective review plans online, obtaining a comprehensive picture of the agencies' progress was difficult because results were spread across multiple web sites. In addition, consistently providing links or citations to the supporting analyses and data, and including more detail on the methodologies and key assumptions used to estimate savings, would help Congress and the public to better understand the basis for projected results. We made three recommendations to OMB to (1) improve reporting on the outcomes of retrospective regulatory reviews, (2) improve how these reviews can be used to help agencies achieve their priority goals, and (3) ensure that OIRA, as part of its oversight role, monitors the extent to which agencies have implemented guidance on retrospective regulatory review requirements and confirm that agencies have identified how they will assess the performance of regulations in the future. Staff from OIRA generally agreed with the three recommendations, and the OIRA Administrator indicated last year that his agency was taking actions to address them. The Administrative Procedure Act (APA), which spells out the basic rulemaking process, generally requires agencies to publish a notice of proposed rulemaking (NPRM) in the Federal Register and solicit public comments before finalizing regulations. However, the APA and other statutes permit exceptions to proposed rules to expedite rulemaking in certain circumstances, such as for an emergency or other "good cause" or when issuing rules about an agency's organization or management. In 2012, we reviewed a generalizable random sample of 1,338 final rules published over 8 years (from 2003 through 2010) to provide information on the frequency, reasons for, and potential effects of agencies issuing final rules without NPRMs. We found that agencies frequently used available exceptions to issue final rules without prior NPRMs. We also found that agencies, though not required, often requested comments on major final rules issued without an NPRM. However, they did not always respond to the comments received. This is a missed opportunity because we found that agencies often made changes to improve the rules when they did respond to public comments. To better balance the benefits of expedited rulemaking procedures with the benefits of public comments, and to improve the quality and transparency of rulemaking records, we recommended that OMB issue guidance to encourage agencies to respond to comments on final major rules issued without a prior notice of proposed rulemaking. OMB stated that it did not believe it necessary to issue guidance at that time and has not, to date, taken any action to implement our recommendation. We continue to believe that the recommendation has merit and urge OMB to reconsider its prior position. In summary, OIRA to date has implemented 9 of the 25 recommendations we made to improve transparency and effectiveness of the Executive Order review process and other aspects of federal rulemaking. We believe that the other 16 related recommendations cited in this statement that have not been implemented still have merit and, if acted upon, would improve the transparency of federal rulemaking. In a step in that direction, the OIRA Administrator in 2015 noted that OIRA has worked with agencies to help them with their Executive Order disclosure requirements. Chairman Meadows, Ranking Member Connolly, and Members of the Subcommittee, this concludes my prepared statement. Once again, I appreciate the opportunity to testify on these important issues. I would be pleased to address any questions you or other members of the subcommittee might have at this time. If you or your staff have any questions about this testimony, please contact Michelle Sager, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Tim Bober, Tara Carter, Andrea Levine, and Joseph Santiago. Regulatory Guidance Processes: Selected Departments Could Strengthen Internal Control and Dissemination Practices. GAO-15-368. Washington, D.C.: April 16, 2015. Federal Rulemaking: Agencies Included Key Elements of Cost-Benefit Analysis, but Explanations of Regulations' Significance Could Be More Transparent. GAO-14-714. Washington, D.C.: September 11, 2014. Reexamining Regulations: Agencies Often Made Regulatory Changes, but Could Strengthen Linkages to Performance Goals. GAO-14-268. Washington, D.C.: April 11, 2014. Federal Rulemaking: Regulatory Review Processes Could Be Enhanced. GAO-14-423T. Washington, D.C.: March 11, 2014. Federal Rulemaking: Agencies Could Take Additional Steps to Respond to Public Comments. GAO-13-21. Washington, D.C.: December 20, 2012. Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews. GAO-09-205. Washington, D.C.: April 20, 2009. Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews. GAO-07-791. Washington, D.C.: July 16, 2007. Federal Rulemaking: Past Reviews and Emerging Trends Suggest Issues That Merit Congressional Attention. GAO-06-228T. Washington, D.C.: November 1, 2005. Rulemaking: OMB's Role in Reviews of Agencies' Draft Rules and the Transparency of Those Reviews. GAO-03-929. Washington, D.C.: September 22, 2003. Regulatory Reform: Procedural and Analytical Requirements in Federal Rulemaking. GAO/T-GGD/OGC-00-157. Washington, D.C.: June 8, 2000. Regulatory Reform: Changes Made to Agencies' Rules Are Not Always Clearly Documented. GAO/GGD-98-31. Washington, D.C.: January 8, 1998. Regulatory Reform: Agencies' Efforts to Eliminate and Revise Rules Yield Mixed Results. GAO/GGD-98-3. Washington, D.C.: October 2, 1997. Regulatory Reform: Implementation of the Regulatory Review Executive Order. GAO/T-GGD-96-185. Washington, D.C.: September 25, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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Federal regulation is a basic tool of government. Agencies issue regulations to achieve public policy goals such as ensuring that workplaces, air travel, foods, and drugs are safe; that the nation's air, water, and land are not polluted; and that the appropriate amount of taxes is collected. Congresses and Presidents have acted to refine and reform the regulatory process during the last several decades. Among the goals of such initiatives are enhancing oversight of rulemaking by Congress and the President, promoting greater transparency and public participation in the process, and reducing regulatory burdens on affected parties. Congress has often asked GAO to evaluate the implementation of procedural and analytical requirements that apply to the rulemaking process. The importance of improving the transparency of the rulemaking process emerged as a common theme throughout GAO's body of work. Based on that body of work, this testimony addresses (1) GAO's prior findings and OIRA's progress to date on recent GAO recommendations to improve the transparency of the regulatory review process, and (2) other challenges and opportunities GAO has identified for increasing the transparency and oversight of the rulemaking process. GAO has made 25 prior related recommendations of which OMB has implemented 9 to date. GAO has consistently found opportunities to improve the transparency of regulatory processes coordinated through the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs (OIRA). Three GAO reports on OIRA's reviews of agencies' rules under Executive Order 12866 illustrate current and specific actions that would increase the transparency of that review process. In a 2014 report on cost-benefit analysis, GAO found that OIRA's reviews resulted in changes. However, in 72 percent of the 109 rules GAO reviewed, there was no explanation for why the rule was designated as significant. In a 2009 report on the development of rules, GAO found that documentation of OIRA's reviews could be improved. In reviews of 12 case studies, GAO found uneven attribution of changes made during the OIRA review period and differing interpretations regarding which changes required documentation. In a 2003 report, GAO examined 85 rules from nine health, safety, or environmental agencies. GAO found that, while the OIRA review process had significantly affected 25 of those rules, some agencies' files did not provide clear and complete documentation of changes made during OIRA's review. However, a few agencies exhibited exemplary transparency practices. Four GAO reports covering the topics of regulatory guidance, retrospective regulatory review processes, and exceptions for expediting the rulemaking process further illustrate opportunities for OMB to enhance transparency. In a 2015 report on guidance development processes at four agencies GAO found that all four identified standard practices to follow when developing guidance. However, the four agencies addressed OMB's requirements on significant guidance to varying degrees. In 2007 and 2014 reports on retrospective regulatory reviews, GAO found that, while such reviews often resulted in changes, OMB and agencies could improve the reporting of progress to enhance the transparency and usefulness of information provided to the public. In a 2012 report on exceptions to proposed rules, GAO reviewed a generalizable sample of final rules published over an 8 year period. GAO found that, although agencies often requested comments on final major rules (rules with an annual impact of $100 million or more) issued without a prior notice of proposed rulemaking, the agencies did not always respond to comments received. GAO made 25 recommendations to OMB to address the transparency issues identified in these seven reports. OMB has implemented 9 of the recommendations. GAO believes that the other 16 recommendations that have not been implemented still have merit and, if acted upon, would improve the transparency of federal rulemaking. In a step in that direction, the OIRA Administrator in 2015 noted that OIRA has worked with agencies to help them with their Executive Order disclosure requirements.
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The majority of children--about 62 percent in 1996--obtain health coverage as dependents through their parents' employer-sponsored group plans. Most other children who are insured are covered by Medicaid, the largest public insurance program for children. The 14 percent of children without health insurance tend to be from families where one or both parents are unemployed, self-employed, or work for firms that either do not provide dependent coverage or offer this coverage at a price the parents consider unaffordable. In such cases, parents may purchase health coverage individually for themselves and their families. Since rates for family coverage in the individual market may be high relative to a family's disposable income, some parents opt to forego coverage for themselves and only purchase coverage for their children. Divorced parents who are required by court order to provide health insurance for their children and grandparents who are retired but caring for their grandchildren are examples of consumers who typically rely on the individual market to purchase health coverage for children. Individual policies are available to children nationwide, and products that are priced specifically for children are available in almost all states. The benefit structure for child-only products was similar to comprehensive products typically available to adults in the individual market. However, the choice of carriers and products may be limited in some markets because many carriers perceive demand for child-only policies as low and, therefore, do not aggressively market this type of product. Furthermore, some carriers do not tend to operate in states with certain regulatory requirements. As long as an adult is the policyholder and is responsible for the premium payment, almost all of the carriers we contacted in the individual market will sell a product that provides comprehensive coverage for a child only. We found that at least one individual comprehensive health insurance product is available to children in all 50 states. Furthermore, among the carriers that provided information, we found that at least five sold a comprehensive health product to children in the individual market of most states. In addition, we found that 49 states and the District of Columbia currently have at least one carrier that offers a product priced specifically for children--that is, child rated. Most insurance agents and brokers we contacted in Georgia and Illinois were generally aware that these products are available from a number of carriers. Approximately 91 percent of the agents we contacted in Georgia and 74 percent of the agents we spoke with in Illinois either sold the products or referred us to a carrier that did. The benefit structure of comprehensive health products available to children was not notably different than products available to adults in the individual market. We found that comprehensive products available to children in our selected sample covered a wide range of benefits, including inpatient and outpatient hospital and medical and surgical services; emergency care; diagnostic services, such as laboratory tests and X rays; prescription drugs; and skilled nursing facility care. Most of these plans also included coverage for physical, occupational, and speech therapies; organ transplants; mental health; substance abuse; home health care; and hospice care. Similar to their adult products, two of the non-HMO multistate carriers--one of which marketed specifically to children--did not include as a core benefit preventive care, such as immunizations and well-baby visits. Coverage for these benefits is available from these two carriers but at an additional cost--ranging from $4 to $33 a month. In addition, another multistate carrier limited the preventive care benefits in its individual product to $50 per member in a calendar year. Although coverage is available nationwide, consumer choice among products and carriers may be limited in a number of states for at least two reasons. First, while many carriers are willing to offer their individual adult products to children, they perceive the demand for child-only policies as low and therefore do not aggressively market this product. Carrier officials told us that the adults who are likely to purchase this type of coverage represent a small share of individual purchasers. One multistate carrier reported that it has sold only a "handful" of child-only policies, while officials at other multistate carriers said they have about 7,000 to 9,000 of these policies currently in force nationally. Among the seven carriers we reviewed, child-only products represent a relatively small share of the carriers' total individual health insurance sales--from under 1 percent to 20 percent. Further, since children's products are often among the lowest priced individual products, the commission amount--which is usually based on a percentage of the premium--may not provide agents a strong incentive to actively sell these products. Second, few carriers tend to operate in states with insurance reforms in place, such as "guaranteed issue" requirements and premium rate restrictions. Guaranteed issue requires all carriers that participate in the individual market to offer at least one plan to all individuals and accept all applicants regardless of their demographic characteristics or health status. Thirteen states require carriers to guarantee-issue certain products to all applicants. Twenty states include provisions in their legislation that attempt in some way to limit the amount carriers can vary premium rates in the individual market or the characteristics they may use to vary these rates. Insurance industry representatives as well as some analysts and policymakers claim that these regulatory provisions can result in the tendency for individuals to wait to purchase insurance until medical care is needed. The potential result is "adverse selection," where a disproportionate number of individuals with high health care costs seek insurance, which increases the average cost of coverage for all those insured. While such reforms can benefit individuals who may otherwise have difficulty obtaining coverage, the combination of guaranteed issue and rate restrictions discourages some carriers from entering or remaining in such a market. Children's monthly premium rates may vary widely based on factors such as a child's age and local market and product characteristics. Carriers also take into account the expected health care utilization of different age groups and the impact of various state regulations in calculating their premium rates. For the products we reviewed that are available to children, we found standard monthly premium rates for a healthy 15-year-old among our selected carriers ranged from a national low of about $42 for a $1,000 deductible PPO plan in Portland, Oregon, to one as high as $321 for a $250 deductible FFS plan in Los Angeles, California. In 18 selected geographically dispersed urban and rural markets, we found that nearly half of the products had premiums priced at more than $80 a month for one child. Even within particular markets, there were substantial differences in the premium prices of products that carriers offered. Table 1 illustrates some choices a consumer would encounter if shopping for coverage for one child in the individual insurance markets of certain cities. Although it is difficult to isolate one factor from another, the standard monthly premium rates generally vary based on the type of plan a consumer chooses and the deductible a consumer is willing to spend up front as well as how the carrier rates its product. Even within a single geographic market, premium prices for child-only products varied considerably. For example, a consumer in Chicago, Illinois, who wanted to purchase health insurance for a healthy 10-year-old could choose from among at least five different products offered by four carriers, with monthly premiums ranging from $63 to $142. Even products that seemed similar differed in price--such as the child-rated, PPO products with a $250 deductible offered by Carriers A and B in Chicago, Illinois, which differed in price by $39 a month. We identified several factors that affect monthly premium rates for child-only products: age and number of covered children in a family and their expected health care utilization; geographic location and state regulations; and plan type and design, including deductible and cost-sharing options. The seven selected carriers in our study priced their products using age and number of children covered from the same family in one of three ways: four carriers used a child rate that was tiered according to specified age groups, two used a single child rate for all enrollees aged 0 through 17 years, and one charged its child enrollees the lowest adult rate--that of an 18-year-old male. In the last case, when more than one child from the same family was covered, the carrier charged a combination rate, whereby the youngest child paid the lowest adult rate and additional children paid a lower, child's rate. Insurance industry officials told us that charging a child rate as opposed to the lowest adult rate can reduce the premium for most children. This is because children are typically low users of health care services compared with adults and therefore are less expensive to insure. Some of the tiered child-rated products were priced differently to take into account the specific age of the child. While children overall are typically low users of health care services compared with adults, some age groups tend to use more services than others. For example, carrier officials stated that children under age 2 tend to be high users of health care services due to the number of immunizations and physical exams recommended by the American Academy of Pediatrics. Thus, to cover the cost of their higher expected utilization, some carriers that offer child-rated products that are tiered by age categories typically charge their youngest enrollees a higher premium than children in other age groups. Two of the regional HMO carriers we reviewed divide children into two age groups: (1) birth through age 2 and (2) age 3 through age 18 or 19. In both cases, the youngest children were charged monthly premiums about $20 higher than the older age group. We also found that two of the carriers, both of which market specifically to children, do not cover children during their first 6 or 12 months due, in part, to the high costs of immunizations and well-child visits. For the carriers in our study that offered child-rated products in three age categories, children aged 6 through 14 years typically had the lowest rates, while premium prices increased for older children--aged 15 through 19 years--to compensate for expected higher health costs during the teen years. Table 2 shows how carriers' rating methods affect the premium prices for a family with three children in different age groups living in Chicago, Illinois. Premiums may also vary by geographic location, due largely to differences in physician and hospital costs as well as cost of living and state regulations. As table 1 illustrates, when Carrier B, Carrier C, and Carrier D are looked at across markets, consumers living in Omaha, Nebraska, are charged less for the same product than those living in Chicago, Illinois. For those carriers, depending on where the consumer resides, monthly premium rates ranged from $33 to $76 across the markets we reviewed. State regulations--guaranteed issue and rate restrictions, in particular--may also impact carriers' determinations of premium rates. For example, in Illinois, where there are no rate restrictions, a healthy 10-year-old could obtain coverage for $63 a month; that same child may pay $192 for coverage of similar benefits in Vermont--a state that has community rating, which requires carriers to set premiums at the same level for all plan participants, regardless of their age, gender, health status, or any other demographic characteristics. The plan type and design offered by the carrier is another factor that may affect the price of an individual health product. Plan types include traditional FFS, PPO, and HMO structures. Usually, the more willing an enrollee is to use selected providers that have negotiated charges for health services with the carrier, such as in PPOs and HMOs, the lower the premium an enrollee will have to pay. Similarly, the cost-sharing arrangement selected by the consumer also determines the price of an individual insurance product. Cost-sharing refers to the policyholder's contribution to the cost of the benefits received. Under traditional FFS plans, consumers pay an annual deductible and coinsurance up to a specified total limit on out-of-pocket expenses. HMOs typically require consumers to make copayments for each service rendered until an annual maximum is reached. The more potential out-of-pocket expenses the consumer could incur, the lower the premium usually will be. Child-only products that we examined included a wide range of cost-sharing alternatives. Deductibles for FFS and PPO plans typically ranged from $250 to $2,500; HMO copayments were typically $15 per physician visit and $100 to $500 per hospital admission. Table 3 shows the difference in one carrier's premium prices for each of the plan types and deductible amounts ($250 and $500) it offers to a healthy 4-year-old in selected markets. In these markets, consumers would pay lower monthly premiums if they opted for the higher $500 deductible and the carrier's more restrictive PPO option. The variation in premium rates attributable to different deductible amounts was also evident in the rates of a carrier in Oregon that we contacted. For this carrier, the monthly premium for the same individual product costs about $42, $70, or $98 a month, depending solely on whether the applicant opted for the $1,000, $500, or $200 deductible, respectively. While most children qualify for coverage at the standard rate, children with certain health conditions can be denied coverage, or their coverage may exclude an existing condition or treatment of certain parts of the body, or they may be charged a rate higher than the standard premium rate in states that allow medical underwriting. Under medical underwriting, carriers may evaluate an applicant's health status on the basis of responses to a detailed health questionnaire. On these questionnaires, applicants may be required to indicate whether the child to be included on the policy has received medical advice or treatment of any kind within the child's lifetime or within a more limited time frame. Applicants may also be required to indicate whether the child has experienced a broad range of specifically identified symptoms, conditions, and disorders. Applicants may have to indicate whether the child has any pending treatments or surgery, is taking any prescription medication, or has ever been refused or canceled from another health or life insurance policy. On the basis of these responses, carriers may request additional information--typically medical records--or may require a physical examination. The information obtained through this process may be used by carriers to determine whether to decline to cover the applicant altogether, accept the applicant but charge a higher than standard premium rate, or exclude from coverage an existing health condition or treatment of a part of the body. While the carriers we interviewed decline coverage to fewer child applicants than adult applicants, they still decline coverage to between 5 and 15 percent of child applicants. Furthermore, as previously mentioned, two of the carriers we reviewed that market specifically to children told us that they do not cover children during their first 6 or 12 months of life due, in part, to the lack of information about a child's potential long-term health status. Carriers may treat certain health conditions differently, so a consumer who is denied coverage due to a particular condition by one carrier may be able to find coverage from another carrier, possibly at a higher rate. (See fig. 1.) For example, Carrier A, Carrier B, and Carrier C decline coverage to applicants with juvenile diabetes, but Carrier D may offer these applicants coverage but at a higher premium. Similarly, a carrier's treatment of certain health conditions may vary depending on the severity and duration of the conditions. For example, Carrier D indicated that applicants with epilepsy could be (1) declined coverage altogether, (2) offered coverage but at a higher than standard premium rate, or (3) accepted for coverage at its standard rate. The criteria used to make these determinations vary among carriers and are considered proprietary. Although comprehensive health insurance coverage is generally available for healthy children in the private individual market across the United States, consumers would do well to shop carefully for the child-only product that best meets their needs. Depending on multiple factors--such as where a child resides, the plan type selected, and the amount of out-of-pocket expenses the purchaser is willing to spend--premium prices vary substantially. In selected markets we reviewed, nearly half of the products had premiums priced at more than $80 a month for one child, making this an expensive purchase for some families. Children who rely on the individual market for health insurance face problems similar to adults. Depending on where they live, premiums may be high relative to their family budget and choice of carriers and products may be limited. Furthermore, in many states, children--like adults--with certain health conditions may be charged a higher premium, have an existing health condition or part of the body excluded from coverage, or be denied coverage altogether. We provided a copy of this report draft to the American Association of Health Plans, BlueCross and BlueShield Association, and Health Insurance Association of America for their review and comment. Each offered clarifying and technical comments, which we incorporated as appropriate. As agreed with your offices, we plan no further distribution of this report for 30 days. At that time, we will make copies of this report available on request. Please contact me at (202) 512-7114 if you or your staff have any further questions. This report was prepared by Mary W. Freeman, Susan T. Anthony, Randy M. DiRosa, and Betty J. Kirksey under the direction of Sheila K. Avruch. Recent state and federal initiatives may have mitigated the effect of medical underwriting in many states in several ways. For example, 13 states that require all carriers to guarantee-issue one or more health plans to all applicants have effectively prohibited carriers from declining to provide coverage to applicants on the basis of their health status. In addition, 27 states have created high-risk insurance pools to act as a safety net to ensure that otherwise uninsurable individuals can obtain coverage, although at a cost that is generally at least 50-percent higher than the average or standard rate charged in the individual insurance market for a comparable plan. In addition to state-level initiatives, recently passed federal legislation also guarantees access to coverage to certain individuals. Under HIPAA, individuals who lose group coverage, exhaust their Consolidated Omnibus Budget and Reconciliation Act of 1985 (COBRA) coverage or other continuation coverage available, and meet several additional criteria have guaranteed access to individual market coverage. Thus, a child who was covered as a dependent under a parent's group coverage (and who meets the eligibility criteria) typically would be eligible for HIPAA's guarantee of access to coverage. In contrast, a child who never had access to group coverage, because the parent's employer did not offer dependent coverage or any health coverage, would not be eligible for the access guarantee. Further, HIPAA's guarantee applies only to those losing group coverage--not to those who have always relied on the individual market for coverage. In addition, HIPAA does not explicitly restrict the premiums carriers may charge for this coverage. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the availability of private sector health coverage for children in the individual insurance market, focusing on: (1) the availability and characteristics of private health insurance products that can be purchased only for a child and how these products differ from other individual private insurance products; (2) the costs of these child-only products; and (3) any barriers in access to individual private health coverage for children. GAO noted that: (1) comprehensive health coverage is available to children in the individual health insurance market across the United States; (2) at least one comprehensive product is available to most children in all 50 states; (3) in almost all states, a product that is priced specifically for children is available; (4) the insurance agents and brokers GAO contacted in two selected states were generally aware that products for children existed and could either sell the products themselves or refer GAO to someone who could; (5) the benefits covered under these products typically mirror those of products available to adults in the individual market; (6) while these products were available nationwide, among the carriers GAO contacted they represented a relatively small share of total individual sales--from under 1 percent to 20 percent; (7) furthermore, since many carriers do not tend to operate in states with certain regulatory requirements, consumers may have a more limited choice of benefit plans and carriers in these states; (8) as is the case with products for adults in the individual market, costs for child-only products varied considerably, both within and across selected markets; (9) standard monthly premium rates for the products GAO reviewed that are available to children are based largely on age, geographic location, plan type, and product design, including deductible and cost-sharing options; (10) in calculating rates, carriers also take into account the expected health care utilization of different age groups and the impact of various state regulations; (11) GAO found standard monthly premium rates for a healthy 15-year-old among its selected carriers ranged from a low of about $42 for a $1,000-deductible preferred provider organization plan in Portland, Oregon, to one as high as $321 for a $250-deductible fee-for-service plan in Los Angeles, California; (12) while these child-only products are available in all states--as is typical in the individual insurance market--many states do not require carriers to accept all applicants; (13) in these states, children with certain health conditions may be denied coverage, or their coverage may exclude an existing condition or treatments for particular parts of the body, or they may be charged a rate higher than the standard premium rate; and (14) of the carriers that GAO reviewed, two that market specifically to children do not cover children under these policies during their first 6 or 12 months of life, due to the high cost of early preventive care and lack of information about a child's possible future health problems.
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The Small Business Innovation Development Act of 1982 provided for a three-phase program. Phase I is intended to determine the scientific and technical merit and feasibility of a proposed research idea. Work in phase II further develops the idea, taking into consideration such things as the commercialization potential. Phase III generally involves the use of nonfederal funds for the commercial application of a technology or non-SBIR federal funds for continued R&D under government contracts. The Small Business Research and Development Enhancement Act of 1992 reauthorized the SBIR program through fiscal year 2000. The act emphasized the program's goal of increasing private sector commercialization and provided for incremental increases in SBIR funding up to not less than 2.5 percent of agencies' extramural R&D budgets by fiscal year 1997. Moreover, the act directed SBA to modify its policy directive to reflect an increase in funding for eligible small businesses, that is, businesses with 500 or fewer employees. This increased funding from $50,000 to $100,000 for phase I and from $500,000 to $750,000 for phase II, with adjustments once every 5 years for inflation and changes in the program. The agencies' SBIR officials reported that they have adhered to the act's requirement of not using SBIR funds to pay for the administrative costs of the program, such as salaries and support services used in processing awards. However, they added that the funding restriction has limited their ability to provide some needed administrative support. The program officials also believe that they are adhering to the statutory requirement to fund the program at 2.5 percent of agencies' extramural research budget. Some of the officials expressed concern because they believe that agencies are using different interpretations of the "extramural budget" definition. This may lead to incorrect calculations of their extramural research budgets. For example, according to DOD's SBIR program manager, all eight of DOD's participating military departments and defense agencies that make up the SBIR program have differing views on what each considers an extramural activity and on the appropriate method for tracking extramural R&D obligations. As a result, the program and budget staff have not always agreed on the dollar amount designated as the extramural budget. Of the five agencies we reviewed, only two have recently audited their extramural R&D budgets. Both NSF and NASA conducted audits of their extramural R&D budgets in fiscal year 1997. DOD, DOE, and NIH have not conducted any audits of their extramural R&D budgets nor do they plan to conduct any audits in the near future. NSF's audit, which was performed by its Inspector General, concluded that NSF was overestimating the size of its extramural R&D budget by including unallowable costs, such as education, training, and overhead. NSF estimated that these unallowable costs totaled over $100 million. The Inspector General's audit report concluded that by excluding these "unallowables," NSF will have reduced the funds available for the SBIR program by approximately $13 million over a 5-year period. Likewise, NASA has completed a survey of fiscal year 1995 budget data and is currently reviewing fiscal year 1996 data at its various field centers. NASA officials say this is an effort to (1) determine the amount spent on R&D and (2) categorize the R&D as either intramural or extramural activities. Most of the SBIR officials we interviewed believed that neither the application review process nor current funding cycles are having an adverse effect on award recipients' financial status or their ability to commercialize their projects. Specifically, DOD, DOE, NSF, and NASA stated that their respective review processes and funding cycles have little to no adverse effect on the recipients' financial status or the small companies' ability to commercialize their technologies. Furthermore, NIH believes that having three funding cycles in each year has had a beneficial effect on applicants. SBIR officials did say that some recipients had said that any interruption in funding awards, for whatever reason, affects them negatively. One SBIR program manager stated that at DOD, most award recipients often have no way of paying their research teams during a funding gap. As a result, ongoing research may be delayed, and the "time-to-market"--that is the length of time from the point when research is completed to the point when the results of the research are commercialized--may be severely impaired, thus limiting a company's commercial potential. As a result, most of the participating SBIR agencies have established special programs and/or processes in an effort to mitigate any adverse effect(s) caused by funding gaps. One such effort is the Fast Track Program, employed at DOD, whereby phase I award recipients who are able to attract third-party funding are given the highest priority in the processing of phase II awards. At DOE and NIH, phase I award recipients are allowed to submit phase II applications prior to the completion of phase I. NASA has established an electronic SBIR management system to reduce the total processing time for awards and is currently exploring the possibility of instituting a fast track program similar to that of DOD. The third phase of SBIR projects is expected to result in commercialization or a continuation of the project's R&D. In 1991, we surveyed 2,090 phase II awards that had been made from 1984 through 1987 regarding their phase III activity. In 1996, DOD conducted its own survey, which closely followed our format. DOD's survey included all 2,828 of DOD's SBIR projects that received a phase II award from 1984 through 1992. While analyzing the response data from our 1991 survey, we found that approximately half of the phase II awards reported phase III activity (e.g., sales and additional funding) while the other half had no phase III activity. (See table 1.) Overall, 515 responses, or 35 percent, indicated that their projects had resulted in sales of products or processes, while 691, or 47 percent, had received additional developmental funding. Our analysis of DOD's 1996 survey responses showed that phase III activity was occurring at similar rates to GAO's survey. Our analysis of these responses showed that 765 projects, or 53 percent, reported that they were active in phase III at the time of the survey, while the other half did not report any phase III activity. The DOD respondents indicated that 442 awards, or 32 percent, had resulted in actual sales, while 588 reported the awards had resulted in additional developmental funding. Agencies are currently using various techniques to foster commercialization, although there is little or no empirical evidence suggesting how successful particular techniques have been. For example, in an attempt to get those companies with the greatest potential for commercial success to the marketplace sooner, DOD has instituted a Fast Track Program, whereby companies that are able to attract outside commitments/capital for their research during phase I are given higher priority in receiving a phase II award. The Fast Track Program not only helps speed these companies along this path but also helps them attract outside capital early and on better terms by allowing the companies to leverage SBIR funds. In 1996, for example, DOD's Fast Track participants were able to attract $25 million in outside investment. Additionally, DOD, in conjunction with NSF and SBA, sponsors three national SBIR conferences annually. These conferences introduce small businesses to SBIR and assist SBIR participants in the preparation of SBIR proposals, business planning, strategic partnering, market research, the protection of intellectual property, and other skills needed for the successful development and commercialization of SBIR technologies. DOE's Commercialization Assistance Program provides phase II award recipients with individualized assistance in preparing business plans and presentation materials to potential partners or investors. This program culminates in a Commercialization Opportunity Forum, which helps link SBIR phase II award recipients with potential partners and investors. NSF provides (1) its phase I award recipients with in-depth training on how to market to government agencies and (2) its phase I and II award recipients with instructional guides on how to commercialize their research. Similarly, NASA assists its SBIR participants through numerous workshops and forums that provide companies with information on how to expand their business. NASA also provides opportunities for SBIR companies to showcase their technologies to larger governmental and commercial audiences. Moreover, NASA has established an SBIR homepage on the Internet to help promote its SBIR technologies and SBIR firms and has utilized several of its publications as a way for SBIR companies to make their technologies known to broader audiences. Using SBA's data, we identified phase I award recipients who had received 15 or more phase II awards in the preceding 5 years. On the basis of survey data from both GAO's and DOD's surveys, we compared the commercialization rates as well as the rates at which projects received additional developmental funding for these multiple-award recipients with the non-multiple-award recipients. This comparison of the phase III activity is summarized in table 2. This analysis shows that the multiple-award recipients and the non-multiple-award recipients are commercializing at comparable rates. According to both surveys, multiple-award recipients receive additional developmental funding at higher rates than the non-multiple-award recipients. However, the average levels of sales and additional developmental funding for the multiple-award recipients are lower than those for non-multiple-award recipients. When an agency funds research for a given solicitation topic where only one proposal was received, it may appear that there was a lack of competition. The majority of the SBIR officials we interviewed indicated that receiving a single proposal for a given solicitation topic is extremely rare. DOD reported that from 1992-96 there were only three instances when a single proposal was submitted for a given solicitation topic out of 30,000 proposals that were received for various solicitations. DOD's SBIR official did state, however, that none of the cases resulted in an award. Both DOE's and NASA's SBIR officials reported that they did not receive any single proposals for this time period. Moreover, NASA's SBIR officials stated that their policy is to revise a solicitation topic/subtopic if it receives fewer than 10 proposals or to drop the topic/subtopic from the solicitation. One of the purposes of the 1992 act was to improve the federal government's dissemination of information concerning the SBIR program, particularly with regard to program participation by women-owned small businesses and by socially and economically disadvantaged small businesses. All of the agencies we reviewed reported participating in activities targeted at women-owned or socially and economically disadvantaged small businesses. All SBIR program managers participate each year in a number of regional small business conferences and workshops that are specifically designed to foster increased participation in the SBIR program by women-owned and socially and economically disadvantaged small businesses. The SBIR managers also participate in national SBIR conferences that feature sessions on R&D and procurement opportunities in the federal government that are available to socially and economically disadvantaged companies. Most of the SBIR agency officials we interviewed stated that they use the two listings of critical technologies as identified by DOD and the National Critical Technologies Panel in developing their respective research topics. The other agencies believed that the research being conducted falls within one of the two lists. At DOE, for example, research topics are developed by the DOE technical programs that contribute to SBIR. In DOE's annual call for topics, SBIR offices are instructed to give special consideration to topics that further one or more of the national critical technologies. DOE's analysis of the topics that appeared in its fiscal year 1995 solicitation revealed that 75 percent of the subtopics listed contributed to one or more of the national critical technologies. Likewise, NASA's research topics, developed by its SBIR offices, reflect the agency's priorities that are originally developed in accordance with the nationally identified critical technologies. At DOD, SBIR topics that do not support one of the critical technologies identified by DOD will not be included in DOD's solicitation. Both NIH and NSF believe that their solicitation topics naturally fall within one of the lists. According to NIH's SBIR official, although research topics are not developed with these critical technologies in mind, their mission usually fits within these topics. For example, research involving biomedical and behavioral issues is very broad and can be applied to similar technologies defined by the National Critical Technologies Panel. NSF's SBIR official echoes the sentiments of NIH. According to this official, although NSF has not attempted to match topics with the listing of critical technologies, it believes that the topics, by their very nature, fall within the two lists. According to our 1991 survey and DOD's 1996 survey, SBIR projects result in little business-related activity with foreign firms. For example, our 1991 survey found that 4.6 percent of the respondents reported licensing agreements with foreign firms and that 6 percent reported marketing agreements with foreign firms. It should also be remembered that both of these agreements refer to activities where the U.S. firm is receiving benefits from the SBIR technology and still maintaining rights to the technology. Sales of the technology or rights to the technology occurred at a much lower rate, 1.5 percent, according to our survey. The DOD survey showed similar results. These data showed that less than 2 percent of the respondents had finalized licensing agreements with foreign firms and that approximately 2.5 percent had finalized marketing agreements with foreign firms. Sales of the technology or the rights to the technology developed with SBIR funds occurred only 0.4 percent of the time. A recent SBA study stated that one-third of the states received 85 percent of all SBIR awards and SBIR funds. In fiscal year 1996, the states of California and Massachusetts had the highest concentrations of awards, 904 awards for a total of $207 million and 628 awards for a total of $148 million, respectively. However, each state has received at least two awards, and in 1996, the total SBIR amounts received by states ranged from $120,000 to $207 million. The SBA study points out that 17 states receive the bulk of U.S. R&D expenditures, venture capital investments, and academic research funds. Hence, the study observes that the number of small high-tech firms in a state, its R&D resources, and venture capital are important factors in the distribution and success of SBIR awards. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or the members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the Small Business Innovation Research (SBIR) program, focusing on: (1) agencies' adherence to statutory funding requirements; (2) agencies' audits of extramural (external) research and development (R&D) budgets; (3) the effect of the application review process and funding cycles on award recipients; (4) the extent of companies' project activity after receiving SBIR funding and agencies' techniques to foster commercialization; (5) the number of multiple award recipients and the extent of project activity after receiving SBIR funding; (6) the occurrence of funding for single proposal awards; (7) participation by women-owned business and socially and economically disadvantaged business; (8) SBIR's promotion of the critical technologies; (9) the extent foreign firms benefit from SBIR results; and (10) the geographical distribution of SBIR awards. GAO noted that: (1) agencies have adhered to the Small Business Research and Development Enhancement Act's funding requirements; (2) agency program officials reported that they are not using SBIR funds to pay for administrative costs of the program; (3) program officials believe that they are adhering to the statutory requirement to fund the program at 2.5 percent of agencies' extramural budget; (4) some officials believe that agencies are using different interpretations of the extramural budget definition, which may lead to incorrect calculations; (5) of the five agencies reviewed, only two have conducted audits of their extramural budgets; (6) while most SBIR officials interviewed said that neither the application review process nor current funding cycles have had an adverse effect on award recipients' financial status or ability to commercialize, some recipients have said that any interruption in funding awards affects them negatively; (7) most participating SBIR agencies have established programs to minimize funding gaps; (8) companies reported that approximately 50 percent of their projects had sales of products or services related to research or received additional developmental funding after receiving SBIR funding; (9) the agencies identified various techniques to foster the commercialization of SBIR-funded technologies; (10) the number of companies receiving multiple awards had grown from 10 companies in 1989 to 17 in 1996; (11) multiple-award recipients and non-multiple-award recipients commercialized at almost identical rates; (12) agencies rarely fund research for a given solicitation topic where only one proposal was received; (13) of the five agencies examined, all reported engaging in activities to foster the participation of women-owned or socially and economically disadvantaged small businesses; (14) all agencies' SBIR officials believed that the listings of critical technologies are used in developing their respective research topics or that the research being conducted falls within one of the two lists; (15) little evidence of foreign firms benefiting from technology or products developed as a direct result of SBIR-funded research; (16) a Small Business Administration study reported that one-third of the states received 85 percent of all SBIR awards and funds; and (17) previous studies of SBIR have linked the concentration of awards to local characteristics.
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VA operates one of the nation's largest health care systems at a cost of more than $16 billion a year. The system has 173 hospitals and 220 clinics that are geographically remote from a VA hospital. VA hospitals typically operate these clinics themselves and staff them with VA personnel. Since its inception in 1930, the VA health care system has developed into a direct delivery system, with the government owning and operating its own health care facilities, in response to a time when there was virtually no public or private health insurance. Traditionally, many veterans traveled long distances to use VA facilities. About one-half of all veterans live more than 25 miles from a VA hospital, including 6 percent who live more than 100 miles from one. Over one-third of all veterans live 25 miles or more from a VA clinic. Currently, VA serves about 10 percent of the 27 million veterans eligible for care including many who travel long distances. Other veterans have often said that they do not use VA facilities for their health care because they live too far from the nearest hospital or clinic. Until 1995, VA required its hospitals to meet rigid criteria to establish outpatient facilities located apart from the hospitals. These criteria included a minimum number of veterans to be served in a clinic and a minimum distance that clinics must be from the VA hospitals. For example, community-based clinics were required to (1) have a projected workload of at least 3,000 visits annually, (2) be 100 miles or 3 hours travel time away from the nearest VA facility, and (3) have more than one-half of the counties in the targeted veteran population in health manpower shortage areas. In anticipation of national health care reform, VA determined that it needed to expand its ability to provide outpatient care, especially for veterans who are geographically distant from VA hospitals. The Amarillo VA hospital is recognized as the first facility to establish access points. Amarillo's first access point began operations in January 1994. In February 1995, VA encouraged all its hospitals to consider establishing access points, like those that Amarillo operates. In doing this, VA eliminated many of its restrictions concerning the workload and location of proposed clinics. In addition, VA policy encouraged hospitals to provide care not only in VA-operated facilities, but also by contracting with other providers. VA gave hospital and veterans integrated service network (VISN) directors the authority to propose and approve access points. When developing new access points, directors are to consider the (1) eligible veteran population, (2) services to be provided, (3) costs of available alternatives, and (4) sources of funds. To date, nine VA hospitals have opened 12 access points (see fig. 1). VISN directors have considerable freedom to develop their own goals and objectives as well as their own implementation strategies; however, they are encouraged to discuss plans with interested parties as well as inform VA headquarters. Each of the 12 new access points generally shares four common operating characteristics. They each have a (1) designated health care provider, (2) prescribed package of medical services, (3) target veteran population, and (4) predetermined cost. VA staff operate four of the access points and contract with county or private clinics to operate the remaining eight. During a veteran's initial visit, access points that have contracted with VA "enroll" the veteran in the facility. The contract access point agrees to care for the veteran for 1 year. For that care, the access point is paid a capitated fee--a one-time payment to cover the veteran's care for a 12-month period, regardless of how many times the veteran seeks care. When new access points are established, VA encourages veterans currently receiving VA health care to enroll along with veterans who have not previously received care. However, some VA hospitals have limited enrollment to veterans with service-connected conditions or current VA users. As of March 1996, the 12 access points had enrolled nearly 5,000 veterans. Veterans receive primary care at access points comparable to that available during visits to a private physician's office. With the exception of emergencies, enrolled veterans are referred to VA hospitals, not local hospitals, for inpatient or specialized care. In early 1996, VA notified the Congress that 47 hospitals (including 5 of the 9 hospitals that already had access points) were ready to open an additional 58 access points. Another 200 were under development and could be operating by December 1996. Subsequently, the 22 VISN directors began developing 1-year tactical, 2- or 3-year strategic, and 5-year target plans. VA expects that new access points will be an important element of the networks' tactical/strategic plans. VA has drafted guidance to be used by VISN directors when planning for new access points. This draft guidance states that the intent of access points is to primarily enroll current users who find it difficult due to location or medical condition to travel to a VA facility. Toward this end, the guidance suggests that directors provide a more thorough analysis of such key factors as eligible veteran population, costs, and source of funds when submitting proposals to establish new or realign existing access points. For example, directors are to complete a workload analysis that describes and distinguishes those patients that will be redirected from the existing service population and those that are new. The guidance also provides a specific set of desirable characteristics that should be considered when siting an access point, including that it be generally within 30 minutes travel time of veterans' residences. Historically, the Congress has limited VA's authority to provide medical care to veterans, expanding it in a careful and deliberate manner. Although VA's authority has increased significantly over the years, important limitations were not recognized by VA in establishing and operating the access points we visited. "for the mutual use, or exchange of use of specialized medical resources . . . only if such an agreement will obviate the need for a similar resource to be provided in a [VA] health care facility." Specialized medical resources are equipment, space, or personnel that--because of cost, limited availability, or unusual nature--are unique in the local medical community. VA officials asserted that primary care provided at access points is a specialized medical resource because its limited availability to veterans in areas where VA facilities are geographically inaccessible (or inconvenient) makes it unique. One significant aspect of VA's reliance on this authority is that it effectively broadens the eligibility criteria for contract outpatient care, thus allowing some veterans, who would otherwise be ineligible, to receive treatment. In our view, this statute does not authorize VA to provide primary care through its access points. The absence of a VA facility close to veterans in a particular area does not make primary care physicians unique in the local medical community, within the meaning of the statute. The purpose of allowing VA to contract for services under the specialized medical resources authority is not to expand the geographic reach of its health care system, but to make available to eligible veterans services that are not feasibly available at a VA facility that presently serves them. Furthermore, contracting for the provision of primary care at access points does not obviate the need for primary care physicians at the parent VA facility. VA has specific statutory authority (38 U.S.C. 1703) to contract for medical care when its facilities cannot provide necessary services because they are geographically inaccessible. This authority could be relied on to authorize contracting for the operation of access points. However, both the types of services available and the classes of veterans eligible for care under this authority are more limited than those under the authority upon which VA relies (38 U.S.C. 8153). For example, under 38 U.S.C. 8153, a veteran who has income above a certain level and no service-connected disability is eligible for pre- and posthospitalization medical services and for services that obviate the need for hospitalization. But under 38 U.S.C. 1703, that same veteran is not eligible for prehospitalization medical services or for services that obviate the need for hospitalization. If access points are established in conformance with 38 U.S.C. 1703, VA would need to limit the types of services provided to all veterans except those with service-connected disabilities rated at 50 percent or higher (who are eligible to receive treatment of any condition). All other veterans are generally eligible for VA care based on statutory limitations (and to the extent that VA has sufficient funds). For example, veterans with service-connected disabilities are eligible for all care needed to treat those conditions. Those with disabilities rated at 30 or 40 percent are eligible for care of nonservice-connected conditions at contract access points to complete treatment incident to hospital care. Furthermore, veterans with disabilities rated at 20 percent or less and those with no service-connected disability may only be eligible for limited diagnostic services and follow-up care after hospitalization. Most veterans currently receiving care at access points do not have service-connected conditions and, therefore, do not appear to be eligible for all care provided. VA is required to assess each veteran's eligibility for care on the merits of his or her situation each time that the veteran seeks care for a new medical condition. We found no indication that VA requires access point contractors to establish veterans' eligibility or priority for primary care or that contractors were making such determinations for each new condition. Last year, VA proposed ways to expand its statutory authority and veterans' eligibility for VA health care. A bill has been passed in the Congress that, if signed by the President, would authorize VA hospitals to establish contract access points and provide more primary care services to veterans in the same manner as the access points are now doing. Access points have significant financial implications for VA hospitals, veterans, and non-VA health care providers. In general, VA hospitals will probably experience these effects only after access points have operated for a few years. In contrast, veterans and non-VA providers could experience financial effects immediately. VA hospital directors are likely to experience a series of financial challenges as they establish new access points. Initially, VA hospitals must finance access points within their existing budgets; this generally will require reallocating resources among other activities and services with no net change in their respective budgets. Over time, however, VA hospitals may incur significant cost increases to provide care to veterans who would otherwise not have used VA's facilities. We have suggested that these additional increases at least in the near term may be offset if these new clinics enable hospitals to conserve money by serving users more efficiently. To date, the nine VA hospitals have funded new clinics by using money saved from hospital-based staff reductions and other hospital-based efficiencies. At one hospital, officials are financing their new clinics by using funds saved by reducing the hospital staff. They estimated savings in excess of $900,000 by eliminating the equivalent of 15.5 positions. Another hospital expects to save up to $400,000 by reviewing patients' use of prescription medications. At other hospitals, such reviews have reduced the number of prescribed medications and have achieved cost savings in procuring, storing, and dispensing drugs. Savings can also be achieved by reducing the staff involved in primary care at the hospitals. Officials at one hospital told us that if a sufficient number of veterans currently receiving care at their hospital can be enrolled in access clinics, they can reduce the size of their primary care staff and use the resulting savings to fund additional access points. Each primary care team at the hospital treats approximately 1,500 patients; consequently, for every group of 1,500 patients they can shift to access points, the hospital can eliminate one hospital-based primary care team. Most VA hospital directors have concluded that it is more cost effective to contract for care in targeted locations than to operate new access points themselves. In many instances it is the only cost-effective option available. One of VA's goals in negotiating contract rates was to obtain a rate that was less than the estimated cost of a VA primary care team providing the same services. While VA does not have a financial system capable of tracking procedure-specific costs, VA hospitals with new access points attempted to estimate VA costs related to primary care services. These hospitals used their cost estimates as the basis to compare bids from clinics interested in establishing VA access clinics. In areas where the veteran population is too small to justify a VA-operated clinic, contracting may be the only cost-effective method available to provide primary care. VA guidance suggests that 3,000 visits per year are needed to justify a VA-operated clinic. In the rural areas served by most new access points, veteran populations are small. For example, in one area served by an access point, only 173 veterans who use VA health care live there, far below the amount needed to justify a full-time VA clinic. Health providers that have agreed to establish access points to serve veterans on a contractual, capitated basis also benefit because they have an existing nonveteran patient base and excess capacity to meet VA's needs. Hospitals also plan to finance clinics by using the savings that result from implementing a managed care delivery system. Clinics will have a major role in this system that plans to be based on a strong primary care network with clinics conveniently located near patients. VA contends that by making primary care more accessible, patients will be more likely to seek preventive care and VA hospitals will experience a consequent reduction in specialist and hospital use. VA believes that veterans should experience an improvement in their health status as VA shifts its emphasis from inpatient to preventive care. VA officials anticipate a significant decrease in the use of specialty clinics and diagnostic services as a result of VA focusing on preventive medicine. VA officials contend that veterans who live several hours away from a VA facility do not receive sufficient preventive care. Typically these veterans would wait until their condition worsened before they would seek treatment. Consequently, when veterans ultimately sought care, the care they would then need would be more intensive, more extensive, and more costly. By providing care closer to where veterans live, VA officials predict that veterans will be more likely to seek and receive care before their condition becomes serious. Additionally, by obtaining their primary care from caregivers in local clinics rather than specialists in VA hospitals, VA anticipates a reduction in the number of diagnostic tests, which are used more frequently by VA specialists than by local primary care givers. If the clinics succeed in improving veterans' health status and reducing the need for specialty and inpatient care, VA hospitals should realize significant cost savings. If the emphasis on primary care results in a reduction of the number of days of hospitalization, that in turn could result in further medical ward consolidations and fewer hospital-based staff. The majority of savings would result from hospital staff reductions and associated salary and benefit savings. For example, when one hospital consolidated inpatient wards and eliminated 23 beds, it saved an estimated $250,000. These savings were used to finance access clinics. Over time, the initial savings that VA experiences with access points may ultimately be reversed and expenses may rise. In a recent study, VA researchers compared two groups of veterans who had been discharged from nine VA hospitals. One group of veterans was given traditional VA services following an inpatient stay and the other group received intensive primary care intervention involving close follow-up by a nurse and a primary care physician beginning before discharge and continuing for the next 6 months. After 6 months, the rehospitalization rate was greater for the group receiving the intensive primary care treatment than for the group receiving traditional VA follow-up services. Although the results are preliminary and the veterans involved in the study suffered from serious medical conditions, the implications of this study relative to increasing the numbers of access points should be carefully considered. The longer-term effects of access points on VA's budget are less certain. Our work has shown that VA has not clearly delineated its goals and objectives nor has it developed a strategic plan that specifies the number of potential access points, time frames for beginning operations, and associated costs. If access point clinics attract a significant number of new users--veterans who heretofore have not used VA for their health care needs--VA hospital specialty use and hospitalization rates may actually increase. The effect on VA's medical budget will depend largely on the number and willingness of these "new" veterans who are referred by clinics to receive specialized treatment at VA hospitals. For example, as of March 1996, 40 percent of the 5,000 veterans enrolled at VA's 12 new access points were new users. If new users receive care only at the clinics and not at VA hospitals, the budget effect may be small. However, if a significant number of new users begin using VA hospitals for specialty and inpatient care, overall VA use could remain stable or even increase with a corresponding increase in VA's expenses. Therefore, the projected savings attributable to managed care could be offset by increased costs at VA hospitals. Overall, both veterans and veterans service officers indicated their satisfaction with the care that veterans have received at the new access points, but some concerns have been expressed about the ownership and operation of the clinics. One veterans service officer at a clinic we visited said that the access point was an improvement for veterans seeking care. Previously, veterans now using the clinic had to travel long distances to get to the nearest VA medical center. The representative said that he had not heard any veteran complaints and that the clinic is especially effective in providing preventive care. He added that the veterans were happy to have medical care available to them at the clinic. He also told us that now veterans are more likely to see a physician more frequently because it is much more convenient to seek care and not wait until the last minute. A veterans service officer at another clinic was very supportive of the clinic, but said she would prefer that the clinic be VA-owned and operated. She was concerned because the clinic only had a part-time physician. If a veteran arrived at the clinic without an appointment, the veteran might have to be cared for by a physician assistant or nurse. She indicated that veterans want to be seen by a physician. She also said there had been problems with medical files not being transferred to or available at the clinic. As a consequence, medical care was delayed. The same representative said that veterans' demand for care may overwhelm the clinic. She said that some of the veterans getting care at the clinic had not received medical care before because it took 3 hours to drive to the nearest VA facility. The veterans are now using the clinic because it is more accessible. About one-half of the veterans we interviewed said that as long as VA paid for the care, they were not bothered by the fact that the care they received was given at the access point rather than at a VA facility. Access points may prove more attractive to veterans than VA hospitals in part because access points moderate barriers such as geographic inaccessibility. The financial benefits that will accrue to veterans using new access points will vary depending on whether veterans are currently using VA hospitals or are new users of VA services. Current users should realize savings related to travel expenses. New low-income users will save these costs in addition to any costs they previously incurred by receiving care at non-VA providers. Savings realized by new high-income users will be offset by VA copayments that will be required. Current VA users will benefit primarily from reduced travel costs. VA reports that many veterans must travel several hours to get to a VA hospital. Because of the distances involved, many elderly patients are not able to travel to and from their homes and receive medical treatment all in one day. Often, veterans and those assisting them must stay in lodging the day before or after a scheduled appointment. Although VA may reimburse these veterans a set amount of money for each mile they travel, lodging and meals are not reimbursed. Clinics located closer to current users would save these veterans both time and money. Veterans new to the VA system have the potential to experience significant cost savings. Besides the savings that current users would receive associated with travel, new users would realize additional savings at rates dependent on the amount that they were spending for health care before they used VA's access points. For example, an insured veteran could avoid a deductible of $250 or more by using VA. In addition, low-income veterans, who previously may have received minimal health care because they lacked the means to travel or pay for care, would no longer have to forgo care. The financial effect on non-VA providers will vary depending on whether they provide care to veterans under contract with VA or compete with VA by providing the same care to veterans while being reimbursed by some other source. When VA enters a community as a payer of community providers, some local providers have the potential to benefit financially. Clinics that have excess capacity are in the best position to benefit from a VA primary care contract. For example, one official at a new access point clinic reported that the clinic's contract with the local VA hospital helped to offset its fixed costs without adding much to its variable costs. Because the general population was getting smaller, local primary care staffs were underutilized. In addition, the populations served by the clinics were disproportionately elderly, poor, and underinsured. Combined, these factors enabled the clinics to better utilize their existing staff and benefit financially by contracting with VA. The veterans service officer at one location said that if it were not for the VA contract, the clinic would probably not have survived. Therefore, not only do the veterans benefit, but VA's presence has public health implications as well. An additional benefit cited by one clinic physician for contracting with VA was the convenience for both veterans and their families to receive care at the same location. While VA pays only for a veteran's health care, a veteran's family can receive treatment at the same location. After VA selects a health care provider to establish a new access point, those providers not selected will lose income to the extent that their veteran patients switch to the VA-sponsored clinic for their care. At one access point, a local physician complained to the clinic that one of his patients switched to the VA access point. The physician expressed concern about losing his other veteran patients. The likelihood that veterans will move from one provider to another depends on a variety of factors, including the number and types of providers available in the same geographic area. VA believes that contracting with existing local health care providers will be less disruptive to the local health community overall. On the other hand, if VA established a VA-operated clinic in a community with sufficient capacity to treat the target veteran population, VA would most likely be viewed as a competitor duplicating existing medical resources. The financial effect on other health care financing organizations will vary depending on whether they are publicly or privately sponsored. Seventy percent of the veterans using access points that we interviewed had Medicare coverage and 7 percent had Medicaid coverage. These public insurers may process fewer claims for these veterans because they are now using VA's access points. Under current law, Medicare and Medicaid are not allowed to pay VA for eligible veterans treated at a VA facility. VA recently asked the Congress for authority to be reimbursed by Medicare for providing care to such veterans. Under the VA proposal, Medicare would reimburse VA for care at a rate no greater than 95 percent of the prevailing rate at which private Medicare providers are reimbursed. Private insurers will likely realize little financial change. About one-half of the veterans that we interviewed reported that they had private insurance coverage. Typically, insurers would be billed by providers. Access points, however, are paid by VA. For veterans with private insurance coverage, VA bills the insurer to recover its costs. VA's new access points represent a proactive effort to transition from a hospital-based delivery system to an integrated network of VA-operated hospitals and non-VA primary care providers. The potential effect of access points on the future role of VA hospitals as health care providers for veterans depends to a large extent on hospitals' operational goals and objectives. To date, VA has not developed a strategic plan for its access points initiative, relying instead on VISN directors to develop their own goals and objectives. In effect, the access points may be considered pilot projects that provide useful information to assess the implications of different network integration goals and veterans' satisfaction with an integrated service delivery network. The effect of the access points on demand for VA health care services is uncertain. Improved accessibility, however, could greatly affect future demand. Each of the three hospitals we studied has established access points to improve the convenience of primary care for their current users. At two of the hospitals, VA officials had decided that the veterans who would benefit most from access points would be those who lived the farthest from their respective medical center. Veterans who received care at these two hospitals had to travel 108 miles on average with some veterans having to travel as many as 300 miles from their homes. While VA's goal is intended to benefit its current veteran population, all but two access points have attracted veterans who had not previously used VA for their health care. The extent to which this occurs depends on a variety of factors, including the number of veterans living in areas served by access points. Despite the intent, access points should help VA improve service delivery for users, which in turn should improve user satisfaction with VA's health care system. Depending on the location of the access point and the number of veterans who live in the area, enrolling new users could significantly affect VA's mission and budget. VA officials at one hospital anticipate a 20-percent increase in the number of new users. To date, about 10 percent of its access point users have been veterans new to the VA health care system. There are 3,848 veterans in the area surrounding the access point clinic who are not currently using VA. In theory, this represents the potential customer base for the access point. VA officials anticipate the number of new users for this access point to be moderate because of the characteristics of the geographic area. Specifically, the access point service area consists of veterans whose homes are scattered throughout a rural area and many would still have to travel long distances to get to the access point. Consequently, a new access point would not be an attractive alternative to a veteran unless it was within a comparable travel distance to his or her current health care provider. In more densely populated areas, however, VA's ability to attract new users is more significant. For example, one VA hospital has contracted with a clinic in a more urbanized area to provide primary care for up to 1,656 veterans. However, there are 4,048 veterans in the service area who currently use VA services and 24,856 veterans who live in the same area who can be considered potential patients. Because veterans who live close to a VA facility are more likely to use VA services, there exists the potential for increasing VA's market share. Additionally, the potential for treating new veterans is much greater in urban areas than in the remote rural areas where the number of potential patients is far lower. VA hospitals are contracting with access points to care for a limited number of veterans. VA hospital resources available to fund access points are finite and are limited to the extent that hospitals have a set of core activities and services that must be maintained and funded. Because demand for service at access points may outstrip VA hospitals' ability to fund the extra clients, VA hospitals have developed procedures to ration care provided at access points. VA hospitals have the discretion to increase the number of veterans covered by contracts, but if demand for medical care at access points exceeds the VA hospitals' resources, the VA hospitals may need to limit care. VA hospitals have discretion on how to ration care. For example, veterans with high incomes and nonservice-connected disabilities might be refused care, but care might also be rationed by medical condition. While the VA hospital officials with whom we spoke did not anticipate having to ration care, they said that if it became necessary they would do so on a first-come, first-served basis rather than limiting care on the basis of VA eligibility criteria. This could result in a situation where veterans who have been using the VA system could be denied care at the access point if they sought care after an access point had enrolled its maximum number of veterans. Simultaneously, veterans who had never used VA health services before going to the access point would continue to use the clinic if they had been enrolled before the maximum number of enrollees had been reached. VA's plans to establish access points could represent a defining moment for its health care system as it prepares to move into the 21st century. The results of this action could range from improving access for a modest number of current or new users who live the greatest distances from VA facilities or in medically underserved areas to opening hundreds of access points and expanding VA's market share by attracting hundreds of thousands of new users. VA's growth potential is, in essence, limited by the availability of resources and statutory authority, new veteran users' willingness to be referred to VA hospitals, and other health care providers' willingness to contract with VA hospitals. Although VA should be commended for encouraging hospital directors to serve veterans using their facilities in the most convenient way possible, VA did not establish access points in conformance with applicable statutory authority. In addition, VA has not developed a plan to ensure that hospitals establish access points in an affordable manner. If developed, such a plan should articulate the number of new access points to be established, target populations to be served, time frames to begin operations, and related costs and funding sources. It should also articulate specific travel times or distances that represent reasonable veteran travel goals that hospitals could use in locating access points. Given the uncertainty surrounding resource needs for new access points, such a plan should also articulate clear goals for the target populations to be served. Hospitals should be directed to provide care at new access points following the statutory service priorities. If sufficient resources are not available to serve all eligible veterans expected to seek care, new access points that are established should first serve veterans with service-connected disabilities; then other categories of veterans; and finally, higher-income veterans. This approach should provide for more equitable access to VA care than VA's current strategy of allowing local hospitals to establish access points that could result in veterans being served on a first-come, first-served basis and then having services rationed to them when resources run out. VA proposed ways to address the legal concerns, and on October 9, 1996, the President signed legislation (P.L. 104-262) that provides VA hospitals with the authority to establish new access points. VA has also drafted guidance to address concerns about equity of access, convenience of access, and enrolling new users. However, the guidance has not been finalized and directors have great latitude in deciding how to use it. Consequently, 22 VISN directors must decide what is the fairest way to use their limited resources to establish new access points that could result in 22 different, potentially conflicting approaches. Given limited resources, our work suggests that VA should first focus on improving the convenience of access for current users, with a goal of equalizing access systemwide. Once this is accomplished, VA could then evaluate the costs and availability of resources to decide whether to pursue seeking new users. This approach seems fair for two reasons. First, veterans will not encounter situations where VA hospitals in certain parts of the country may provide convenient access for new users while veterans who have used VA hospitals in other parts of the country for from 5 to 20 years will be required to travel long distances for care. Second, VA hospitals' efforts to add new users will exacerbate the potential resource shortfalls, resulting in hospitals running out of money sooner than they otherwise would. Ensuring equity of access for current users before adding new users will also provide VA hospitals with additional time to assess the financial implications of the access points and better plan outreach strategies for new users. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to establish a travel time or distance standard to be followed by VA hospitals as they plan for additional access points in their service areas. We also recommend that the Secretary direct the Under Secretary to require VA hospitals to establish their access points in a manner that focuses on (1) the equalization of access for current users of the VA health care system on the basis of the designated time or distance standard and (2) the enrollment of any new users of the system in accordance with statutory priorities for VA care. Finally, we recommend that the Secretary direct the Under Secretary to provide the Congress a report that presents VA's overall plan and time schedule for the systemwide establishment of access points to assist the Congress in determining the affordability of VA's plan. In commenting on our draft report, VA agreed, in principle, with all but one of our recommendations. For example, VA stated that its ongoing network planning will include activities that should achieve our overall objectives of improving, in an equitable manner, veterans' access to care. Each VISN director is expected to consistently work to achieve specific desirable outcomes and goals and to consider desirable characteristics including travel time or distance criteria when making decisions about new access points for hospitals in his or her network. VA cautioned, however, that applying a single national standard as we recommended may be difficult given the diverse nature of the veteran population and VA's current health system that involves both urban and rural locations. For these reasons, VA believes that it is critical that the 22 VISN directors have considerable discretion in the placement of access points given veterans' travel times or driving distances. In the draft report provided to VA for its comment, we recommended that VA comply with the then-existing statutes regarding both veterans' eligibility for health care services and contracting for those services. In response to that recommendation, VA said that its general counsel is reviewing each new request for access points. In VA's opinion, the recently passed reform bill will help resolve disagreements over its interpretation and implementation of existing statutes. In view of the recent congressional action, we have deleted our recommendation from this final report. VA did not agree that it is necessary to provide the Congress with a report solely on VA's overall plans for systemwide establishment of access points. VA believes that the 22 networks' efforts to develop 1-year tactical and 2- or 3-year strategic plans will serve the same purpose. These 22 network plans will be consolidated into a national business plan that will include planned activities relating to the establishment of access points. While we agree that VA's national plan could provide a means to achieve the intent of our recommendation, it is not known at this time whether the plan will ultimately provide sufficient detail to afford the Congress enough information to determine the overall extent and cost of establishing access points. Copies of this letter are being sent to the Ranking Minority Members of the House Committee on Veterans' Affairs and the Senate Subcommittee on VA, HUD and Independent Agencies, Committee on Appropriations and the Secretary of Veterans Affairs. Copies also will be sent to other interested congressional committees and made available to others upon request. Please call me at (202) 512-7101 if you have any questions or need additional assistance. Other major contributors to this report include Paul Reynolds, Assistant Director; Michael O'Dell, Senior Social Science Analyst; Patrick Gallagher and Abigail Ohl, Senior Evaluators; Robert Crystal, Assistant General Counsel; Sylvia Shanks, Senior Attorney; Linda Diggs and Larry Moore, Evaluators; and Joan Vogel, Evaluator (Computer Science). VA Health Care: Efforts to Improve Veterans' Access to Primary Care Services (GAO/T-HEHS-96-134, Apr. 24, 1996). VA Health Care: Exploring Options to Improve Veterans' Access to VA Facilities (GAO/HEHS-96-52, Feb. 6, 1996). VA Health Care: How Distance from VA Facilities Affects Veterans' Use of VA Services (GAO/HEHS-96-31, Dec. 20, 1995). VA Clinic Funding (GAO/HEHS-95-273R, Sept. 19, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) efforts to establish health care access points to provide outpatient care for veterans who are geographically distant from VA hospitals. GAO found that: (1) the new access points represent a proactive effort to transition from a direct delivery system to an integrated network of VA-operated hospitals and VA and non-VA outpatient providers; (2) VA ignored statutory limitations in its legal authority to provide primary care to veterans, but legislation has been enacted which expands VA authority to contract for the provision of such care and veterans' eligibility to receive such services; (3) VA hospitals must finance access points within their existing budgets, which will generally require reallocating resources among current activities and services; (4) although access points should in time allow VA hospitals to serve current users more efficiently, the efficiencies may not generate enough savings to offset the increased costs associated with caring for increased numbers of veterans who may use the new clinics; and (5) because VA has not developed a strategic plan for expanding veterans' access to its medical care system, it is difficult to accurately gauge the number of access points VA will need or the effect they will have on the VA mission.
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The Aviation and Transportation Security Act established TSA as the federal agency with primary responsibility for securing the nation's civil aviation system, which includes the screening of all passenger and property transported by commercial passenger aircraft. At the 463 TSA- regulated airports in the U.S., prior to boarding an aircraft, all passengers, their accessible property, and their checked baggage are screened pursuant to TSA-established procedures, which include passengers passing through security checkpoints where they and their identification documents are checked by transportation security officers (TSO) and other TSA employees or by private sector screeners under TSA's Screening Partnership Program. Airport operators, however, are directly responsible for implementing TSA security requirements, such as those relating to perimeter security and access controls, in accordance with their approved security programs and other TSA direction. TSA relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers include behavior detection officers (BDOs), who examine passenger behaviors and appearances to identify passengers who might pose a potential security risk at TSA-regulated airports; travel document checkers, who examine tickets, passports, and other forms of identification; TSOs responsible for screening passengers and their carry-on baggage at passenger checkpoints, using x-ray equipment, magnetometers, Advanced Imaging Technology, and other devices; random employee screening; and checked baggage screening systems. Other security layers cited by TSA include, among others; intelligence gathering and analysis; passenger prescreening against terrorist watchlists; random canine team searches at airports; federal air marshals, who provide federal law enforcement presence on selected flights operated by U.S. air carriers; Visible Intermodal Protection Response (VIPR) teams; reinforced cockpit doors; the passengers themselves; as well as other measures both visible and invisible to the public. Figure 1 shows TSA's layers of aviation security. TSA has also implemented a variety of programs and protective actions to strengthen airport perimeters and access to sensitive areas of the airport, including conducting additional employee background checks and assessing different biometric-identification technologies. Airport perimeter and access control security is intended to prevent unauthorized access into secure areas of an airport--either from outside or within the airport complex. According to TSA, each one of these layers alone is capable of stopping a terrorist attack. TSA states that the security layers in combination multiply their value, creating a much stronger system, and that a terrorist who has to overcome multiple security layers to carry out an attack is more likely to be preempted, deterred, or to fail during the attempt. TSA has taken actions to validate the science underlying its behavior detection program, but more work remains. We reported in May 2010 that TSA deployed SPOT nationwide before first determining whether there was a scientifically valid basis for using behavior and appearance indicators as a means for reliably identifying passengers who may pose a risk to the U.S. aviation system. DHS's Science and Technology Directorate completed a validation study in April 2011 to determine the extent to which SPOT was more effective than random screening at identifying security threats and how the program's behaviors correlate to identifying high-risk travelers. However, as noted in the study, the assessment was an initial validation step, but was not designed to fully validate whether behavior detection can be used to reliably identify individuals in an airport environment who pose a security risk. According to DHS, further research will be needed to comprehensively validate the program. According to TSA, SPOT was deployed before a scientific validation of the program was completed to help address potential threats to the aviation system, such as those posed by suicide bombers. TSA also stated that the program was based upon scientific research available at the time regarding human behaviors. We reported in May 2010 that approximately 14,000 passengers were referred to law enforcement officers under SPOT from May 2004 through August 2008. Of these passengers, 1,083 were arrested for various reasons, including being illegal aliens (39 percent), having outstanding warrants (19 percent), and possessing fraudulent documents (15 percent). The remaining 27 percent were related to other reasons for arrest. As noted in our May 2010 report, SPOT officials told us that it is not known if the SPOT program has ever resulted in the arrest of anyone who is a terrorist, or who was planning to engage in terrorist-related activity. According to TSA, SPOT referred about 50,000 passengers for additional screening in fiscal year 2010 resulting in about 3,600 referrals to law enforcement officers. These referrals yielded approximately 300 arrests. Of these 300 arrests, TSA stated that 27 percent were illegal aliens, 17 percent were drug-related, 14 percent were related to fraudulent documents, 12 percent were related to outstanding warrants, and 30 percent were related to other offenses. DHS has requested about $254 million in fiscal year 2012 for the SPOT program, which would support an additional 350 (or 175 full-time equivalent) BDOs. If TSA receives its requested appropriation, TSA will be in a position to have invested about $1 billion in the SPOT program since fiscal year 2007. A 2008 report issued by the National Research Council of the National Academy of Sciences stated that the scientific evidence for behavioral monitoring is preliminary in nature. The report also noted that an information-based program, such as a behavior detection program, should first determine if a scientific foundation exists and use scientifically valid criteria to evaluate its effectiveness before deployment. The report added that such programs should have a sound experimental basis and that the documentation on the program's effectiveness should be reviewed by an independent entity capable of evaluating the supporting scientific evidence. As we reported in May 2010, an independent panel of experts could help DHS develop a comprehensive methodology to determine if the SPOT program is based on valid scientific principles that can be effectively applied in an airport environment for counterterrorism purposes. Thus, we recommended that the Secretary of Homeland Security convene an independent panel of experts to review the methodology of the validation study on the SPOT program being conducted to determine whether the study's methodology is sufficiently comprehensive to validate the SPOT program. We also recommended that this assessment include appropriate input from other federal agencies with expertise in behavior detection and relevant subject matter experts. DHS concurred and stated that its validation study, completed in April 2011, included an independent review of the study with input from a broad range of federal agencies and relevant experts, including those from academia. DHS's validation study found that SPOT was more effective than random screening to varying degrees. For example, the study found that SPOT was more effective than random screening at identifying individuals who possessed fraudulent documents and identifying individuals who law enforcement officers ultimately arrested. According to DHS's study, no other counterterrorism or screening program incorporating behavior- and appearance-based indicators is known to have been subjected to such a rigorous, systematic evaluation of its screening accuracy. However, DHS noted that the identification of such high-risk passengers was rare in both the SPOT and random tests. In addition, DHS determined that the base rate, or frequency, of SPOT behavioral indicators observed by TSA to detect suspicious passengers was very low and that these observed indicators were highly varied across the traveling public. Although details about DHS's findings related to these indicators are sensitive security information, the low base rate and high variability of traveler behaviors highlights the challenge that TSA faces in effectively implementing a standardized list of SPOT behavioral indicators. In addition, DHS outlined several limitations to the study. For example, the study noted that BDOs were aware of whether individuals they were screening were referred to them as the result of identified SPOT indicators or random selection. DHS stated that this had the potential to introduce bias into the assessment. DHS also noted that SPOT data from January 2006 through October 2010 were used in its analysis of behavioral indicators even though questions about the reliability of the data exist. In May 2010, we reported weaknesses in TSA's process for maintaining operational data from the SPOT program database. Specifically, the SPOT database did not have computerized edit checks built into the system to review the format, existence, and reasonableness of data. Because of these data-related issues, we reported that meaningful analyses could not be conducted to determine if there is an association between certain behaviors and the likelihood that a person displaying certain behaviors would be referred to a law enforcement officer or whether any behavior or combination of behaviors could be used to distinguish deceptive from nondeceptive individuals. In our May 2010 report, we recommended that TSA establish controls for this SPOT data. DHS agreed and TSA has established additional data controls as part of its database upgrade. However, some of DHS's analysis used SPOT data recorded prior to these additional controls. The study also noted that it was not designed to comprehensively validate whether SPOT can be used to reliably identify individuals in an airport environment who pose a security risk. The DHS study made recommendations related to strengthening the program and conducting a more comprehensive validation of whether the science can be used for counterterrorism purposes in the aviation environment. Some of these recommendations, such as the need for a comprehensive program evaluation including a cost-benefit analysis, reiterate recommendations made in our prior work. As we reported in March 2011, Congress may wish to consider the study's results in making future funding decisions regarding the program. TSA is currently reviewing the study's findings and assessing the steps needed to address DHS's recommendations. If TSA decides to implement the recommendations in the April 2011 DHS validation study, DHS may be years away from knowing whether there is a scientifically valid basis for using behavior detection techniques to help secure the aviation system against terrorist threats given that the initial study took about 4 years to complete. TSA has taken actions to strengthen airport perimeter and access controls security, but has not conducted a comprehensive risk assessment or developed a national strategy for airport security. We reported in September 2009 that TSA has implemented a variety of programs and actions since 2004 to improve and strengthen airport perimeter and access controls security, including strengthening worker screening and improving access control technology. For example, to better address the risks posed by airport workers, in 2007 TSA implemented a random worker screening program that has been used to enforce access procedures, such as ensuring workers display appropriate credentials and do not possess unauthorized items when entering secure areas. According to TSA officials, this program was developed to help counteract the potential vulnerability of airports to an insider attack--an attack from an airport worker with authorized access to secure areas. TSA has also expanded its requirements for conducting worker background checks and the population of individuals who are subject to these checks. For example, in 2007 TSA expanded requirements for name-based checks to all individuals seeking or holding airport-issued identification badges and in 2009 began requiring airports to renew all airport-identification media every 2 years. TSA also reported taking actions to identify and assess technologies to strengthen airport perimeter and access controls security, such as assisting the aviation industry and a federal aviation advisory committee in developing security standards for biometric access controls. However, we reported in September 2009 that while TSA has taken actions to assess risk with respect to airport perimeter and access controls security, it had not conducted a comprehensive risk assessment based on assessments of threats, vulnerabilities, and consequences, as required by DHS's National Infrastructure Protection Plan (NIPP). We further reported that without a full depiction of threats, vulnerabilities, and consequences, an organization's ability to establish priorities and make cost-effective security decisions is limited. We recommended that TSA develop a comprehensive risk assessment, along with milestones for completing the assessment. DHS concurred with our recommendation and said it would include an assessment of airport perimeter and access control security risks as part of a comprehensive assessment for the transportation sector--the Transportation Sector Security Risk Assessment (TSSRA). The TSSRA, published in July 2010, included an assessment of various risk-based scenarios related to airport perimeter security but did not consider the potential vulnerabilities of airports to an insider attack--the insider threat--which it recognized as a significant issue. In July 2011, TSA officials told us that the agency is developing a framework for insider risk that is to be included in the next iteration of the assessment, which TSA expected to be released at the end of calendar year 2011. Such action, if taken, would meet the intent of our recommendation. We also recommended that, as part of a comprehensive risk assessment of airport perimeter and access controls security, TSA evaluate the need to conduct an assessment of security vulnerabilities at airports nationwide. At the time of our review, TSA told us its primary measures for assessing the vulnerability of airports to attack were professional judgment and the collective results of joint vulnerability assessments (JVA) it conducts with the Federal Bureau of Investigation (FBI) for select--usually high-risk--airports. Our analysis of TSA data showed that from fiscal years 2004 through 2008, TSA conducted JVAs at about 13 percent of the approximately 450 TSA-regulated airports that existed at that time, thus leaving about 87 percent of airports unassessed. TSA has characterized U.S. airports as an interdependent system in which the security of all is affected or disrupted by the security of the weakest link. However, we reported that TSA officials could not explain to what extent the collective JVAs of specific airports constituted a reasonable systems- based assessment of vulnerability across airports nationwide. Moreover, TSA officials said that they did not know to what extent the 87 percent of commercial airports that had not received a JVA as of September 2009-- most of which were smaller airports--were vulnerable to an intentional security breach. DHS concurred with our recommendation to assess the need for a vulnerability assessment of airports nationwide. TSA officials also stated that based on our review they intended to increase the number of JVAs conducted at Category II, III, and IV airports and that the resulting data would assist TSA in prioritizing the allocation of limited resources. Our analysis of TSA data showed that from fiscal year 2004 through July 1, 2011, TSA conducted JVAs at about 17 percent of the TSA-regulated airports that existed at that time, thus leaving about 83 percent of airports unassessed. Since we issued our report in September 2009, TSA had not conducted JVAs at Category III and IV airports. Further, TSA could not tell us to what extent it has studied the need to conduct JVAs of security vulnerabilities at airports nationwide. We also reported in September 2009 that TSA's efforts to enhance the security of the nation's airports have not been guided by a national strategy that identifies key elements, such as goals, priorities, performance measures, and required resources. To better ensure that airport stakeholders take a unified approach to airport security, we recommended that TSA develop a national strategy for airport security that incorporates key characteristics of effective security strategies, such as measurable goals and priorities. DHS concurred with this recommendation and stated that TSA would implement it by updating the Transportation Systems-Sector Specific Plan (TS-SSP), to be released in the summer of 2010. In July 2011 TSA officials told us that a pre- publication version of the TS-SSP had been sent to Congress on June 29, 2011, and that DHS was in the process of finalizing the TS-SSP for publication, but a specific date had not been set for public release. TSA has revised explosives detection requirements for checked baggage screening systems but faces challenges in deploying equipment that meet the requirements. Explosives represent a continuing threat to the checked baggage component of aviation security. TSA deploys EDS and explosives trace detection (ETD) machines to screen all checked baggage transported by U.S. and foreign air carriers departing from TSA- regulated airports in the United States. An EDS uses a computed tomography X-ray source that rotates around a bag, obtaining a large number of cross-sectional images that are integrated by a computer that automatically triggers an alarm when objects with the characteristic of explosives are detected. An ETD machine is used to chemically analyze trace materials after a human operator swabs checked baggage to identify any traces of explosive material. TSA seeks to ensure that checked baggage screening technology is capable of detecting explosives through its Electronic Baggage Screening Program, one of the largest acquisition programs within DHS. Under the program, TSA certifies and acquires systems used to screen checked baggage at 463 TSA-regulated airports throughout the United States. TSA certifies explosives detection-screening technologies to ensure they meet explosives detection requirements developed in conjunction with the DHS Science and Technology Directorate along with input from other agencies, such as the FBI and Department of Defense. Our July 2011 report addressed TSA's efforts to enhance explosives detection requirements for checked-baggage screening technologies as well as TSA's efforts to ensure that currently deployed and newly acquired explosives detection technologies meet the enhanced requirements. As highlighted in our July 2011 report, requirements for EDSs were established in 1998 and subsequently revised in 2005 and 2010 to better address the threats. Currently, checked baggage screening systems are not operating under the 2010 requirements. As of January 2011, some of the EDS in TSA's fleet are detecting explosives at the level established by the 2005 requirements. Meanwhile, other EDS are configured to meet older requirements established in 1998, but include software to meet 2005 requirements. The remaining EDS are configured to meet 1998 requirements but lack the software or both the hardware and software that would enable them to detect at the levels established by the 2005 requirements. TSA plans to implement the revised requirements in a phased approach spanning several years. The first phase, which includes implementation of the 2005 requirements, is scheduled to take years to fully implement and deploying EDS that meet 2010 requirements could prove difficult given that TSA did not begin deployment of EDS meeting 2005 requirements until 2009--4 years later. We found that TSA did not have a plan to deploy and operate EDS to meet the most recent requirements and recommended, among other things, that TSA develop a plan to deploy EDS that meet the current EDS explosives detection requirements and ensure that new EDS, as well as those already deployed in airports, be operated at the levels established in those requirements. In addition, TSA has faced challenges in procuring the first 260 EDS to meet 2010 requirements. For example, due to the danger associated with certain explosives, TSA and DHS encountered challenges safely developing simulants and collecting data on the explosives' physical and chemical properties needed by vendors and agencies to develop detection software and test EDS prior to the current acquisition. Also, TSA's decision to pursue EDS procurement complicated both the data collection and procurement efforts, which resulted in a delay of over 7 months for the current acquisition. We recommended that TSA complete data collection for each phase of the 2010 EDS requirements prior to pursuing EDS procurements that meet those requirements to help TSA avoid additional schedule delays. Our report also examined other key issues such as the extent to which TSA's approach to its current EDS acquisition meets best practices for schedules and cost estimates and included a review of TSA's plans for potential upgrades of deployed EDSs. The report contained six recommendations to TSA, including that the agency develop a plan to ensure that new EDSs, as well as those EDSs currently deployed in airports, operate at levels that meet revised requirements. DHS concurred with all of the recommendations and has subsequently outlined actions to implement them. Chairman Chaffetz, Ranking Member Tierney, and Members of the Subcommittee, this concludes my statement. I look forward to answering any questions that you may have at this time. For questions about this statement, please contact Stephen M. Lord at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony are David M. Bruno, Glenn Davis, and Steve Morris, Assistant Directors; Scott Behen; Ryan Consaul; Barbara Guffy; Tom Lombardi; Lara Miklozek; and Doug Sloane. 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 attempted bombing of Northwest flight 253 in December 2009 underscores the need for effective aviation security programs. Aviation security remains a daunting challenge with hundreds of airports, thousands of aircraft, and thousands of flights daily carrying millions of passengers and pieces of checked baggage. The Department of Homeland Security's (DHS) Transportation Security Administration (TSA) has spent billions of dollars and implemented a wide range of aviation security initiatives. Three key layers of aviation security are (1) TSA's Screening of Passengers by Observation Techniques (SPOT) program designed to identify persons who may pose a security risk; (2) airport perimeter and access controls security; and (3) checked baggage screening systems. This testimony provides information on the extent to which TSA has taken actions to validate the scientific basis of SPOT, strengthen airport perimeter security and access controls, and deploy more effective checked baggage screening systems. This statement is based on prior reports GAO issued from September 2009 through July 2011 and selected updates in June and July 2011. GAO analyzed documents on TSA's progress in strengthening aviation security, among other things. DHS has completed an initial study to validate the scientific basis of the SPOT program; however, additional work remains to fully validate the program. GAO reported in May 2010 that TSA deployed this program, which uses behavior observation and analysis techniques to identify potentially high-risk passengers, before determining whether there was a scientifically valid basis for using behavior and appearance indicators as a means for reliably identifying passengers who may pose a risk to the U.S. aviation system. TSA officials said that SPOT was deployed in response to potential threats, such as suicide bombers, and was based on scientific research available at the time. GAO recommended in May 2010 that DHS, as part of its study, assess the methodology to help ensure the validity of the SPOT program. DHS concurred and its April 2011 validation study found that SPOT was more effective than random screening to varying degrees. For example, the study found that SPOT was more effective than random screening at identifying individuals who possessed fraudulent documents and individuals who were subsequently arrested. However, DHS's study was not designed to fully validate whether behavior detection can be used to reliably identify individuals in an airport environment who pose a security risk. The study noted that additional work is needed to comprehensively validate the program. TSA officials are assessing the actions needed to address the study's recommendations. In September 2009, GAO reported that since 2004 TSA has taken actions to strengthen airport perimeter and access controls security by, among other things, deploying a random worker screening program; however, TSA has not conducted a comprehensive risk assessment or developed a national strategy. Specifically, TSA had not conducted vulnerability assessments for 87 percent of the approximately 450 U.S. airports regulated by TSA at that time. GAO recommended that TSA develop (1) a comprehensive risk assessment and evaluate the need to assess airport vulnerabilities nationwide and (2) a national strategy to guide efforts to strengthen airport security. DHS concurred and said TSA is developing the assessment and strategy, but has not yet evaluated the need to assess airport vulnerabilities nationwide. GAO reported in July 2011 that TSA revised explosives detection requirements for its explosives detection systems (EDS) used to screen checked baggage in January 2010, but faces challenges in deploying EDS that meet these requirements. Deploying systems that meet the 2010 EDS requirements could be difficult given that TSA did not begin deployment of systems meeting the previous 2005 requirements until 2009. As of January 2011 some of the EDS in TSA's fleet detect explosives at the level established in 2005 while the remaining EDS detect explosives at levels established in 1998. Further, TSA does not have a plan to deploy and operate systems to meet the current requirements and has faced challenges in procuring the first 260 systems to meet these requirements. GAO recommended that TSA, among other things, develop a plan to ensure that EDS are operated at the levels in established requirements. DHS agreed and has outlined actions to do so. GAO has made recommendations in prior work to strengthen TSA's SPOT program, airport security efforts, checked baggage screening efforts. DHS and TSA generally concurred with the recommendations and have actions under way to address them.
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While TRIA has improved the availability of terrorism insurance, particularly for high-risk properties in major metropolitan areas, most commercial policyholders are not buying the coverage. Limited industry data suggest that 10 - 30 percent of commercial policyholders are purchasing terrorism insurance, perhaps because most policyholders perceive themselves at relatively low risk for a terrorist event. Some industry experts are concerned that those most at risk from terrorism are generally the ones buying terrorism insurance. In combination with low purchase rates, these conditions could result in uninsured losses for those businesses without terrorism coverage or cause financial problems for insurers, should a terrorist event occur. Moreover, even policyholders who have purchased terrorism insurance may remain uninsured for significant risks arising from certified terrorist events--that is, those meeting statutory criteria for reimbursement under TRIA--such as those involving NBC agents or radioactive contamination. Finally, although insurers and some reinsurers have cautiously reentered the terrorism risk market, insurance industry participants have made little progress toward developing a mechanism that could permit the commercial insurance market to resume providing terrorism coverage without a government backstop. TRIA has improved the availability of terrorism insurance, especially for some high-risk policyholders. According to insurance and risk management experts, these were the policyholders who had difficulty finding coverage before TRIA. TRIA requires that insurers "make available" coverage for terrorism on terms not differing materially from other coverage. Largely because of this requirement, terrorism insurance has been widely available, even for development projects in high-risk areas of the country. Although industry data on policyholder characteristics are limited and cannot be generalized to all policyholders in the United States, risk management and real estate representatives generally agree that after TRIA was passed, policyholders--including borrowers obtaining mortgages for "trophy" properties, owners and developers of high-risk properties in major city centers, and those in or near "trophy" properties-- were able to purchase terrorism insurance. Additionally, TRIA contributed to better credit ratings for some commercial mortgage-backed securities. For example, prior to TRIA's passage, the credit ratings of certain mortgage-backed securities, in which the underlying collateral consisted of a single high-risk commercial property, were downgraded because the property lacked or had inadequate terrorism insurance. The credit ratings for other types of mortgage-backed securities, in which the underlying assets were pools of many types of commercial properties, were also downgraded but not to the same extent because the number and variety of properties in the pool diversified their risk of terrorism. Because TRIA made terrorism insurance available for the underlying assets, thus reducing the risk of losses from terrorist events, it improved the overall credit ratings of mortgage-backed securities, particularly single-asset mortgage-backed securities. Credit ratings affect investment decisions that revolve around factors such as interest rates because higher credit ratings result in lower costs of capital. According to an industry expert, investors use credit ratings as guidance when evaluating the risk of mortgage-backed securities for investment purposes. Higher credit ratings reflect lower credit risks. The typical investor response to lower credit risks is to accept lower returns, thereby reducing the cost of capital, which translates into lower interest rates for the borrower. To the extent that the widespread availability of terrorism insurance is a result of TRIA's "make available" requirement, Treasury's decision on whether to extend the requirement to year three of the program is vitally important. While TRIA has ensured the availability of terrorism insurance, we have little quantitative information on the prices charged for this insurance. Treasury is engaged in gathering data through surveys that should provide useful information about terrorism insurance prices. TRIA requires that they make the information available to Congress upon request. In addition, TRIA also requires Treasury to assess the effectiveness of the act and evaluate the capacity of the industry to offer terrorism insurance after its expiration. This report is to be delivered to Congress no later than June 30, 2005. Although TRIA improved the availability of terrorism insurance, relatively few policyholders have purchased terrorism coverage. We testified previously that prior to September 11, 2001, policyholders enjoyed "free" coverage for terrorism risks because insurers believed that this risk was so low that they provided the coverage without additional premiums as part of the policyholder's general property insurance policy. After September 11, prices for coverage increased rapidly and, in some cases, insurance became very difficult to find at any price. Although a purpose of TRIA is to make terrorism insurance available and affordable, the act does not specify a price structure. However, experts in the insurance industry generally agree that after the passage of TRIA, low-risk policyholders (for example, those not in major urban centers) received relatively low-priced offers for terrorism insurance compared to high-risk policyholders, and some policyholders received terrorism coverage without additional premium charges. Yet according to insurance experts, despite low premiums, many businesses (especially those not in "target" localities or industries) did not buy terrorism insurance. Some simply may not have perceived themselves at risk from terrorist events and considered terrorism insurance, even at low premiums (relative to high-risk areas), a bad investment. According to insurance sources, other policyholders may have deferred their decision to buy terrorism insurance until their policy renewal date. Some industry experts have voiced concerns that low purchase rates may indicate adverse selection--where those at the most risk from terrorism are generally the only ones buying terrorism insurance. Although industry surveys are limited in their scope and not appropriate for market-wide projections, the surveys are consistent with each other in finding low "take-up" rates, the percentage of policyholders buying terrorism insurance, ranging from 10 to 30 percent. According to one industry survey, the highest take-up rates have occurred in the Northeast, where premiums were generally higher than the rest of the country. The combination of low take-up rates and high concentration of purchases in an area thought to be most at risk raises concerns that, depending on its location, a terrorist event could have additional negative effects. If a terrorist event took place in a location not thought to be a terrorist "target," where most businesses had chosen not to purchase terrorism insurance, then businesses would receive little funding from insurance claims for business recovery efforts, with consequent negative effects on owners, employers, suppliers, and customers. Alternatively, if the terrorist event took place in a location deemed to be a "target," where most businesses had purchased terrorism insurance, then adverse selection could result in significant financial problems for insurers. A small customer base of geographically concentrated, high-risk policyholders could leave insurers unable to cover potential losses facing possible insolvency. If, however, a higher percentage of business owners had chosen to buy the coverage, the increased number of policyholders would have reduced the chance that losses in any one geographic location would create a significant financial problem for an insurer. Since September 11, 2001, the insurance industry has moved to tighten long-standing exclusions from coverage for losses resulting from NBC attacks and radiation contamination. As a result of these exclusions and the actions of a growing number of state legislatures to exclude losses from fire following a terrorist attack, even those policyholders who choose to buy terrorism insurance may be exposed to potentially significant losses. Although NBC coverage was generally not available before September 11, after that event insurers and reinsurers recognized the enormity of potential losses from terrorist events and introduced new practices and tightened treaty language to further limit as much of their loss exposures as possible. (We discuss some of these practices and exclusions in more detail in the next section.) State regulators and legislatures have approved these exclusions, allowing insurers to restrict the terms and conditions of coverage for these perils. Moreover, because TRIA's "make available" requirements state that terms for terrorism coverage be similar to those offered for other types of policies, insurers may choose to exclude the perils from terrorism coverage just as they have in other types of coverage. According to Treasury officials, TRIA does not preclude Treasury from providing reimbursement for NBC events, if insurers offered this coverage. However, policyholder losses from perils excluded from coverage, such as NBCs, would not be "insured losses" as defined by TRIA and would not be covered even in the event of a certified terrorist attack. In an increasing number of states, policyholders may not be able to recover losses from fire following a terrorist event if the coverage in those states is not purchased as part of the offered terrorism coverage. We have previously reported that approximately 30 states had laws requiring coverage for "fire-following" an event--known as the standard fire policy (SFP)--irrespective of the fire's cause. Therefore, in SFP states fire following a terrorist event is covered whether there is insurance coverage for terrorism or not. After the terrorist attacks of September 11, 2001, some legislatures in SFP states amended their laws to allow the exclusion of fire following a terrorist event from coverage. As of March 1, 2004, 7 of the 30 SFP states had amended their laws to allow for the exclusion of acts of terrorism from statutory coverage requirements. However as discussed previously, the "make available" provision requires coverage terms offered for terrorist events to be similar to coverage for other events. Treasury officials explained that in all non-SFP states, and the 7 states with modified SFPs, insurers must include in their offer of terrorism insurance coverage for fire following a certified terrorist event because coverage for fire is part of the property coverage for all other risks. Thus, policyholders who have accepted the offer would be covered for fire following a terrorist event, even though their state allows exclusion of the coverage. However, policyholders who have rejected their offer of coverage for terrorism insurance would not be covered for fire following a terrorist event. According to insurance experts, losses from fire damage can be a relatively large proportion of the total property loss. As a result, excluding terrorist events from SFP requirements could result in potentially large losses that cannot be recovered if the policyholder did not purchase terrorism coverage. For example, following the 1994 Northridge earthquake in California, total insured losses for the earthquake were $15 billion--$12.5 billion of which were for fire damage. According to an insurance expert, policyholders were able to recover losses from fire damage because California is an SFP state, even though most policies had excluded coverage for earthquakes. Under TRIA, reinsurers are offering a limited amount of coverage for terrorist events for insurers' remaining exposures, but insurers have not been buying much of this reinsurance. According to insurance industry sources, TRIA's ceiling on potential losses has enabled reinsurers to return cautiously to the market. That is, reinsurers generally are not offering coverage for terrorism risk beyond the limits of the insurer deductibles and the 10 percent share that insurers would pay under TRIA. In spite of reinsurers' willingness to offer this coverage, company representatives have said that many insurers have not purchased reinsurance. Insurance experts suggested that the low demand for the reinsurance might reflect, in part, commercial policyholders' generally low take-up rates for terrorism insurance. Moreover, insurance experts also have suggested that insurers may believe that the price of reinsurance is too high relative to the premiums they are earning from policyholders for terrorism insurance. The relatively high prices charged for the limited amounts of terrorism reinsurance available are probably the result of interrelated factors. First, even before September 11 both insurance and reinsurance markets were beginning to harden; that is, prices were beginning to increase after several years of lower prices. Reinsurance losses resulting from September 11 also depressed reinsurance capacity and accelerated the rise in prices. The resulting hard market for property-casualty insurance affected the price of most lines of insurance and reinsurance. A notable example has been the market for medical malpractice insurance. The hard market is only now showing signs of coming to an end, with a resulting stabilization of prices for most lines of insurance. In addition to the effects of the hard market, reinsurer awareness of the adverse selection that may be occurring in the commercial insurance market could be another factor contributing to higher reinsurance prices. Adverse selection usually represents a larger-than-expected exposure to loss. Reinsurers are likely to react by increasing prices for the terrorism coverage that they do sell. In spite of the reentry of reinsurers into the terrorism market, insurance experts said that without TRIA caps on potential losses, both insurers and reinsurers likely still would be unwilling to sell terrorism coverage because they have not found a reliable way to price their exposure to terrorist losses. According to industry representatives, neither insurers nor reinsurers can estimate potential losses from terrorism or determine prices for terrorism insurance without a pricing model that can estimate both the frequency and the severity of terrorist events. Reinsurance experts said that current models of risks for terrorist events do not have enough historical data to dependably estimate the frequency or severity of terrorist events, and therefore cannot be relied upon for pricing terrorism insurance. According to the experts, the models can predict a likely range of insured losses resulting from the damage if specific event parameters such as type and size of weapon and location are specified. However, the models are unable to predict the probability of such an attack. Even as they are charging high prices, reinsurers are covering less. In response to the losses of September 11, industry sources have said that reinsurers have changed some practices to limit their exposures to acts of terrorism. For example, reinsurers have begun monitoring their exposures by geographic area, requiring more detailed information from insurers, introducing annual aggregate and event limits, excluding large insurable values, and requiring stricter measures to safeguard assets and lives where risks are high. And as discussed previously, almost immediately after September 11 reinsurers began broadening NBC exclusions beyond scenarios involving industrial accidents, such as nuclear plant accidents and chemical spills, to encompass intentional destruction from terrorists. For example, post-September 11 exclusions for nuclear risks include losses from radioactive contamination to property and radiation sickness from dirty bombs. As of March 1, 2004, industry sources indicated that there has been little development or movement among insurers or reinsurers toward developing a private-sector mechanism that could provide capacity, without government involvement, to absorb losses from terrorist events. Industry officials have said that their level of willingness to participate more fully in the terrorism insurance market in the future will be determined, in part, by whether any more events occur. Industry sources could not predict if reinsurers would return to the terrorism insurance market after TRIA expires, even after several years and the absence of further major terrorist attacks in the United States. They explained that reinsurers are still recovering from the enormous losses of September 11 and still cannot price terrorism coverage. In the long term and without another major terrorist attack, insurance and reinsurance companies might eventually return. However, should another major terrorist attack take place, reinsurers told us that they would not return to this market-- with or without TRIA. Congress had two major objectives in establishing TRIA. The first was to ensure that business activity did not suffer from the lack of insurance by requiring insurers to continue to provide protection from the financial consequences of another terrorist attack. Since TRIA was enacted in November 2002, terrorism insurance generally has been widely available even for development projects in high-risk areas of the country, in large part because of TRIA's "make available" requirement. Although most businesses are not buying coverage, there is little evidence that development has suffered to a great extent--even in lower-risk areas of the county, where purchases of coverage may be lowest. Further, although quantifiable evidence is lacking on whether the availability of terrorism coverage under TRIA has contributed to the economy, the current revival of economic activity suggests that the decision of most commercial policyholders to decline terrorism coverage has not resulted in widespread, negative economic effects. As a result, the first objective of TRIA appears largely to have been achieved. Congress's second objective was to give the insurance industry a transitional period during which it could begin pricing terrorism risks and developing ways to provide such insurance after TRIA expires. The insurance industry has not yet achieved this goal. We observed after September 11 the crucial importance of reinsurers for the survival of the terrorism insurance market and reported that reinsurers' inability to price terrorism risks was a major factor in their departure from the market. Additionally, most industry experts are tentative about predictions of the level of reinsurer and insurer participation in the terrorism insurance market after TRIA expires. Unfortunately, insurers and reinsurers still have not found a reliable method for pricing terrorism insurance, and although TRIA has provided reinsurers the opportunity to reenter the market to a limited extent, industry participants have not developed a mechanism to replace TRIA. As a result, reinsurer and consequently, insurer, participation in the terrorism insurance market likely will decline significantly after TRIA expires. Not only has no private-sector mechanism emerged for supplying terrorism insurance after TRIA expires, but to date there also has been little discussion of possible alternatives for ensuring the availability and affordability of terrorism coverage after TRIA expires. Congress may benefit from an informed assessment of possible alternatives--including both wholly private alternatives and alternatives that could involve some government participation or action. Such an assessment could be a part of Treasury's TRIA-mandated study to "assess...the likely capacity of the property and casualty insurance industry to offer insurance for terrorism risk after termination of the Program." As part of the response to the TRIA-mandated study that requires Treasury to assess the effectiveness of TRIA and evaluate the capacity of the industry to offer terrorism insurance after TRIA expires, we recommend that the Secretary of the Treasury, after consulting with the insurance industry and other interested parties, identify for Congress an array of alternatives that may exist for expanding the availability and affordability of terrorism insurance after TRIA expires. These alternatives could assist Congress during its deliberations on how best to ensure the availability and affordability of terrorism insurance after December 2005. Mr. Chairman, Madam Chairwoman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Subcommittees may have. For further information regarding this testimony please contact Richard J. Hillman or Davi M. D'Agostino, Directors, or Lawrence D. Cluff or Wesley M. Phillips, Assistant Directors, Financial Markets and Community Investment, (202) 512-8678. Individuals making key contributions to this testimony include Sonja Bensen, Rachel DeMarcus, Tom Givens III, Jill Johnson, Barry Kirby, Caitlyn Lam, Tarek Mahmassani, Angela Pun, and Barbara Roesmann. Under TRIA, Treasury is responsible for reimbursing insurers for a portion of terrorism losses under certain conditions. Payments are triggered when (1) the Secretary of the Treasury certifies that terrorists acting on behalf of foreign interests have carried out an act of terrorism and (2) aggregate insured losses for commercial property and casualty damages exceed $5,000,000 for a single event. TRIA specifies that an insurer is responsible (that is, will not be reimbursed) for the first dollars of its insured losses-- its deductible amount. TRIA sets the deductible amount for each insurer equal to a percentage of its direct earned premiums for the previous year. Beyond the deductible, insurers also are responsible for paying a percentage of insured losses. Specifically, TRIA structures pay-out provisions so that the federal government shares the payment of insured losses with insurers at a 9:1 ratio--the federal government pays 90 percent of insured losses and insurers pay 10 percent--until aggregate insured losses from all insurers reach $100 billion in a calendar year (see fig. 1). Thus, under TRIA's formula for sharing losses, insurers are reimbursed for portions of the claims they have paid to policyholders. Furthermore, TRIA then releases insurers who have paid their deductibles from any further liability for losses that exceed aggregate insured losses of $100 billion in any one year. Congress is charged with determining how losses in excess of $100 billion will be paid. TRIA also contains provisions and a formula requiring Treasury to recoup part of the federal share if the aggregate sum of all insurers' deductibles and 10 percent share is less than the amount prescribed in the act--the "insurance marketplace aggregate retention amount." TRIA also gives the Secretary of the Treasury discretion to recoup more of the federal payment if deemed appropriate. Commercial property-casualty policyholders would pay for the recoupment through a surcharge on premiums for all the property-casualty policies in force after Treasury established the surcharge amount; the insurers would collect the surcharge. TRIA limits the surcharge to a maximum of 3 percent of annual premiums, to be assessed for as many years as necessary to recoup the mandatory amount. TRIA also gives the Secretary of the Treasury discretion to reduce the annual surcharge in consideration of various factors such as the economic impact on urban centers. However, if Treasury makes such adjustments, it has to extend the surcharges for additional years to collect the remainder of the recoupment. Treasury is funding the Terrorism Risk Insurance Program (TRIP) office operations--through which it administers TRIA provisions and would pay claims--with "no-year money" under a TRIA provision that gives Treasury authority to utilize funds necessary to set up and run the program. The TRIP office had a budget of $8.97 million for fiscal year 2003 (of which TRIP spent $4 million), $9 million for fiscal year 2004, and a projected budget of $10.56 million for fiscal year 2005--a total of $28.53 million over 3 years. The funding levels incorporate the estimated costs of running a claims-processing operation in the aftermath of a terrorist event: $5 million in fiscal years 2003 and 2004 and $6.5 million in fiscal year 2005, representing about 55 - 60 percent of the budget for each fiscal year. If no certified terrorist event occurred, the claims-processing function would be maintained at a standby level, reducing the projected costs to $1.2 million annually, or about 23 percent of the office's budget in each fiscal year. Any funds ultimately used to pay the federal share after a certified terrorist event would be in addition to these budgeted amounts. Terrorist attacks and natural catastrophes---such as hurricanes and earthquakes---pose unique challenges to insurers. Forecasting the timing and severity of such events is difficult and the large losses associated with catastrophes can threaten insurer safety and soundness. Insurers also frequently respond to catastrophic events by cutting back coverage significantly or substantially increasing premiums for policyholders. Over the years, several approaches have been suggested to expand the capacity of the insurance industry to cover catastrophic events. These approaches include securitization of catastrophe risk, changing tax and accounting treatment of catastrophe risk, and permitting risk-retention groups to cover property as well as liability exposures. At the request of the Chairman of the House Financial Services Committee and others, we have completed reports that address some of these issues or have work ongoing in these areas. Our work may assist the Committee in its oversight of the insurance industry and consideration of the industry's ability to both insure against and respond to catastrophic events. Given the enormous financial losses associated with catastrophic events and questions about insurers' ability to cover such losses, interest has been generated in transferring some of these risks to the capital markets, which had total value of about $29 trillion as of the first quarter of 2003. Since the mid-1990s, some insurance companies, reinsurance companies, and capital market participants have developed various financial instruments, the most prevalent of which are catastrophe bonds. These bonds offer a relatively high rate of return to investors that are willing to accept some of the substantial risks associated with catastrophes. In two previous reports, we assessed the development of the catastrophe bond market. We found that some insurance companies view catastrophe bonds as an important component of their overall strategy for managing natural catastrophe financial risks. In addition, representatives from some institutional investors we contacted expressed positive views about catastrophe bonds because they offer attractive yields compared to traditional investments and help diversify investment risks. However, other insurers and investors are not willing to issue or purchase catastrophe bonds because they are more costly than traditional reinsurance, too risky, or illiquid. We also reported that developing catastrophe bonds to cover terrorism risks in the United States is considered challenging for many reasons, including the difficulties associated with developing computer models to predict the frequency and severity of terrorist attacks. Sophisticated models have been developed to predict the frequency and severity of natural catastrophes--particularly hurricanes--that have facilitated the development of catastrophe bonds covering such risks. We are currently conducting follow-up work on potential tax and accounting issues raised in our previous reports that might affect the use of catastrophe bonds. As we reported in September 2002, most catastrophe bonds are issued offshore--for example, in Bermuda--rather than in the United States due to favorable tax considerations. Some insurance industry groups have argued for changes in U.S. tax laws to encourage insurers to issue catastrophe bonds onshore to lessen transaction costs and afford regulators greater scrutiny over these activities. As part of our ongoing work, we are reviewing the tax treatment of catastrophe risk coverage in selected European countries. Furthermore, in 2003 we reported that the Financial Accounting Standards Board had issued guidance that may require insurers or investors to list catastrophe bond assets and liabilities on their balance sheets. We reported that this guidance had the potential to limit the appeal of issuing catastrophe bonds but that insurers and financial market participants were not certain of the impact of this guidance. We are continuing to investigate developments on these tax and accounting issues and will discuss them in an upcoming report. Some believe removing accounting and tax barriers that prevent U.S. insurance companies from establishing tax-deductible reserves to cover the financial risks associated with potential natural catastrophes and terrorist attacks would supplement private-sector capacity. Under current U.S. accounting standards and tax law, insurers must build any reserves for events that have not yet occurred from after-tax income (retained earnings). As a result, insurers do not usually establish reserves in anticipation of catastrophic events, such as hurricanes. Therefore, insurers attempt to limit their exposure to catastrophic risks through the underwriting process, the purchase of reinsurance, or issuance of catastrophe bonds, among other alternatives. There is considerable disagreement about the appropriateness and effectiveness of tax-deductible reserving. Advocates believe that allowing insurers to establish such reserves would provide increased capacity at lower cost. On the other hand, critics of tax-deductible reserving have argued that, in addition to lowering federal tax receipts, there is no assurance that insurers would actually increase their catastrophe insurance capacity, but rather either shield existing capital from taxes or substitute tax-deductible reserves for reinsurance. At the Chairman's request, we are currently reviewing the tax treatment of catastrophe risk reserves in selected European countries---France, Spain, Germany, Switzerland, and Italy. We continue to review these practices and will comment on them in a forthcoming report. In addition to discussing reserving practices, we are gathering information on general approaches to insuring against catastrophic risks in these countries. Congress enacted the Liability Risk Retention Act of 1986 (Act) to facilitate the formation of risk-retention groups (RRGs) and risk- purchasing groups (RPGs), insurance entities initially established to increase the availability and affordability of liability insurance during the 1980s. As authorized by the Act, these groups may only provide commercial liability insurance. An RRG is simply a group of businesses with similar risks that join to create an insurance company to self-insure their risks. An RPG, on the other hand, is a group formed to purchase insurance as a single entity from a traditional insurer. The majority of our ongoing work focuses on RRGs because, as insurers, they have the potential to provide new insurance capacity. A wide variety of groups, such as professional groups (doctors, attorneys), institutions (universities, hospitals), and businesses (trucking firms, homebuilders) have created RRGs. As of mid-April 2004, about 150 RRGs were operational and approximately 72 were formed in the last year and half. In contrast to most other insurers, an RRG can sell insurance in as many states as it chooses but is to be regulated by only one state--the state in which it is chartered. Our ongoing work focuses on assessing the extent to which RRGs have met the Act's intent that they increase the availability and affordability of liability insurance. We will also assess how the unique regulatory structure of RRGs--where only one state serves as regulator--has promoted the establishment of RRGs and if this structure has resulted in uneven or ineffective regulation. The recent failure of four RRGs has resulted in some regulators questioning the efficacy of having a single-state regulator and the standards used by some states to charter and regulate RRGs. If we identify any problems as part of our work, we will evaluate what legislative or regulatory changes might be needed. These changes, if needed, could be important whether or not, as some advocates have suggested, the Act is expanded to include commercial property insurance. Finally, in the event the Act were expanded to include property insurance, we also are exploring the potential of RRGs to provide additional capacity for terrorism insurance. U.S. General Accounting Office, Terrorism Insurance: Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-307 (Washington, D.C.: Apr. 23, 2004). U.S. General Accounting Office, Catastrophe Insurance Risks: Status of Efforts to Securitize Natural Catastrophe and Terrorism Risk, GAO-03- 1033 (Washington, D.C.: Sep. 24, 2003). U.S. General Accounting Office, Catastrophe Insurance Risks: The Role of Risk-Linked Securities, GAO-03-195T (Washington, D.C.: Oct. 8, 2002). U.S. General Accounting Office, Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors Affecting Their Use, GAO-02-941 (Washington, D.C.: Sep. 24, 2002). U.S. General Accounting Office, Terrorism Insurance: Rising Uninsured Exposure to Attacks Heightens Potential Economic Vulnerabilities, GAO- 02-472T (Washington, D.C.: Feb. 27, 2002). U. S. General Accounting Office, Terrorism Insurance: Alternative Programs for Protecting Insurance Consumers, GAO-02-199T (Washington, D.C.: Oct. 24, 2001). U.S. General Accounting Office, Terrorism Insurance: Alternative Programs for Protecting Insurance Consumers, GAO-02-175T (Washington, D.C.: Oct. 24, 2001). U.S. General Accounting Office, Insurers' Ability to Pay Catastrophe Claims, GAO/GGD-00-57R (Washington, D.C.: Feb. 8, 2000). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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After the terrorist attacks of September 11, 2001, insurance coverage for terrorism largely disappeared. Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002 to help commercial property-casualty policyholders obtain terrorism insurance and give the insurance industry time to develop mechanisms to provide such insurance after the act expires on December 31, 2005. Under TRIA, the Department of Treasury (Treasury) caps insurer liability and would process claims and reimburse insurers for a large share of losses from terrorist acts that Treasury certified as meeting certain criteria. As Treasury and industry participants have operated under TRIA for more than a year, GAO was asked to describe how TRIA affected the terrorism insurance market. TRIA has enhanced the availability of terrorism insurance for commercial policyholders, largely fulfilling a principal objective of the program. In particular, TRIA has benefited commercial policyholders in major metropolitan areas perceived to be at greater risk for a terrorist attack. Prior to TRIA, we reported concern that some development projects had already been delayed or cancelled because of the unavailability of insurance and continued fears that other projects also would be adversely impacted. We also conveyed the widespread concern that general economic growth and development could be slowed by a lack of available terrorism insurance. Since TRIA's enactment, terrorism insurance generally has been widely available, even for development projects in perceived high-risk areas, largely because of the requirement in TRIA that insurers "make available" coverage for terrorism on terms not differing materially from other coverage. Although the purpose of TRIA is to make terrorism insurance available, it does not directly address prices. As part of its assessment of TRIA's effectiveness, Treasury is engaged in gathering data through surveys that should provide useful information about terrorism insurance prices in the marketplace. Despite increased availability of coverage, limited industry data suggest that most commercial policyholders are not buying terrorism insurance, perhaps because they perceive their risk of losses from a terrorist act as being relatively low. The potential negative effects of low purchase rates, in combination with the probability that those most likely to be the targets of terrorist attacks may also be the ones most likely to have purchased coverage, would become evident only in the aftermath of a terrorist attack and could include more difficult economic recovery for businesses without terrorism coverage or potentially significant financial problems for insurers. Moreover, those that have purchased terrorism insurance may still be exposed to significant risks that have been excluded by insurance companies, such as nuclear, biological, or chemical contamination. Meanwhile, although insurers and some reinsurers have cautiously reentered the terrorism risk market to cover insurers' remaining exposures, little progress has been observed within the private sector toward either finding a reliable method for pricing terrorism insurance or developing any viable reinsurance alternatives to TRIA once it expires.
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In almost every year an influenza virus causes acute respiratory disease in epidemic proportions somewhere in the world. Influenza is more severe than some of the other viral respiratory infections, such as the common cold. Most people who get the flu recover completely in 1 to 2 weeks, but some develop serious and potentially life-threatening medical complications, such as pneumonia. People who are aged 65 and older, people of any age with chronic medical conditions, children younger than 2 years, and pregnant women are more likely to get severe complications from influenza than other people. Influenza and pneumonia rank as the fifth leading cause of death among persons aged 65 and older. For the 2004-05 flu season, CDC is recommending that about 185 million Americans in these at-risk populations and other target groups receive the vaccine, which is the primary method for preventing influenza. Flu vaccine is generally widely available in a variety of settings, ranging from the usual physicians' offices, clinics, and hospitals to retail outlets such as drugstores and grocery stores, workplaces, and other convenience locations. Millions of individuals receive flu vaccinations through mass immunization campaigns in nonmedical settings, where organizations such as visiting nurse agencies under contract administer the vaccine. It takes about 2 weeks after vaccination for antibodies to develop in the body and provide protection against influenza virus infection. CDC recommends October through November as the best time to get vaccinated because the flu season often starts in late November to December and peaks between late December and early March. However, if influenza activity peaks late, vaccination in December or later can still be beneficial. Producing the influenza vaccine is a complex process that involves growing viruses in millions of fertilized chicken eggs. This process, which requires several steps, generally takes at least 6 to 8 months from January through August each year, so vaccine manufacturers must predict demand and decide on the number of doses to produce well before the onset of the flu season. Each year's vaccine is made up of three different strains of influenza viruses, and, typically, each year one or two of the strains is changed to better protect against the strains that are likely to be circulating during the coming flu season. The Food and Drug Administration (FDA) and its advisory committee decide which strains to include based on CDC surveillance data, and FDA also licenses and regulates the manufacturers that produce the vaccine. In a typical year, manufacturers make flu vaccine available before the optimal fall season for administering flu vaccine. Currently, two manufacturers--one in the United States and one in the United Kingdom-- produce over 95 percent of the vaccine used in the United States. According to CDC officials, for the 2002-03 flu season, manufacturers produced about 95 million doses of vaccine, of which about 83 million doses were used and 12 million doses went unused. Production for the 2003-04 flu season was based on the previous year's demand and was about 87 million doses. For the 2004-05 season, CDC estimates that about 100 million doses will be available. Currently, flu vaccine production and distribution are largely private- sector responsibilities. Like other pharmaceutical products, flu vaccine is sold to thousands of purchasers by manufacturers, numerous medical supply distributors, and other resellers such as pharmacies. These purchasers provide flu vaccinations at physicians' offices, public health clinics, nursing homes, and less traditional locations such as workplaces and various retail outlets. Most influenza vaccine distribution and administration are accomplished within the private sector, with relatively small amounts of vaccine purchased and distributed by CDC or by state and local health departments. HHS also has a role in planning to prepare for and respond to an influenza pandemic. Planning is key to being prepared for and mitigating the negative effects of the next influenza pandemic, including major illness, death, economic loss, and social disruption. A national pandemic influenza plan was first developed in 1978 and was revised in 1983. In 1993, efforts to revise the national plan were initiated, and these efforts picked up momentum in the late 1990s. In August 2004, HHS released a draft plan for comment entitled, "Pandemic Influenza Preparedness and Response Plan." To foster state and local pandemic planning and preparedness, CDC first issued draft interim planning guidance to states in 1997 and posted guidance on its Web site for state and local health departments in 2001. Since that time, states have been preparing pandemic response plans, and many are integrating these plans with existing state plans to respond to public health emergencies such as natural disasters and bioterrorist attacks. Ensuring an adequate and timely supply of vaccine is a difficult task. It has become even more difficult because there are few manufacturers. Problems at one or more manufacturers can significantly upset the traditional fall delivery of influenza vaccine. These problems, in turn, can create variability in who has ready access to the vaccine. Matching flu vaccine supply and demand is a challenge because the available supply and demand for vaccine can vary from month to month and year to year. For example, In 2000-01, when a substantial proportion of flu vaccine was distributed much later than usual due to manufacturing difficulties, temporary shortages in the prime period for vaccinations were followed by decreased demand as additional vaccine became available later in the year. Despite efforts by CDC and others to encourage people to seek flu vaccinations later in the season, providers still reported a drop in demand in December. The light flu season in 2000-01, which had relatively low influenza mortality, probably also contributed to the lack of interest. As a result of the waning demand that year, manufacturers and distributors reported having more vaccine than they could sell. In addition, some physicians' offices, employee health clinics, and other organizations that administered flu shots reported having unused doses in December and later. For the 2003-04 flu season, shortages of vaccine have been attributed to an earlier than expected and more severe flu season and to higher than normal demand, likely resulting from media coverage of pediatric deaths associated with influenza. According to CDC officials, this increased demand occurred in a year in which manufacturers had produced about the same number of doses as in the previous season and that supply was not adequate to meet the demand. If production problems delay the availability of vaccine in a given year, the timing for an individual provider to obtain flu vaccine may depend on which manufacturer's vaccine it ordered. This happened in the 2000-01 season, and it could happen again. This year, one of the two major manufacturers recently announced a delay in its shipments of vaccine. On August 26, 2004, one manufacturer announced that release of its flu vaccine would be delayed because of production problems related to sterility of a small number of doses at its manufacturing facility. The company stated that it expected to deliver between 46 million and 48 million doses to the U.S. market beginning in October, and CDC issued a notice on September 24, 2004, stating that some delays might occur for customers receiving this manufacturer's vaccine. Those customers may receive their vaccine later than those who ordered from the other manufacturer, which reported sending its vaccine on schedule beginning in August and September. As a result, one provider could hold vaccination clinics in early October that would be available to anyone who wants a flu shot, while another provider would not yet have any vaccine for its high- risk patients. Shortages of flu vaccine can result in temporary spikes in the price of vaccine. When vaccine supply is limited relative to public demand for flu shots, distributors and others who have supplies of the vaccine have the ability--and the economic incentive--to sell their supplies to the highest bidders rather than filling lower-priced orders they had already received. When there was a delay and temporary shortage of vaccine in 2000, those who purchased vaccine that fall--because their earlier orders had been cancelled, reduced, or delayed, or because they simply ordered later-- found themselves paying much higher prices. For example, one physician's practice ordered flu vaccine from a supplier in April 2000 at $2.87 per dose. When none of that vaccine had arrived by November 1, the practice placed three smaller orders in November with a different supplier at the escalating prices of $8.80, $10.80, and $12.80 per dose. On December 1, the practice ordered more vaccine from a third supplier at $10.80 per dose. The four more expensive orders were delivered immediately, before any vaccine had been received from the original April order. Our work has also found that there is no mechanism in place to ensure distribution of flu vaccine to high-risk individuals before others when the vaccine is in short supply. When the supply was not sufficient in the fall of 2000, focusing distribution on high-risk individuals was difficult because all types of providers served at least some high-risk individuals. Some physicians and public health officials were upset when their local grocery stores, for example, were offering flu shots to everyone when they, the health care providers, were unable to obtain vaccine for their high-risk patients. Many physicians reported that they felt they did not receive priority for vaccine delivery, even though about two-thirds of seniors--one of the largest high-risk groups--generally get their flu shots in medical offices. In our follow-up work, we found no indication that the situation would be different if there was a shortage today. This raises the question of what more can be done to better prepare for possible vaccine delays and shortages in the future. Because flu vaccine production and distribution largely are private-sector responsibilities, options are somewhat limited. While CDC can recommend and encourage providers to immunize high-risk patients first, it does not have control over the distribution of vaccine, other than the small amount that is distributed through public health departments. Although HHS has limited authority to directly control flu vaccine production and distribution, it undertook several initiatives following the 2000-01 flu season. More specifically, CDC has taken actions that may encourage manufacturers to supply more vaccine because the action could lead to increased or more stable demand for flu vaccines. Actions taken by CDC and its advisory committee include the following: Extending the optimal period for getting a flu vaccination until the end of November, to encourage more people to get vaccinations later in the season. Expanding the target population to include children aged 6 through 23 months and all persons who take care of children aged 0 to 23 months. Including the flu vaccine in the Vaccines for Children (VFC) stockpile to help improve flu vaccine supply. For 2004, CDC has contracted for a stockpile of approximately 4.5 million doses of flu vaccine through its VFC authority. Beginning an annual assessment of the projected vaccine supply, and making a determination if vaccination should proceed for all persons or if a tiered approach should be used, targeting limited vaccine supplies to seniors and other high-risk individuals first. For both last season and the upcoming flu season, CDC announced that it did not envision any need for a tiered approach. For the 2004-05 flu season, CDC issued a notice on September 24 recommending that vaccination proceed for all recommended persons as soon as vaccine is available. HHS's draft pandemic influenza plan describes federal roles and responsibilities in responding to an influenza pandemic and provides planning guidance to state and local health departments and the health care system. Although the draft plan is comprehensive in scope, it leaves some important decisions about the purchase, distribution, and administration of vaccines unresolved. In addition, the draft plan does not make recommendations for how population groups should be prioritized to receive vaccines in a pandemic. Consequently, states are left to make their own decisions, potentially compromising the timing and adequacy of a response to an influenza pandemic. HHS's draft pandemic influenza plan describes HHS's role in coordinating a national response to an influenza pandemic and provides guidance and tools to promote pandemic preparedness planning and coordination at federal, state, and local levels, including both the public and the private sectors. Pandemic influenza response activities are outlined by the different phases of a pandemic. The draft plan also provides technical background information on preparedness and response activities such as vaccine development and production. The draft plan acknowledges that states and local areas have important roles in the national response to a pandemic. To facilitate the state and local response, the draft plan provides guidance for state and local health departments and the health care system. The draft plan states that planning for an influenza pandemic will build on HHS-supported efforts to prepare for other public health emergencies such as infectious disease outbreaks, bioterrorist events, or natural disasters, and provides important guidance on areas specific to an influenza pandemic, including disease surveillance, delivery of vaccine and other medications, and communication. According to the Council of State and Territorial Epidemiologists, currently 11 states have pandemic influenza plans. Six of these states have final plans, and five states have draft plans. According to the draft plan, federal agencies are taking steps to ensure and expand influenza vaccine production capacity; increase influenza vaccination use; stockpile influenza medications; enhance U.S. and global disease detection and surveillance infrastructures; expand influenza- related research; support public health planning and laboratory capacity; and improve health care system readiness at the community level. Although most of these activities have not been targeted specifically to pandemic planning, according to HHS officials, spending in these areas will help prepare for the next influenza pandemic. The draft plan also encourages states to allocate funding from the CDC Bioterrorism Cooperative Agreement and 2004 Immunization Continuation Grants for pandemic preparedness planning. Although HHS's draft pandemic influenza plan is comprehensive in scope, it leaves many important decisions about the purchase, distribution, and administration of vaccines unresolved. These decisions include determining the public- versus the private-sector roles in the purchase and distribution of vaccines; the division of responsibility between the federal government and the states for vaccine distribution; and how population groups will be prioritized and targeted to receive limited supplies of vaccines. As we have stated previously, until these key decisions are made, states will find it difficult to plan, and the timeliness and adequacy of response efforts may be compromised. The draft plan does not establish a definitive federal role in the purchasing and distribution of vaccine. Instead, HHS provides options for vaccine purchase and distribution that include public-sector purchase and distribution of all pandemic influenza vaccine; a mixed public-private system where public-sector supply may be targeted to specific priority groups; and maintenance of the current largely private system. Currently, approximately 85 percent of the influenza vaccine produced for annual outbreaks is purchased by the private sector, and a majority of the annual vaccinations are also delivered by the private sector. HHS states in the draft plan that such a distribution method may not be optimal in a pandemic. Furthermore, the draft plan delegates to the states responsibility for distribution of vaccine. The lack of a clearly defined federal role in distribution complicates pandemic planning for the states. Among the current state pandemic influenza plans, there is no consistency in terms of their procurement and distribution of vaccine and the relative role of the federal government. States also approach annual vaccine procurement and distribution differently. Approximately half the states handle procurement and distribution of the influenza vaccine through the state health agency. The remainder either operate through a third-party contractor for distribution to providers or use a combination of these two approaches. In 2003 we reported that state officials were concerned that there were no national recommendations for how population groups should be prioritized to receive vaccines. Identifying priority populations from among high-risk groups and essential health care and emergency personnel is likely to be a controversial issue. The draft plan does not identify priority groups, but HHS indicates that it has separately developed an initial list of suggested priority groups and is soliciting public comment on this list. The draft pandemic plan instructs the states to prioritize the persons receiving the initial doses of vaccine and indicates that as information about the severity of the virus becomes available, recommendations will be formulated at the national level. Prioritization will be an iterative process and will be tied to vaccine availability and the progression of the pandemic. While recognizing that this is an iterative process, state officials have consistently told us that a lack of detailed guidance makes it difficult for states to plan for the use of limited supplies of vaccine. Ensuring an adequate and timely supply of vaccine to protect seniors and others from influenza and flu-related complications continues to be challenging. Only two manufacturers currently produce flu vaccine for seniors and others at high risk for flu-related complications, and manufacturing problems experienced in recent years illustrate the fragility of the current methods of production. Despite efforts by CDC and others, there remains no system to ensure that persons at high risk for complications receive flu vaccine first when vaccine is in short supply. These influenza vaccine supply and distribution problems may become especially acute in a pandemic. We acknowledge the need for flexibility in planning because many aspects of an influenza pandemic cannot be known in advance. However, the absence of more detail in HHS's draft plan creates uncertainty for the states regarding how to plan for the use of limited supplies of vaccine. Until decisions are made about vaccine purchase, distribution, and administration, and priority populations are designated, states will not be able to develop strategies consistent with federal priorities. Officials from CDC provided technical comments that we incorporated as appropriate. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other Members of the Committee may have. For further information about this testimony, please contact Janet Heinrich at (202) 512-7119. Gigi Barsoum, Anne Dievler, Martin Gahart, Jennifer Major, Roseanne Price, and Kim Yamane also made key contributions to this statement. SARS Outbreak: Improvements to Public Health Capacity Are Needed for Responding to Bioterrorism and Emerging Infectious Diseases. GAO-03- 769T, Washington, D.C.: May 7, 2003. Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have Improved Public Health Response Capacity, but Gaps Remain. GAO-03- 654T, Washington, D.C.: April 9, 2003. Flu Vaccine: Steps Are Needed to Better Prepare for Possible Future Shortages. GAO-01-786T, Washington, D.C.: May 30, 2001. Flu Vaccine: Supply Problems Heighten Need to Ensure Access for High- Risk People. GAO-01-624, Washington, D.C.: May 15, 2001. Influenza Pandemic: Plan Needed for Federal and State Response. GAO-01-4, Washington, D.C.: October 27, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Influenza is associated with an average of 36,000 deaths and more than 200,000 hospitalizations each year in the United States. Persons aged 65 and older are involved in more than 9 of 10 deaths and 1 of 2 hospitalizations related to influenza. The best way to prevent influenza is to be vaccinated each fall. In the 2000-01 flu season, and again in the 2003-04 flu season, this country experienced periods when the demand for flu vaccine exceeded the supply, and there is concern about the availability of vaccines for this and future flu seasons. There is also concern about the prospect of a worldwide influenza epidemic, or pandemic, which many experts believe to be inevitable. Three influenza pandemics occurred in the twentieth century. Experts estimate that the next pandemic could kill up to 207,000 people in the United States and cause major social disruption. Public health experts have raised concerns about the ability of the nation's public health system to respond to an influenza pandemic. GAO was asked to discuss issues related to supply, demand, and distribution of vaccine for a regular flu season and assess the federal plan to respond to an influenza pandemic. GAO based this testimony on products it has issued since October 2000, as well as work it conducted to update key information. Challenges persist in ensuring an adequate and timely flu vaccine supply. The number of producers remains limited, and the potential for manufacturing problems such as those experienced in recent years is still present. If a manufacturer's production is affected, those providers who ordered vaccine from that manufacturer could experience shortages, while providers who received supplies from another manufacturer might have all the vaccine they need. This potential for imbalance is what creates situations in which some providers might not have enough vaccine for persons at highest risk, while other providers might have enough supply to hold mass-immunization clinics even for persons at lower risk for flu-related complications. To help limit the potential for such situations, the Centers for Disease Control and Prevention (CDC) and others have taken such steps as adding flu vaccine to federal stockpiles and more aggressively monitoring the projected supply of vaccine. However, there is no system in place to ensure that seniors and others at high risk for complications receive flu vaccinations first when vaccine is in short supply. The Department of Health and Human Services' (HHS) draft "Pandemic Influenza Preparedness and Response Plan" provides a blueprint for the government's role but leaves some important decisions about the government's response unresolved. In addition to describing the federal role, responsibilities, and actions in collaboration with the states in responding to an influenza pandemic, the plan also provides planning guidance to state and local health departments and the health care system. The draft plan is comprehensive in scope, but it leaves decisions about the purchase, distribution, and administration of vaccines open for public comment and for the states to decide individually. In addition, the draft plan does not make recommendations for how population groups should be prioritized to receive vaccines in a pandemic. Difficulties encountered during the annual flu season in the purchase, distribution, and administration of flu vaccine highlight the importance of resolving these issues for pandemic preparedness. Officials from CDC provided technical comments on this testimony that GAO incorporated as appropriate.
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Servicemembers deployed to Afghanistan and Iraq are surviving injuries that would have been fatal in past conflicts due, in part, to advances in battlefield medicine and protective equipment. However, the severity of their injuries can result in a lengthy transition from injured servicemember to veteran. Initially, most seriously injured servicemembers are brought to Landstuhl Regional Medical Center in Germany for treatment. From there, they are usually transported to major MTFs in the United States. According to DOD officials, once stabilized and discharged from MTFs, servicemembers usually relocate closer to their homes or military bases and are treated as outpatients. At this point, the military generally begins to assess whether the servicemember will be able to remain in the military, a process that could take months to complete. Faced with the need to provide benefits and services to a new generation of veterans with disabilities, VA formed an internal task force--the Seamless Transition Task Force--in August 2003 to develop and implement policies to improve the transition of injured servicemembers back to civilian life. Although the task force's initial priority was to ensure the continuity of medical care for injured servicemembers as they transitioned from military to VA health care, it also coordinated efforts to ensure access to all other VA benefits, including vocational rehabilitation. DOD has also supported transition assistance in various ways. For example, the VA/DOD Joint Executive Committee was established in February 2002 to promote collaboration between the two departments, including resolving obstacles to information sharing. The committee is chaired by the Deputy Secretary of Veterans Affairs and the Under Secretary of Defense for Personnel and Readiness. In addition, the Army-- in cooperation with VA--established the Disabled Soldier Support System in April 2004 as an advocacy group and information clearinghouse to clarify the services available to disabled soldiers as they transition to civilian life. In addition, DOD participated at times on VA's Seamless Transition Task Force. Separation from the military and return to civilian life often entail the exchange of individually identifiable health data between DOD and VA. The exchange of these data must comply with the HIPAA Privacy Rule, which became effective April 14, 2001. The Privacy Rule permits VA and DOD to share servicemembers' health data under certain circumstances. VA has given priority consideration and assistance to seriously injured servicemembers returning from Afghanistan and Iraq. In a September 2003 letter, VA asked its regional offices to coordinate with staff at MTFs in their areas to ascertain the identities, medical conditions, and military status of the seriously injured OEF/OIF servicemembers. VA specifically instructed regional offices to focus on servicemembers whose disabilities were definitely or likely to result in military separation. Minimally, this included servicemembers with injuries that had been classified as "very serious," "serious," or in a "special category." In this letter, VA instructed its regional offices to assign a case manager to each seriously injured servicemember who applied for disability compensation. In addition, VA noted the particular importance of early intervention for those who were seriously injured and emphasized that seriously injured servicemembers applying for vocational rehabilitation should receive the fastest possible service. Moreover, VA reminded vocational rehabilitation staff that they can initiate evaluation and counseling and, in some cases, authorize training before a servicemember was discharged. Since most seriously injured servicemembers are initially treated at major MTFs, VA has detailed staff to these facilities to identify and educate these servicemembers about VA services. These staff include VA social workers and disability compensation benefits counselors. At Walter Reed Army Medical Center, where the largest number of seriously injured servicemembers has been treated, VA's Washington, D.C. regional office has since 2001 also provided a vocational rehabilitation counselor to work with hospitalized patients, specifically to offer and provide vocational counseling and evaluation. The counselor reported attempting to contact all patients within 48 hours of their arrival and visited them routinely thereafter to establish rapport. Her primary mission is to work with servicemembers who will need to prepare for civilian employment, although she told us that her early intervention efforts could also help servicemembers who are able to remain in the military. Staff at another regional office noted that they also advocate early intervention. These staff said that they try to contact servicemembers as soon as possible to establish rapport and provide vocational rehabilitation program information even before the servicemembers are physically ready to begin vocational rehabilitation. We previously reported on the importance of early intervention to maximize the work potential of individuals with disabilities. We reported, for example, that rehabilitation offered as close as possible to the onset of disabling impairments has the greatest likelihood of success. Despite efforts by VA's regional offices to identify and obtain medical information on seriously injured OEF/OIF servicemembers, lack of systematic data from DOD poses a challenge. Although VA requested in the spring of 2004 that DOD provide on a systematic basis personal identifying data, medical data, and DOD's injury classification for seriously injured servicemembers, DOD and VA have not developed a data sharing agreement. In the absence of a data sharing agreement with DOD, VA cannot reliably identify all seriously injured servicemembers or know with certainty when they are medically stabilized, when they may be undergoing evaluation for a medical discharge, or when they are discharged from the military. As a result, VA cannot provide reasonable assurance that some seriously injured servicemembers who may benefit from vocational rehabilitation services have not been overlooked. In our review of 12 VA regional offices, we found that the nature of the local relationship between VA staff and MTF staff was a key factor in the completeness and reliability of the information that the MTF provided on seriously injured servicemembers. For example, at one location, the MTF staff provided VA regional office staff with the names of new patients but no indication of the severity of their conditions or the combat theater from which they were returning. Another regional office reported receiving lists of servicemembers for whom the Army had initiated a medical separation in addition to lists of patients with information on the severity of their injuries. Some regional offices were able to capitalize on long-standing informal relationships. For example, the VA coordinator responsible for identifying and monitoring the seriously injured servicemembers at one regional office had served as an Army nurse at the local MTF and was provided all pertinent information. VA staff at the 12 regional offices generally expressed confidence that the data sources they developed enabled them to identify most seriously injured servicemembers. However, we noted that informal data sharing relationships could break down with changes in personnel at either the MTF or the VA regional office. Several VA headquarters' officials and regional office staff we interviewed said that systematic data from DOD would provide them with a way to reliably identify and follow up with seriously injured servicemembers. Additionally, VA officials said these data would help them plan for projected increases in services for newly returning OEF/OIF servicemembers. After more than 2 years of discussion, DOD and VA have not developed a data sharing agreement. Although DOD and VA officials agree that the HIPAA Privacy Rule permits the exchange of individually identifiable health data if the individual signs a proper authorization, the departments have not pursued this as an alternative to a data sharing agreement. DOD and VA officials said the departments want to pursue options under other provisions of the Privacy Rule that may permit them to exchange data without individual authorizations. However, DOD and VA differ in their understanding of HIPAA Privacy Rule provisions that govern the sharing of individually identifiable health data for servicemembers currently receiving treatment in MTFs without an authorization, and the extent to which the Privacy Rule would permit that exchange. DOD's and VA's inability to resolve these differences has impeded coming to an agreement on exchanging servicemembers' individually identifiable health data. Two examples help illustrate the different views of DOD and VA regarding the HIPAA Privacy Rule. First, the Privacy Rule permits covered entities that are also government agencies providing public benefits to disclose individually identifiable health data to each other when the programs serve the same or similar populations, and the disclosure is necessary to coordinate the covered functions of such programs or to improve administration and management related to the covered functions of the programs. VA officials have said they believe that this provision allows DOD to share servicemembers' health data with VA because the departments serve the same or similar populations--active duty servicemembers who transition to veteran status. VA officials also said they believe that DOD and VA provide public benefits. In contrast, a DOD official who is responsible for implementation of the Privacy Rule does not agree that DOD and VA serve the same or similar populations or that DOD provides public benefits. This official said he believes that serving the same or similar populations means that servicemembers have a dual eligibility for both DOD and VA services. Although the official said that while some former servicemembers are dually eligible for DOD and VA services, not all qualify for both services simultaneously. This official also said that the services that DOD provides are not public benefits because they are unlike the examples of public benefits programs provided in the preamble to the Privacy Rule. The Privacy Rule does not define public benefits. In the second example, the Privacy Rule explicitly permits the disclosure of individually identifiable health data by DOD to VA upon the separation or discharge of a servicemember in order to determine eligibility for VA benefits. DOD views "upon the separation or discharge" as referring to the separation process that varies by servicemember, but which begins with the decision by DOD that the servicemember will separate. According to VA officials, the HIPAA Privacy Rule would allow DOD to share data sooner than the decision by DOD that the servicemember will separate. However, DOD is reluctant to provide individually identifiable health data to VA until DOD is certain that a servicemember will separate from the military. DOD is concerned that VA's outreach to servicemembers who are still on active duty could work at cross-purposes to the military's retention goals. According to DOD officials, it would be premature for VA to begin working with servicemembers who may eventually return to active duty. VA contends that DOD could define the specific point of separation or discharge earlier in the process. In commenting on our January 2005 report, VA said that a memorandum of understanding was then being negotiated that would allow VA to obtain from DOD the servicemember's medical information prior to discharge from military service. VA added that its Office of General Counsel was confident that there are exceptions in the Privacy Rule that would permit military service medical information to be disclosed for VA benefits purposes and that it had pressed the case with DOD's General Counsel. As of May 17, 2005, the memorandum of understanding between DOD and VA has not been finalized. Despite being unable to agree on an exchange of individually identifiable health data, DOD and VA are currently reviewing a draft memorandum of understanding. DOD and VA officials told us they believe that the memorandum of understanding will move the two departments closer to a data sharing agreement. However, we found that the draft memorandum of understanding restates many of the legal authorities contained in the Privacy Rule for the use and disclosure of individually identifiable health data. For example, the draft memorandum of understanding does not specify that individually identifiable health data of OEF/OIF servicemembers shall be disclosed and restates that data will be shared upon separation or discharge without further defining the specific point during the separation or discharge process when data can be shared. As a result, even if the memorandum of understanding is finalized, DOD and VA will still not have a data sharing agreement that specifies what types of individually identifiable health data can be exchanged and when the data can be shared. Mr. Chairman, this completes my prepared remarks. I will be pleased to answer any questions you or other Members of the Subcommittee may have at this time. For further information, please contact Cynthia A. Bascetta at (202) 512- 7101. Also contributing to this statement were Mary Ann Curran, Marcia Mann, Kevin Milne, and Janet Overton. Vocational Rehabilitation: VA Has Opportunities to Improve Services, but Faces Significant Challenges. GAO-05-572T. Washington, D.C.: April 20, 2005. VA Disability Benefits and Health Care: Providing Certain Services to the Seriously Injured Poses Challenges. GAO-05-444T. Washington, D.C.: March 17, 2005. Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Seriously Injured Servicemembers. GAO-05-167. Washington, D.C.: January 14, 2005. Health Information: First-Year Experiences under the Federal Privacy Rule. GAO-04-965. Washington, D.C.: September 3, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since the onset of Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF), the Department of Defense (DOD) reported that more than 12,000 servicemembers have been injured in combat. While many return to active duty, others with more serious injuries are likely to be discharged from the military. To ensure the continuity of medical care and access to all other Department of Veterans Affairs' (VA) benefits, such as vocational rehabilitation, VA formed its Seamless Transition Task Force. In January 2005, GAO reported that VA had given high priority to OEF/OIF servicemembers, but faced challenges in identifying, locating, and following up with seriously injured servicemembers. GAO recommended that VA and DOD reach an agreement for VA to obtain systematic data from DOD, and the departments concurred. However, DOD raised privacy concerns. GAO was asked to review VA's efforts to expedite vocational rehabilitation services to seriously injured servicemembers and to determine the status of an agreement between DOD and VA to share health data. GAO relied on its prior work; interviewed VA and DOD officials; and reviewed the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the HIPAA Privacy Rule, which govern the sharing of individually identifiable health data. While VA has taken steps to expedite services to seriously injured servicemembers, VA does not have systematic data from DOD on seriously injured servicemembers who may need VA vocational rehabilitation and other benefits. As a result, VA has had to rely on its regional offices to develop informal data sharing arrangements with local military treatment facility (MTF) staff to identify servicemembers who may need vocational rehabilitation services. However, VA staff have no official data source from DOD from which to confirm the completeness and reliability of the data they obtain. Furthermore, they cannot provide reasonable assurance that some seriously injured servicemembers who may have benefited from vocational rehabilitation services have not been overlooked. Although several VA headquarters officials and regional office staff GAO interviewed said that systematic data from DOD would provide them with a way to reliably identify and follow up with seriously injured servicemembers, DOD and VA have not developed a data sharing agreement. Additionally, VA officials said these data would help VA plan for projected increases in the need for services for newly returning OEF/OIF servicemembers. VA has requested that DOD provide systematic data on seriously injured servicemembers who may need vocational rehabilitation. DOD and VA have been working on a data sharing agreement for over 2 years, but have not reached an agreement. DOD and VA differ in their understanding of HIPAA Privacy Rule provisions that govern the sharing of individually identifiable health data for servicemembers currently receiving treatment at MTFs, and the extent to which the Privacy Rule would permit that exchange. DOD's and VA's inability to resolve these differences has impeded coming to an agreement on exchanging seriously injured servicemembers' individually identifiable health data. Despite being unable to agree on an exchange of individually identifiable health data, DOD and VA are reviewing a draft memorandum of understanding, which the departments believe will move them closer to a data sharing agreement. However, GAO found that the draft memorandum restates many of the legal authorities contained in the Privacy Rule for the use and disclosure of individually identifiable health data. As a result, even if the memorandum of understanding is finalized, DOD and VA will still have to agree on what types of individually identifiable health data can be exchanged and when the data can be shared. DOD and VA generally agreed with GAO's findings.
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To increase the involvement of religious organizations in the delivery of social services, the Congress included charitable choice provisions in the legislation for several federal programs. These provisions were designed to remove legal or perceived barriers that religious organizations might face in contracting with the federal government. First enacted in 1996, charitable choice provisions apply to administrators, service providers, and recipients of TANF and WTW funds, as established through PRWORA. Subsequently, the Congress included charitable choice provisions in the 1998 reauthorization of the CSBG program and the amendments to the Public Health Services Act in 2000 affecting the SAPT block grant program. Funding levels for programs with charitable choice provisions vary considerably, with TANF having the highest level of funding (see table 1). These programs allocate funds in a variety of ways. TANF, CSBG, and SAPT are block grants, which are distributed in lump sums to states. WTW has two funding streams, one of which is comprised of state formula grants that are mostly passed on to localities and the other representing a smaller portion of funds called national competitive grants, which the Department of Labor awarded directly to local applicants. Most federal funding for these programs is administered by state or local government entities, which have the ability to contract with social service providers, including religious organizations. In addition to establishing that FBOs can compete for public funds while retaining their religious nature, charitable choice provisions are intended to safeguard the interests of the various parties involved in financial agreements to provide services (see table 2). While charitable choice provisions vary somewhat by program, they all share common themes of protecting religious autonomy among service providers, safeguarding the interests of beneficiaries of federally funded services, and ensuring that all contracting agencies, including religious organizations, are held financially accountable. Overall, FBOs contracted for a small proportion of the government funding available to nongovernmental contractors under the four programs we examined. Contracts with FBOs accounted for 8 percent (or about $80 million) of the $1 billion in federal and state TANF funds spent by state governments on contracts with nongovernmental entities in 2001, and 2 percent (or about $16 million) of the $712 million Welfare-to-Work competitive grant funds in fiscal years 1998 and 1999. National data are not available on the proportion of contracted funds FBOs received for CSBG, SAPT, and Welfare-to-Work formula grants. However, state data indicate that FBOs received a small proportion of CSBG and SAPT funds in the five states we visited. All FBOs that we visited had tax-exempt status and most were incorporated separately from religious institutions. In addition, a majority had established contracts with the government before the passage of charitable choice provisions in legislation; most were affiliated with Christian denominations; and most contracted for TANF funds. Under the contracts we examined, FBOs provided an array of services in line with the key uses of each program's funds and sometimes provided additional services such as mentoring or fatherhood training. Contracting with FBOs constituted a relatively small proportion of all contracting with nongovernmental entities using federal and state TANF funds in 2001, according to our national survey. TANF contracting occurs only at the state level in 24 states, only at the local level in 5 states, at both levels in 20 other states, and in the District of Columbia. TANF contracting does not occur in South Dakota. The majority of the approximately $1 billion in federal and state TANF funds spent by state governments on contracts with nongovernmental entities nationwide went to secular nonprofit organizations, as shown in figure 1. In contrast, contracts with FBOs accounted for 8 percent of the contracted funds. While FBOs received a small proportion of federal and state TANF funds contracted out in 2001 at the state level, this proportion varied considerably across states, as shown in table 3. New Jersey spent over 32 percent of these funds on contracts with FBOs. Nine states and the District of Columbia spent more than 15 percent of these federal and state TANF funds on contracts with FBOs. In contrast, 23 states awarded to FBOs less than 5 percent of the federal and state TANF funds they contracted out to nongovernmental organizations. While table 3 depicts contracting by state governments, it does not include information on contracting by local entities. In states such as California, New York, and Texas, TANF contracting occurs predominately at the local level. Our national survey of TANF contracting identified more than $500 million in local government contracts with nongovernmental entities. About 8 percent of these funds were with FBOs. In addition, national data show that a small proportion of WTW competitive grant funds went to FBOs. According to Labor, 6 of 191 contracts for these funds went to FBOs in fiscal years 1998 and 1999; these contracts totaled $16.2 million, or approximately 2 percent of WTW competitive grant funds in those years. National data are not available to indicate the magnitude of contracting with FBOs in other charitable choice programs we examined. Labor did not have information about the proportion of WTW formula grants that went to FBOs. States administer these grant funds through local entities. In addition, HHS has not compiled national data on the level of contracting with FBOs using CSBG and SAPT funds. Although national information is not available, in the five states we visited we found that FBOs received 9 percent or less of SAPT funds contracted out by states. In addition, FBOs represented between 2 and 20 percent of the organizations licensed or certified by these five states to provide substance abuse treatment services, as shown in table 4. In addition, in the five states we visited, FBOs received a small proportion of the overall CSBG funds passed through by states. States allocate these funds to "eligible entities," primarily community action agencies (CAAs), which include mostly private, nonprofit organizations but also some public agencies. None of the eligible entities in the five states we visited were FBOs. However, some of them subcontracted with other providers, including FBOs, for services. In Texas and Washington, FBOs received more than half of these subcontracted funds, as shown in table 5. All of the FBOs we visited had tax-exempt status; most were incorporated separately from religious institutions; and a majority of them had a fairly long history of contracting with the government. While 31 of the 35 FBO contractors we visited had been established to be independent of religious institutions, all of them had tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Several of these FBOs told us that they needed this status to compete for nongovernmental sources of funding, such as funding from private foundations. Some FBOs noted that this status established them as a legal entity separate from a church so that the church would be protected from liability for the services the FBO offered. Moreover, some FBO officials told us that 501(c)(3) status gave their program added credibility and an established presence in the community. Of the 35 FBO contractors we visited, 21 had contracted with the government before the passage of charitable choice legislation in the relevant programs. One FBO had provided services through government contracts since 1913. The FBOs we selected for interviews in the five states we visited varied in size and structure but shared some commonalities. While some FBOs were very small, operating on a budget of less than $200,000, others had large annual budgets, as high as $60 million. Some of the FBOs we visited operated independently; some were multidenominational coalitions of churches; and others were affiliated with a national religious organization, such as Catholic Charities, the Association of Jewish Family & Children's Services, or the Salvation Army. Twenty-nine of the 35 FBOs were affiliated with the Christian faith and included various Christian denominations, for example, Baptist, Methodist, and Lutheran. Finally, about two-thirds of these FBOs contracted for TANF-funded services. FBOs we visited contracted for services that matched the key uses of each program's funds and sometimes included additional features. While more FBOs provided services closer to the key uses of TANF program funds, such as job preparation, several of the FBOs contracting for TANF services included fatherhood programs or forms of mentoring in their programs. FBOs that contracted for WTW funds mostly provided job training and placement; one also helped clients find daycare services. FBOs contracting for SAPT funds provided prevention and treatment of substance abuse. The two FBOs that contracted for CSBG funds offered services that included parent education, case management for families with a variety of needs, and medical services. While charitable choice has created opportunities for FBOs, several factors continue to constrain some FBOs from contracting with the government. These factors include FBOs' limited awareness of funding opportunities, limited administrative and financial capacity, inexperience with government contracting, and beliefs about the separation of church and state. However, most of these limitations are not unique to FBOs but are common to small, inexperienced organizations seeking to enter into contracts with government. Although most officials in the states we visited reported no legal barriers to prevent religious organizations from partnering with government, some officials noted that their history of a strong separation of church and state might lead all parties to be cautious about collaboration. Government agencies in the states we visited differed in their approaches to identification and removal of constraints that can limit financial contracting between FBOs and government. Most states we visited have broadened access to information and provided assistance for FBOs, while others have been less active in identifying and addressing constraints. Federal agencies have also taken steps to address constraints by establishing funding for small faith-based and community organizations to develop or expand model social service programs. Small FBOs are generally unaware of funding opportunities unless they have past experience with government, according to some FBO and government officials we interviewed. Notices about funding opportunities are sent to current provider mailing lists, to newspapers, and sometimes to agency Web sites. Because state and local governments are not required to promote a broader awareness of funding opportunities for new providers under current charitable choice provisions, government agencies in less active states have not taken steps to disseminate information about funding opportunities to FBOs. As a result, potential service providers that are not on current notification lists, including FBOs, may remain unaware of upcoming funding opportunities while experienced providers have advance notice. Moreover, small, inexperienced FBOs are disadvantaged by their limited administrative capacity, according to many government and FBO officials we interviewed. Small FBO providers often lack the administrative resources necessary to deal with the complex paperwork requirements of government contracting. Local program officials said that some new FBO providers may have never submitted a budget, or may overestimate their capacity to provide services, or may have difficulty with reporting requirements. Some small FBOs we interviewed rely on one person--who may have other duties--or a small number of staff and volunteers, to perform administrative tasks. Government officials told us that small faith- based contractors inexperienced in government contracting often required administrative and technical assistance. Similarly, FBO officials have expressed concerns about the financial constraints of government contracting. Some FBO officials we interviewed reported experiencing cash flow problems resulting from start-up costs and payment delays. In some cases, their churches helped with start-up funds, or other expenses, including overhead and indirect assistance. Furthermore, in a March 2001 survey conducted by the Georgia Faith- Based Liaison, religious leaders reported that while they were interested in government contracting, they had concerns regarding their limited financial capacity to manage publicly funded programs. These same leaders also expressed concerns about their financial capacity if they were to offer child-care or social services for welfare clients because of the risks associated with payment delays. Most state and local officials in the states we visited reported that no legal barriers exist to prevent FBOs from contracting with the government in programs with charitable choice provisions. However, some officials noted that perceptions about the separation of church and state might cause both FBO and government officials to be cautious about entering into contracts. One state lawmaker in Georgia identified the state's constitution as one source of this perception, noting that it contains language forbidding the funding of religious organizations with state funds. Because of confusion over whether the state constitution also applied to federal funds, Georgia adopted a law that specified that charitable choice allowed religious organizations to receive federal funding. Most government officials we interviewed told us that state licensure or certification requirements for substance abuse treatment providers do not restrict religious organizations from participating in publicly funded treatment programs. However, in all of the states we visited, substance abuse treatment providers are required to be licensed or certified in order to be eligible for publicly funded contracts. Government officials noted that because the health and safety requirements attached to licensing can be costly, they might pose a barrier to small FBOs that want to be licensed to offer this service. To address this, lawmakers in the state of Washington proposed easing licensing requirements for FBO substance abuse treatment providers. However, this proposal was not approved because of concerns that this would lower standards for FBO providers. Government and FBO officials we interviewed in several states reported that some FBOs prefer not to partner with government for various reasons. For example, some faith-based providers do not want to separate their religion from their delivery of services. In a recent survey conducted by Oklahoma's Office of Faith-Based and Community Initiative to identify barriers to collaboration, religious leaders reported that they were concerned about potential erosion of their religious mission, government intrusion into affairs of the congregation, and excessive bureaucracy. While states we visited differed in their approaches, some states have taken more active strategies toward addressing factors that constrain FBOs from government contracting. Some states, such as Texas and Virginia, established task forces to advise the governor or legislature about actions for improving government collaboration with FBOs. To promote awareness and facilitate collaborations with FBOs, 20 states have appointed faith-based liaisons since the enactment of charitable choice provisions in the current law. Four of the five states we visited directed outreach activities to engage religious leaders and government officials in discussions of the perceived barriers to collaboration and to promote awareness of funding opportunities. Some states took steps to strengthen the administrative capacity of FBOs by providing informational opportunities and developing educational material for FBOs unfamiliar with government contracting. Indiana, Virginia, and Texas conducted informational sessions and workshops for FBOs. In addition, Virginia and Indiana created educational handbooks dedicated to new faith-based social service providers with information on topics such as applying for government funding, writing grants, and forming a nonprofit, tax-exempt 501(c)(3) organization. Some state and local officials we interviewed told us that they offer assistance and administrative information to any small, new provider during the pre- contracting phase. Other states, which we did not visit, reported that they created separate funding for their faith-based initiatives. New Jersey set up its own Office of Faith-Based and Community Initiative and funded it using only state funds, according to the New Jersey faith-based liaison. This office began awarding grants for services such as day care, youth mentoring, and substance abuse treatment to FBOs in 1998 and plans to award $2.5 million in grants this year to faith-based providers. North Carolina developed a "Communities of Faith Initiatives," which set aside $2.45 million in TANF funds for its Faith-Demonstration awards in 1999 and 2000 to contract with various FBOs for job retention and follow- up demonstration pilots. Federal agencies have also acted to identify and address constraints to government collaborations with FBOs. President Bush issued two executive orders in January 2001, establishing the White House Office of Faith-Based and Community Initiatives and Centers for Faith-Based and Community Initiatives in five federal agencies. These agencies have reported on barriers to collaboration with FBOs and outlined recommendations to address some of the barriers. Moreover, a Compassion Capital Fund of $30 million was approved in the fiscal year 2002 budget as part of the Labor, HHS, and Education appropriations.The funds are to be used for grants to charitable organizations to emulate model social service programs and encourage research on the best practices of social services organizations. In addition, Labor established another funding source to enhance collaborations with faith-based and community providers. Labor's Employment and Training Administration announced on April 17, 2002, the availability of grant funding geared toward helping faith-based and community-based organizations participate in the workforce development system. In the five states we visited, understanding and implementation of charitable choice safeguards differed, and the incidence of problems involving safeguards is unknown. A few of the safeguard provisions specified in federal law are subject to interpretation, and federal agencies have issued limited guidance on how to interpret them. As a result, some government and FBO officials expressed confusion concerning two matters: (1) allowable activities under the prohibition on the use of federal funds for religious instruction or proselytizing and (2) FBOs' ability to hire on the basis of faith. State and local government entities also differed in how they interpret the charitable choice safeguards and their approaches to communicating them to FBOs. Officials in the states we visited reported receiving few complaints from FBO clients. These officials relied on complaints and grievance procedures to identify discrimination or proselytizing, and in some cases FBOs and clients may not be aware of the charitable choice safeguards. Therefore, violations of the safeguard requirements may go unreported or undetected. In the 6 years since charitable choice provisions were passed as part of PRWORA, federal agencies have issued limited guidance to state agencies concerning charitable choice safeguards--such as the prohibition on the use of federal funds for religious instruction or proselytizing--and how they should be implemented. Even though HHS has recently created a charitable choice Web site outlining most of the safeguards and has sponsored workshops featuring charitable choice issues, it has not issued guidance to states on the meaning of the provisions designed to safeguard parties involved in government contracting. According to an HHS official, although they have drafted guidance for charitable choice provisions as they apply to substance abuse prevention and treatment programs, this document has not been released. HHS officials told us that the agency did not write regulatory language concerning charitable choice and TANF because PRWORA specifically limits HHS from regulating the conduct of states under TANF, except as expressly provided in the law. While PRWORA includes charitable choice provisions, the law does not indicate that HHS may prescribe how states must implement these provisions. With respect to CSBG funds, HHS's Office of Community Services has distributed an information memorandum to states communicating the safeguards as they are listed in the CSBG law, but this memorandum does not offer guidance on how states should interpret the safeguard provisions. Finally, Labor's solicitation of grant applications for WTW competitive grants specifically mentioned that FBOs were eligible to apply for the funds, but Labor did not issue guidance concerning charitable choice safeguards. Labor reported that in the case of WTW formula grants, the only information it gave to states was to note charitable choice provisions in the planning guidance it issued initially for the program. Most state and local officials we interviewed knew that charitable choice provisions were meant to allow FBOs to participate in the contracting process on the same basis as other organizations and understood that the law prohibits the use of public funds for religious worship, instruction, or proselytizing; however, they often differed in their understanding of allowable religious activities. Several state and local officials reported that prayer was not allowed in the delivery of publicly funded social services, while many FBO officials said that voluntary prayer was permissible during such services. PRWORA and other laws with charitable choice provisions do not define what constitutes proselytizing or religious worship and federal guidance concerning this matter has not been issued to state and local government entities. Without guidance from HHS, consistency in interpretations is unlikely. Some state, local, and FBO officials we interviewed were unaware of the charitable choice safeguard allowing religious organizations to retain limited exception to federal employment discrimination law. This safeguard exempts religious organizations from the prohibition against discrimination on the basis of religion in employment decisions, even when they receive federal funds. For example, even though the law allows FBOs to make hiring decisions on the basis of faith, one government official said that the boilerplate language in the agency's contracts with service providers specifically indicates that providers are not allowed to discriminate in employment decisions on the basis of religion. Other state and local officials we interviewed were aware of this safeguard, but some perceived it to be in conflict with local antidiscrimination laws. In particular, one local agency official said that up to 17 percent of the local population consisted of sexual minorities and expressed concern that they would be discriminated against in both the hiring and the delivery of services. In contrast, almost all FBO officials we interviewed said that they do not consider faith when making hiring decisions for any of their organizations' positions. In addition, all FBO officials we interviewed said they do not consider the faith of the client in the delivery of their services. Some states were more active than others in communicating charitable choice safeguards to the various parties involved in contracting. For example, the state of Virginia enacted legislation to include all charitable choice provisions in Virginia's procurement law. These provisions were included in its technical assistance handbook for faith- and community- based organizations and used as a curriculum for educating over 1,000 representatives from faith- and community-based groups on charitable choice safeguards, such as the FBOs' right to display religious symbols. Virginia also distributed a statement that local agencies under Virginia procurement law must give to all clients informing them of their right to an alternative (nonreligious) provider under charitable choice. Indiana's Family and Social Services Administration implemented a similar practice. States also communicated the safeguards by including various charitable choice provisions in contracts or requests for proposals (RFP). State and local government contracting entities in Indiana, Virginia, and Texas included information in their TANF RFPs specifically stating that FBOs were eligible to apply for federal funds. The Indiana Family and Social Services Administration's Indiana Manpower Placement and Comprehensive Training Program and the Texas Department of Human Services included all charitable choice safeguards in their contracts with TANF service providers. Georgia has recently passed legislation to implement charitable choice provisions; however, both Georgia and Washington do not currently include any charitable choice language in their TANF contracts or RFPs. Washington state officials said that after reviewing the charitable choice statutory provisions, they decided that no action was required because they already contracted with FBOs. Government officials said that in practice, safeguards were most often verbally communicated, many times through technical assistance workshops or bidders' conferences. However, most of the FBOs we interviewed said that the contracting agency had not explained the provisions to them. In addition, few local and FBO officials we interviewed recalled receiving any guidance on the safeguards, informal or otherwise, from state or local officials, respectively. In the five states we visited, government officials reported few problems concerning FBO use of federal funds for proselytizing, discrimination against clients, or client requests for alternative (nonreligious) providers; however, the incidence of violations of these safeguard requirements is unknown. FBOs we interviewed did not report any intrusive government behavior that interfered with their ability to retain their religious nature under charitable choice. These FBOs often displayed religious symbols and none said that government officials restricted this ability under charitable choice by asking them to remove religious icons. In Texas, one lawsuit was filed against an FBO for allegedly using public funds to purchase bibles for a charitable choice program, and the case was dismissed in federal court. However, almost all of the government and FBO officials we interviewed said that they had not received any complaints from clients about the religious nature of an FBO. Officials in the five states we visited also said that few clients had asked for an alternative (nonreligious) provider, one of the charitable choice protections afforded to clients who object to receiving services from a religious organization. However, only two of the five states we visited, Indiana and Virginia, issued written guidance to inform clients that they had this right to an alternative (nonreligious) provider, and these two states only recently issued such guidance. Texas includes such information in its TANF contracts, but requires that the provider communicate this information to the client. Failure to communicate information about this safeguard to clients raises the possibility that some clients who may prefer to receive services from a nonreligious provider may not be aware of their right to do so. The majority of state and local agencies relied on complaint-based systems to identify violations of the charitable choice safeguard requirements. Agency officials typically monitored financial and programmatic aspects of the services. A few officials said that any "red flags" would show up during regular programmatic monitoring, and that such indications would be the basis for further investigation. Nonetheless, it is not clear whether there are violations of the safeguard requirements that go unreported or undetected because clients and FBOs may not be aware of the safeguard provisions. FBOs are held accountable for performance in the same way as other organizations that contract with the government, according to state and local officials in the five states we visited. Most officials said that all contractors are held accountable on the basis of the same standards, such as those contained in the contract language. None of the officials said that FBOs are held to a different standard, either higher or lower, compared to other contractors. Most agencies responsible for monitoring contractors said that they monitored all contracting organizations in the same way, whether faith-based or not. None of the state and local officials we interviewed said that they monitored FBOs differently from other organizations. Monitoring activities included program audits, financial audits, and regular performance reports from FBOs. Although FBOs are held accountable for performance in the same way as non-FBOs, comparative information on contractor performance is unavailable for several reasons. One reason is that cost-reimbursement contracts, used by many of the agencies in the five states visited, pay contractors on the basis of the allowable costs they incur in providing services, rather than performance outcomes--the results expected to follow from a service. In contrast, performance-based contracts, which were used by some of the agencies visited, pay contractors on the basis of the degree to which the services performed meet the outcomes set forth in the contract. Examples of such performance outcomes include the percentages of clients that obtain or retain employment for a specified period of time. However, even when contracts specified expected outcomes, some state and local officials said that comparative information on contractor performance was unavailable. In the five states, specified performance outcomes sometimes varied with each contractor individually, often because contractors either provided different services or the same services to different populations. In Indiana, for example, TANF contractors proposed their performance outcomes as part of the bidding process on the basis of the local agency's needs. While specified performance outcomes sometimes differed on the basis of the services provided and the populations served, none of the state and local officials told us that these performance outcomes varied according to whether the contractor was faith based. While contractors shared the same specified performance outcomes in a few cases, state and local officials had not compared the performance of FBOs to that of other contractors. Many officials told us that they did not track the performance of FBOs as a group at all. For example, one state- level agency tracked substance abuse treatment outcomes by providers but had not identified which contractors were FBOs. Most state and local officials that provided their opinion believed that their FBO service providers performed as well as or better than other organizations overall, even though they did not provide data regarding FBO performance. Research efforts are currently under way to provide information on the performance of FBOs in delivering social services. Researchers at Indiana University-Purdue University Indianapolis are conducting a 3-year evaluation comparing the performance of FBOs and non-FBOs in Indiana, Massachusetts, and North Carolina. Researchers expect to complete the study in 2003. In addition, in February 2002, The Pew Charitable Trusts awarded a $6.3 million grant to the Rockefeller Institute of Government, based at the State University of New York in Albany, to study the capacity and effectiveness of FBOs in providing social services and other issues. While HHS and Labor have taken steps to increase awareness of funding opportunities for religious and community organizations, state and local government officials and FBO officials continue to differ in their understanding of charitable choice rules, particularly regarding specific safeguards designed to protect the various parties involved in financial arrangements, including FBOs and clients. In addition, clients are sometimes not being informed about the safeguards that are specifically designed to protect them. This is a problem because government entities generally rely on complaints from clients to enforce such safeguards. When all parties are not fully aware of their rights and responsibilities under charitable choice provisions, violations of these rights may go undetected and unreported. While HHS officials said that they interpret PRWORA to mean that the agency does not have the authority to issue regulations on charitable choice for TANF programs, HHS does have the authority to issue other forms of guidance to states for TANF programs. Additional guidance to clarify the safeguards and suggest ways in which they can be implemented would promote greater consistency in the way that government agencies meet their responsibilities in implementing charitable choice provisions. Without guidance from HHS, consistency in the interpretation of charitable choice provisions is unlikely. Because the WTW funds were not reauthorized and all funds have been distributed to grantees, the issuance of guidance by Labor to states is no longer needed. In order to promote greater consistency of interpretation and implementation of charitable choice provisions, we recommend that the Secretary of HHS issue guidance to the appropriate state and local agencies administering TANF, CSBG, and SAPT programs on charitable choice safeguards, including the safeguard prohibiting the use of federal funds for religious worship, instruction, or proselytizing and the safeguard concerning a client's right to an alternative (nonreligious) provider. In particular, this guidance should offer clarification concerning allowable activities that a religious organization may engage in while retaining its religious nature. We provided a draft of this report to HHS and Labor for their review. HHS agreed with our recommendation and said that it is in the process of developing and issuing guidance to the appropriate state and local agencies administering these programs. HHS also provided detailed information on how it plans to use the $30 million Compassion Capital Fund, which is intended to assist FBOs and community-based organizations. HHS's comments are reprinted in appendix II. Labor had no formal comments. HHS and Labor also provided technical comments that we incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Secretary of Labor, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7215. Other contacts and staff acknowledgments are listed in appendix III. To obtain specific information about how charitable choice has been implemented, we visited 5 states--Georgia, Indiana, Texas, Virginia, and Washington. We selected these states to obtain a range in the levels of both state government activities with regard to faith-based initiatives and contracting with faith-based organizations, as well as geographic dispersion. In addition, we did telephone interviews with faith-based liaisons established in 15 states (these were all of the liaisons that had been established as of September 2001). To identify what is known about the extent and nature of faith-based organization (FBO) contracting, we compiled information from several sources. We analyzed results from our national survey of Temporary Assistance for Needy Families (TANF) contracting of all 50 states, the District of Columbia, and the 10 counties with the largest federal TANF- funding allocations in each of the 13 states that locally administer their TANF programs. In addition, we interviewed state and local program officials that administer TANF, Welfare-to-Work (WTW), Community Services Block Grant (CSBG), and Substance Abuse Prevention and Treatment (SAPT) funded programs in the states we visited. Finally, we analyzed documents and data provided to us by federal, state, and local officials. To identify the extent of FBO contracting in the WTW program, we obtained national information from the Department of Labor, which oversees this program. To identify the extent of FBO contracting in the SAPT block grant programs in the 5 states visited, we contacted state officials responsible for these programs to obtain data on certified substance abuse treatment providers eligible to receive federal funds and contracting under this program. To identify the extent of FBO contracting in the CSBG programs in these states, we contacted state officials responsible for CSBG funded programs to obtain data on FBO contracting and subcontracting. To identify the nature of services provided in the four programs, we contacted federal, state and local officials overseeing these programs. In addition, we visited FBOs that contracted with the government and some that did not have contracts. We also reviewed relevant documents related to the contracting process. To obtain information on the implementation of charitable choice, including factors that constrain FBOs in contracting with the government, implementing safeguard provisions, and the performance of FBOs, we met with officials at the Departments of Health and Human Services and Labor in Washington, D.C., that oversee the TANF, WTW, CSBG, and SAPT programs. We conducted telephone interviews with faith-based liaisons in 15 states and on-site interviews with state and local officials in various locations in Georgia, Indiana, Texas, Virginia, and Washington. To obtain the perspective of FBOs, we also interviewed FBO officials that have had contracts with the government under these programs, as well as some that do not have contracts with the government. In addition, we interviewed researchers that have conducted related studies on charitable choice implementation and the relative performance of FBOs. We also reviewed audit reports for the two federal agencies that oversee these programs. Finally, we analyzed documents that we obtained from federal, state, and local officials, including contracts, guidance, and communications regarding charitable choice implementation. In addition to the above contacts, Mary E. Abdella, Richard P. Burkard, Jennifer A. Eichberger, Randall C. Fasnacht, and Nico Sloss made important contributions to this report. Charitable Choice: Overview of Research Findings on Implementation. GAO-02-337. Washington, D.C.: January 18, 2002. Regulatory Programs: Balancing Federal and State Responsibilities for Standard Setting and Implementation. GAO-02-495. Washington, D.C.: March 20, 2002. Welfare Reform: Federal Oversight of State and Local Contracting Can Be Strengthened. GAO-02-661. Washington, D.C.: June 11, 2002. Welfare Reform: States Provide TANF-Funded Services to Many Low- Income Families Who Do Not Receive Cash Assistance. GAO-02-564. Washington, D.C.: April 5, 2002. Welfare Reform: More Coordinated Federal Effort Could Help States and Localities Move TANF Recipients With Impairments Toward Employment. GAO-02-37. Washington, D.C.: October 31, 2001. Welfare Reform: Progress in Meeting Work-Focused TANF Goals. GAO-01- 522T. Washington, D.C.: March 15, 2001. Welfare Reform: Moving Hard-to-Employ Recipients into the Workforce. GAO-01-368. Washington, D.C.: March 15, 2001. Welfare Reform: Data Available to Assess TANF's Progress. GAO-01-298. Washington, D.C.: February 28, 2001. Drug Abuse: Research Shows Treatment Is Effective, but Benefits May Be Overstated. GAO/HEHS-98-72. Washington, D.C.: March 27, 1998.
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The federal government spends billions of dollars annually to provide services to the needy directly, or through contracts with a large network of social service providers. Faith-based organizations (FBO), such as churches and religiously affiliated entities, are a part of this network and have a long history of providing social services to needy families and individuals. In the past, religious organizations were required to secularize their services and premises, so that their social service activities were distinctly separate from their religious activities, as a condition of receiving public funds. Beginning with the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Congress enacted "charitable choice" provisions, which authorized religious organizations to compete on the same basis as other organizations for federal funding under certain programs without having to alter their religious character or governance. The statutory provisions cover several programs, including Temporary Assistance for Needy Families (TANF) and Welfare to Work. Similar provisions also apply to the Community Services Block Grant and the substance abuse prevention and treatment programs. GAO found that faith-based organizations receive a small proportion of the government funding provided to nongovernmental contractors. Contracts with faith-based organizations accounted for 8 percent of the $1 billion in federal and state TANF funds spent by state governments on contracts with nongovernmental entities in 2001. Although charitable choice was intended to allow FBOs to contract with government in these programs, several factors continue to constrain the ability of small FBOs to contract with the government. These factors include FBO's lack of awareness of funding opportunities, limited administrative and financial capacity, inexperience with government contracting, and beliefs about the separation of church and state. State and local officials differed in their understanding and implementation of certain charitable choice safeguards, such as the prohibition on the use of federal funds for religious worship or instruction; however, the incidence of problems involving safeguards is unknown. Faith-based organizations are held accountable for performance in the same way as other organizations contracting with the government. However, little information is available to compare the performance of FBOs to that of other organizations.
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GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies' major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the President's budget, provide a direct linkage between an agency's longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies' performance reports, due this year by March 31, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. NSF's mission is to promote the progress of science; to advance the national health, prosperity, and welfare; and to secure the national defense. NSF carries out its mission primarily by making merit-based grants and cooperative agreements to individual researchers and groups in partnership with colleges, universities, and other public and private institutions. For fiscal year 2001, NSF has a budget of $4.4 billion and a staff of about 1,200 government employees to accomplish its mission. Implementing GPRA has been a challenge for NSF, whose mission involves funding research activities, because the substance and timing of research outcomes are unpredictable and research results can be difficult to report quantitatively. With OMB's approval, NSF uses an alternative format--a qualitative scale for the assessment of outcomes--for which it relies on independent committees of scientific experts. These committees determine the level of NSF's success in achieving its goals. NSF uses quantitative goals for its management and investment process goals. This section discusses our analysis of NSF's performance in achieving the selected key outcomes, as well as the strategies it has in place-- particularly strategic human capital management and information technology strategies--for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which NSF has provided assurance that the performance information it is reporting is accurate and credible. NSF, in its fiscal year 2000 performance report, states that it met its discoveries outcome and cites numerous examples of its achievements in such scientific fields as mapping the Arctic Ocean floor and extra-solar planetary discovery. NSF judged its performance as successful on the basis of assessments by independent committees of scientific experts. In compiling committee members' scores and aggregating their comments, NSF took into account only those reports with substantive comments and ratings that were clearly justified. NSF officials told us that, for the scientific discoveries outcome goal, all of the committees judged NSF as successful in achieving it and justified their assessments. However, the performance report did not provide information on the specific numbers of reports it included and excluded in reaching its judgments for this outcome or any of the other outcomes. Furthermore, NSF discussed the independent scientific committees' results for only one of the scientific discoveries five areas of emphasis--namely, the balance of innovative, risky, and interdisciplinary research area. Instead of providing a more complete analysis of the scientific committees' assessments, NSF contracted with an external third party--PricewaterhouseCoopers--to make an independent assessment of the performance results. PricewaterhouseCoopers concluded that NSF's fiscal year 2000 results were valid and verifiable. NSF's fiscal year 2002 performance plan included a new section on the means and strategies for success related to this outcome that includes strategies that generally are clear and reasonable. To implement its outcome goal, NSF has both (1) process strategies, such as supporting the most promising ideas through merit-based grants and cooperative agreements, and (2) program strategies, such as supporting programmatic themes identified as areas of emphasis. However, NSF's plan generally does not address key components of strategic human capital management, although its "people" and "management" outcome goals include such human capital initiatives as workforce diversity, an NSF Academy for workforce training, and a survey on the work environment. NSF is in the process of developing a 5-year strategic plan on its workforce needs that must be submitted to OMB by July 20, 2001. This strategic plan will guide NSF's future effort in this area. NSF reported that it made substantial progress, achieving most of its performance goals related to the award and administration of research grants. While not listed as an outcome goal, the administration of grants includes many of NSF's management and investment process goals. For example, NSF exceeded by 21 percent one of its management performance goals--to receive at least 60 percent of full grant proposal submissions electronically through a new computer system called FastLane. NSF also exceeded by 5 percent another management goal that at least 90 percent of its funds will be allocated to projects reviewed by appropriate peers external to NSF and selected through a merit-based competitive process. NSF continued to miss one of its investment process goals--to process 70 percent of proposals within 6 months of receipt--dropping from 58 percent to 54 percent in fiscal year 2000. As part of its review of NSF, PricewaterhouseCoopers concluded that NSF's fiscal year 2000 processes were valid and verifiable and relied on sound business processes, system and application controls, and manual checks of system queries to confirm the accuracy of reported data. NSF's fiscal year 2002 performance plan generally includes strategies for achieving NSF's performance goals that appear to be clear and reasonable. However, in some cases, the strategies are vague, and how NSF will use them to achieve its performance goals is unclear. For example, one of NSF's three strategies for identifying best management practices for its large infrastructure projects is to ensure input from members of the external community who build, operate, and utilize research facilities. Furthermore, while NSF has strategies for the process of funding awards, it does not generally address the oversight needs to ensure that funding recipients meet the awards' requirements. NSF's 5-year workforce strategic plan is addressing concerns regarding the management of a growing portfolio of program activities with relatively flat personnel levels--a key issue for developing strategic human capital management strategies. For the selected key outcomes, this section describes major improvements or remaining weaknesses in NSF's (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency's fiscal year 2000 report and fiscal year 2002 plan address concerns and recommendations by NSF's Inspector General. NSF improved its fiscal year 2000 performance report, making major changes to address the weaknesses we reported in the prior year's performance report. Our prior year's review noted that NSF did not discuss either its reasons for falling short of a performance goal or its strategies for attaining the goal in the future. NSF's 2000 report corrected this weakness. For example, regarding the technology-related goal to submit, review, and process proposals electronically, the report states that the reason for not achieving the goal was due to the technological, financial, and legal issues related to electronic signatures. The strategy for addressing the technological issue was to demonstrate the paperless review capability by conducting 10 pilot paperless projects in 2001 that manage the review process in an electronic environment. We also questioned the quality of the information in the 1999 performance report, noting that it provided virtually no assurance that the information was credible. As mentioned earlier, NSF contracted with PricewaterhouseCoopers to review aspects of its GPRA data collection efforts and its performance assessment results. PricewaterhouseCoopers found no basis for questioning the integrity of the results. NSF can improve its future reports in several ways. The results of the independent committees' reviews would benefit from more detailed information, such as including all of the areas of emphasis and the results. In addition, last year, we noted that the 1999 performance report did not describe NSF's financial role in the examples of scientific successes presented. Such information, we said, would help to judge the extent of NSF's role in achieving these successes. NSF officials maintain that determining NSF's financial role in these successes would be extremely difficult and would take a considerable effort. NSF officials told us that the successes they identified for this outcome were primarily due to NSF awards. That statement would have been useful in assessing the 2000 performance report. NSF made improvements to its fiscal year 2002 performance plan. For example, last year, we reported that the performance plan contained little useful information about NSF's intended strategy to achieve its goals, including a discussion of the problems. The 2002 plan includes a new section on the means and strategies for success. For example, for its new goal of award oversight and management, NSF will ensure that the internal committee reviewing the oversight activities for large infrastructure projects has broad disciplinary expertise and experience in managing facilities. As previously mentioned, NSF is also addressing data quality concerns, providing confidence that future performance information will be credible. Furthermore, NSF revised its outcome goal such that it does not have to succeed in demonstrating significant achievement in discoveries that advance the frontiers of science, engineering, or technology. Rather, discoveries is now one of six performance indicators for which NSF will consider itself successful when a majority is achieved. Last year, we also reported that the strategies for achieving the goals were not clearly discussed. NSF includes a new section on the means and strategies for success under each goal. NSF can improve its future performance plans by addressing its resource needs. Last year, we noted that the plan did not clearly discuss the resources for achieving the goals or the specific links between the resources and the areas of emphasis. The 2002 performance plan still does not do so. As discussed earlier, NSF's 5-year workforce strategic plan is expected to address human capital issues, providing a basis for addressing this issue in next year's performance plan. GAO has identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, we found that NSF's performance plan generally did not have goals and measures related to strategic human capital management, and NSF's performance report did not explain its progress in resolving strategic human capital management challenges. However, as mentioned earlier, NSF is developing a 5-year workforce strategic plan. With respect to information security, we found that NSF's performance plan had a goal and measures related to information security. While NSF's performance report did not explain its progress in resolving information security challenges, it did indicate that NSF has internal management controls that continually monitor data security. We provided NSF and the Office of the Inspector General with a draft of this report for their review and comment. We met with NSF officials, including the Chief Information Officer and the Inspector General. The NSF officials generally agreed with the report. However, they noted that the fiscal year 2000 performance report did not respond to some of the Inspector General's management challenges primarily because these challenges were identified in a November 30, 2000, letter. The Inspector General agreed that some of these management challenges were new. The NSF officials recognize that certain challenges not in the current plan and report are important, and they noted that these challenges are being addressed through internal management controls and processes. They added that NSF will continue to consider these challenges for incorporation in future performance plans. The NSF officials also provided technical clarifications, which we incorporated as appropriate. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of NSF's operations and programs, GAO's identification of best practices concerning performance planning and reporting, and our observations on NSF's other GPRA-related efforts. We also discussed our review with NSF officials in the Office of Information and Resource Management; the Office of Budget, Finance, and Award Management; the Office of Integrative Activities; and the Office of Inspector General. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for NSF and do not reflect the outcomes for all of NSF's programs or activities. The major management challenges confronting NSF, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by (1) our January 2001 high-risk update and (2) NSF's Office of Inspector General in November 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of NSF's performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Director, NSF; and the Director of OMB. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report were Richard Cheston, Alan Stapleton, Elizabeth Johnston, and Sandy Joseph. The following table discusses the major management challenges confronting the National Science Foundation (NSF), including the governmentwide high-risk areas of strategic human capital management and information security, identified by our January 2001 high-risk update and NSF's Office of Inspector General (IG) in November 2000. The first column of the table lists the management challenges identified by our office and NSF's IG. The second column discusses NSF's progress, as discussed in its fiscal year 2000 performance report, in resolving these challenges. The third column discusses the extent to which NSF's fiscal year 2002 performance plan includes performance goals and measures to address each of these challenges. We found that while the fiscal year 2000 performance report discussed NSF's progress in resolving most of its major challenges, it did not discuss NSF's progress in resolving the following challenges: (1) addressing strategic human capital management issues regarding strategic human capital planning and organizational alignment, leadership continuity and succession planning, and creating results-oriented organizational cultures; (2) developing appropriate data security controls to reduce the ever increasing risk of unauthorized access; (3) developing a more coherent award administration program that ensures that grantees comply with NSF's award requirements; (4) ensuring that NSF grantees meet their cost-sharing obligations; and (5) providing the science, operations, and logistics support needed to manage the U.S. Antarctic Program. Of NSF's 10 major management challenges, its fiscal year 2002 performance plan (1) had goals and measures that were directly related to 5 of the challenges; (2) had goals and measures that were indirectly applicable to 1 challenge; (3) had no goals and measures related to 1 challenge but discussed strategies to address it; and (4) did not have goals, measures, or strategies to address 3 challenges.
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This report reviews the National Science Foundation's (NSF) fiscal year 2000 performance report and fiscal year 2002 performance report plan required by the Government Performance and Results Act. Specifically, GAO discusses NSF's progress in addressing several key outcomes that are important to NSF's mission. NSF reported that it made substantial progress in achieving its key outcomes. Although the planned strategies for achieving these key outcomes generally are clear and reasonable, some are vague and do not identify the specific steps for achieving the goals. NSF's fiscal year 2000 performance report and fiscal year 2002 performance plan reflect continued improvement compared with the prior year's report and plan. Although the 2002 performance plan does not substantially address NSF's human capital management, NSF is developing a five-year workforce strategic plan to address strategic human capital management issues that must be submitted to the Office of Management and Budget by July 20, 2001. NSF's performance report did not explain its progress in resolving information security challenges, but NSF indicated that it has internal management controls that continually monitor data security.
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Charter schools are public schools that operate under charters (or contracts) specifying the terms by which they may operate. In general, they are established under state law, do not charge tuition, and are nonsectarian. State charter school laws and policies vary widely regarding the degree of autonomy provided to the schools, the number of charter schools that may be established, the qualifications of charter school applicants and teachers, and the accountability criteria that charter schools must meet. As of September 1997, 29 states and the District of Columbia had enacted laws authorizing charter schools, according to the Center for Education Reform. In school year 1996-97, over 100,000 students were enrolled in nearly 500 charter schools in 16 states and the District of Columbia. (App. II shows the states with charter school laws as of September 1997 and the number of charter schools operating during the school year by state.) To explore the effects of various education reform efforts, in January 1997, the Congress began holding hearings in Washington, D.C., and around the country. Among other reform efforts, the Congress has focused on the development of charter schools. Charter school operators and others at the hearings raised concerns about charter schools' receiving the share of federal title I and IDEA grant funds they are eligible to receive. These concerns were raised in part because of differences in the way charter schools receive funds. Some charter schools receive funds directly from their states, while other charter schools depend on their local school districts for title I and IDEA program benefits. In addition to learning more about this issue, the Congress has expressed interest in learning how charter schools use federal funds intended to help them get started as new schools. To improve understanding of the charter school model, the Congress authorized the Public Charter Schools Program (start-up grants) as part of its 1994 reauthorization of ESEA. Under the program, the federal government provides financial assistance for the design and initial implementation of charter schools. The Department of Education has the authority to competitively award grants to states with laws authorizing the operation of charter schools. In evaluating state grant applications, the Department must use a peer review process and judge states' applications on the basis of several criteria, including the (1) contribution that a state's program will make toward helping educationally disadvantaged and other students in achieving state content and student performance standards, (2) degree of flexibility that a state will offer charter schools, and (3) likelihood that a state's program will improve students' educational results. States that receive grants, in turn, award subgrants to charter schools. (If a state does not apply for a grant, individual or groups of charter schools may apply directly for grants to the Department.) States may use up to 5 percent of their grant award for administration and may set aside 20 percent for establishing a charter school revolving loan fund. Grants awarded to charter schools must be used for either (1) the planning and design of a charter school, which may include establishing achievement and assessment standards and providing professional development for teachers and other staff, or (2) the initial implementation of a charter school, which may include informing the community about the school, acquiring equipment and supplies, developing curricula, or initial operational costs. Although dozens of financial aid programs exist for public elementary and secondary schools, two programs, title I and IDEA, are by far the largest federal programs. Under title I and IDEA, the Department allocates funds to state educational agencies (SEA), which then allocate funds to local educational agencies (LEA) or school districts. Charter schools receive title I and IDEA funds from their SEAs therefore in states that treat charter schools as LEAs (called the independent model). LEAs allocate title I funds to schools in their districts. In addition, LEAs provide special education and related services to eligible children enrolled in their schools and use IDEA funds to help pay the costs of doing so. Charter schools in states that treat these schools as dependents of an LEA (called the dependent model) benefit from the title I and IDEA programs on the same basis as do the LEAs' other schools. The seven states in our review used both the independent and dependent funding models. Although Massachusetts and Minnesota consider all charter schools as independent LEAs, California and Colorado consider all charter schools as dependent members of a school district. Arizona, Michigan, and Texas use both models within their states depending on the particular program involved, the chartering authority, or other circumstances. Title I is the largest federal elementary and secondary education aid program. The program provides grants to school districts or LEAs to help them educate disadvantaged children--those with low academic achievement attending schools serving high-poverty areas. To be eligible for title I funds, LEAs must meet statutory and regulatory guidelines for minimum poverty thresholds. LEAs that have more than one school--including charter schools operating under the dependent model--allocate title I funds among their schools. The federal statute and regulations lay out complex criteria and conditions that LEAs use in deciding how to allocate funds to their schools, which results in shifting title I funds received by LEAs to individual schools with relatively higher percentages of students from low-income families. An individual school that is part of an LEA in a high-poverty area therefore might have to have enrolled a higher percentage of low-income children to receive title I funds than it would have if the school were treated as an independent LEA. In this case, a charter school that would have received title I funds as an independent LEA may not receive title I funds under the dependent model because other schools in the LEA served higher percentages of low-income children. The IDEA federal grant program is designed to help states pay for the costs of providing a free appropriate public education to all eligible children with disabilities between the ages of 3 and 21 living in the state, depending on state law or practice. The act requires, among other things, that states make such education available to all eligible children with disabilities in the least restrictive environment. Under the current formula, the Department of Education annually allocates funds to SEAs on the basis of their reported numbers of eligible children receiving special education and related services for the preceding fiscal year, the national average per pupil expenditure, and the amount the Congress appropriates for the program. The most funding that a state may receive for any fiscal year is capped at 40 percent of the national average per pupil expenditure multiplied by the number of eligible children with disabilities in the state who receive special education and related services. Under the current formula, states must distribute at least 75 percent of the IDEA funds they receive from the Department to LEAs and may reserve the rest for state-level activities. In general, SEAs allocate IDEA funds to eligible LEAs on the basis of their relative share of their state's total number of eligible children receiving special education and related services. The benefits that individual schools may receive from IDEA funds vary by state. States may allocate IDEA funds to LEAs or to other agencies included in the act's definition of LEAs. These other agencies include, for example, regional educational service agencies authorized by state law to develop, manage, and provide services or programs to LEAs. Some states allocate IDEA funds to regional educational service agencies for providing special education and related services to children with disabilities enrolled in the schools of one or more LEAs, including charter schools. Other states allocate IDEA funds directly to school districts, which then develop, manage, and provide their own such services to children with disabilities. A majority of the charter school operators that we surveyed reported that they received fiscal year 1996 federal start-up grant funds. Operators used these funds for a variety of purposes to establish their charter schools. Although no centralized repository of data exists for determining the extent to which charter schools have received federal funds nationwide, our study suggests that charter schools in the seven states we surveyed have not been systematically denied access to title I and IDEA funds. To date, the Congress has appropriated $155 million for start-up grants under this program. In fiscal year 1996, the Department of Education awarded grants to 19 states and the District of Columbia, ranging from about $191,000 to about $1.9 million, according to Education. In turn, each state made grant funds available to charter schools in their states. The seven states in our survey all received fiscal year 1996 program funds; the amounts they received ranged from $500,000 to almost $1.9 million. (See table 1.) Of the 41 charter schools responding to our survey, slightly more than half (or 23) received fiscal year 1996 start-up grants. States awarded grants to these schools ranging from $7,000 to $84,000; the average grant amount was about $36,000 and the median was $32,500. Funds received by individual charter schools varied by state. These differences reflect states' flexibility in administering their grant programs and in allocating funds. funding. In Texas, for example, all charter schools received an equal amount of fiscal year 1996 grant funds ($26,785), even though enrollment at these schools varied greatly--from 90 students in one school to 180 students in another. The charter schools in our survey that received start-up grants used these funds most often to help pay for school equipment and curriculum materials, technology, and facilities renovation or leasing. Several charter schools used these funds for multiple purposes. (See table 2.) Operators of charter schools we surveyed that did not receive grant funds told us that their schools were either (1) ineligible for grants under their state guidelines, (2) unsuccessful in competing for a grant, or (3) did not apply for a grant. Schools ineligible for funds included schools that were no longer considered start-up operations or had previously received funds and did not qualify under state guidelines. Some charter school operators told us that although they applied for start-up grants, their applications were scored lower than other schools' and, as a result, did not receive awards. Finally, a few charter school operators said that they did not apply for start-up grants because they were uninterested, did not need funds, or did not know that funds were available. Education, these funds are expected to provide, on average, about $639 per student for services provided to the nearly 6 million eligible students aged 3 through 21, plus an additional $650 per student to provide services for approximately 575,800 eligible preschool children aged 3 through 5. Despite concerns about issues related to the funding of charter schools raised during the 1997 congressional hearings, most charter school operators we surveyed who had applied for title I and IDEA funds received them. Overall, about two-fifths of the charter schools we surveyed received title I funds for the 1996-97 school year. Survey results indicated that slightly more than one-third of charter schools operating under the independent model and almost one-half of the schools operating under the dependent model received title I funds. Table 3 shows the number of charter schools surveyed that received title I funds by funding model. About two-fifths of the charter schools we surveyed did not apply for title I funds. Charter school officials who did not apply cited reasons such as (1) a lack of time to do so, (2) their school was ineligible for funds and therefore they did not apply, or (3) they found that applying for these funds would cost more than the funding would provide. Of those schools that applied for title I funds, two-thirds, or 16 of 25, reported receiving funds. Title I funding for these schools ranged from $96 to $941 per poverty student; the average amount was $466 per poverty student and the median amount was $413. The difference in per student funding relates to the allocation formulas, which consider the number and proportion of low-income children in the school, district, and county. Title I funds received by these schools represented between 0.5 and 10.0 percent of their total operating budgets. For all but four of these schools, funds received represented 5 percent or less of the schools' total operating budgets. Regarding the IDEA program, slightly more than half of our survey respondents received funds or IDEA-funded services. Of all charter schools surveyed, two-fifths operating under the independent model received funds or IDEA-funded services; three-quarters of those operating under the dependent model received funds or services. Table 4 shows the number of charter schools surveyed that received IDEA funds or IDEA-funded services by funding model. Overall, about a third of the charter schools we surveyed did not apply for IDEA funds or services. Charter school officials who did not apply cited reasons similar to those who did not apply for title I funds such as (1) a lack of time to do so, (2) they were not eligible for funds, (3) they did not know about the availability of IDEA funds, or (4) they found that applying for these funds would cost more than the funding would provide. Four-fifths of the charter school officials who told us that they applied for IDEA funds or services reported that they received funds or services for the 1996-97 school year. For schools that obtained IDEA funds, rather than services, amounts received ranged from $30 to $1,208 per eligible student; the average school value was $421 per eligible student, and the median value was $206. IDEA funds received by schools represented between 0.08 percent and 2.50 percent of their total operating budgets. believe otherwise. For charter schools under the dependent model, however, about four times as many survey respondents believe that their schools received a fair share of IDEA funds or services as believe otherwise. Even though many charter school operators we surveyed believe that they received a fair share of federal funds, they reported, as did state officials and technical assistance providers, that several barriers hindered charter schools' access to title I and IDEA funds. These barriers included (1) difficulties in establishing program eligibility, (2) workload demands that prohibited schools from pursuing program funds or made doing so too costly, and (3) charter school operators' and district and state administrators' lack of program and administrative experience. One barrier reported by charter school operators was the difficulty in establishing program eligibility primarily due to a lack of a prior year's enrollment data and problems collecting student eligibility data. For example, three charter school officials told us that because they had no prior year's enrollment or student eligibility data, they were not eligible under state guidelines for federal funds. School officials noted that besides this being a problem for new schools, using even 1-year-old enrollment data can significantly understate the number of title I-eligible students enrolled in schools that are incrementally increasing the number of grades they serve. Other school officials reported difficulty in collecting required student eligibility data because some families are reluctant, due to privacy concerns, to return surveys sent home with students asking for the amount of household income. Competing workload demands were another barrier reported by charter school officials. In our survey, several school officials emphasized that other administrative and educational responsibilities left them little time and resources to devote to accessing title I and IDEA funds. These officials often played many roles at their schools, including principal, office manager, nurse, and janitor. In addition, even though a majority of a charter school operators who noted in our survey that the title I and IDEA application processes were only somewhat or not at all difficult, some operators told us that, nonetheless, it was not worth their while to pursue these funds. One operator, for example, said that application and program compliance costs would exceed the amount of funds his school would be eligible for, while another said that the amount of funds his school could expect to receive was simply not worth his while to apply for them. Finally, we spoke to technical assistance providers and consultants who told us that charter school operators are often dedicated educators but who lack business and administrative experience in general or experience with federal programs in particular. They told us that such inexperience may likely discourage individuals from pursuing federal funding for their schools. Some operators told us that their lack of experience with the title I and IDEA programs was a barrier to accessing these funds. In addition, charter schools represent new and additional responsibilities for districts and SEAs that administer federal programs. As a result, state and district officials told us that it has taken time to develop new policies and procedures to accommodate charter schools. Charter school operators reported that outreach and technical assistance were critical to their ability to access federal funds. Charter school officials most often cited receiving information about the availability of federal funds and the amount their schools would be eligible for as factors helping them access title I and IDEA funds. Officials cited a number of sources from which they had obtained such information, including their own states' departments of education and local school district officials. In addition, other operators told us that state and local program officials' flexibility facilitated their access to funds. Several states and the Department have taken steps to help charter schools access federal funds. Some states, for example, are changing allocation procedures to better accommodate charter schools and providing training and technical assistance to school operators. Among other things, some states are allowing charter schools to use comparable--and more easily obtainable--data to establish the income levels of students' families. Such efforts will allow charter schools to demonstrate eligibility for title I funds without having historical data. In addition, some states have actively sought to inform charter school operators of available funds and provide training to school operators on applying for and administering these funds. using state administrative and excess title I funds to serve new charter schools. Under the charter school start-up grant program, the Congress provided that the Department may reserve up to 10 percent of appropriated funds to conduct national activities. Using these funds, the Department has sponsored national meetings for state officials and charter school operators. In November 1997, for example, the Department sponsored a national conference for charter schools in Washington, D.C. The Department invited state officials and charter school operators from across the country and conducted workshops on topics, including federal grant programs, new requirements under IDEA, and developing and implementing charter schools. The Department has also funded the development of an Internet web site with information on federal programs, charter school operational issues, a charter school resource directory as well as profiles of charter school states and charter schools. Charter schools have used federal start-up funds for a variety of purposes, depending on the schools' particular needs. These needs have most often included school equipment and curriculum materials, technology, and facilities renovation or leasing. Our study suggests that charter schools in the seven states we surveyed have not been systematically denied access to title I and IDEA funds and that the barriers charter schools face in accessing these funds appear to have no relation to charter schools' treatment as school districts or as members of school districts. Rather, other barriers, many of which have no relation to the path federal funds take, have more significantly affected charter schools' ability to access title I and IDEA funds. These other barriers include state systems that base funding allocations on the prior year's enrollment and student eligibility data, the costs of accessing funds compared with the amounts that schools would receive, and time constraints that prevent charter school operators from pursuing funds. Despite these barriers, most charter school operators who expressed an opinion in our survey believe that title I and IDEA funds are fairly allocated to charter schools. Although a variety of factors help charter schools access federal funds, according to our review, training and technical assistance are critical to ensuring that charter school operators have access to these funds. Several states and the Department of Education have initiatives under way to facilitate such access. This concludes my statement, Mr. Chairman. I would be happy to answer any questions you or the members of the Committee may have. Charter schools were also operating in Alaska, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, New Mexico, and Wisconsin during the 1996-97 school year. Not applicable. Totals do not include alternative schools operating in Oregon during the 1996-97 school year. States with charter legislation but no charter schools. States included in our survey with number of schools operating in each. States and the District of Columbia having charter laws and schools but not included in our survey, with number of schools operating in each. 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 charter schools' experiences in accessing selected federal funds, focusing on: (1) start-up grants under title I of the Elementary and Secondary Education Act (ESEA) and the Individuals with Disabilities Education Act (IDEA); (2) factors that help and hinder charter schools in accessing title I and IDEA funds; (3) charter school operators' opinions about whether they are receiving a fair share of these funds; and (4) state and federal efforts intended to help charter schools gain access to title I and IDEA funds. GAO noted that: (1) slightly more than half of the schools GAO surveyed received fiscal year 1996 start-up grants ranging from $7,000 to $84,000; the average grant amount was $36,000; (2) the schools used the start-up grant funds for a variety of purposes, including curriculum materials and equipment, other technology, and facilities renovation or leasing; (3) about two-fifths of the charter schools GAO surveyed received title I funds, and slightly more than half of the schools received IDEA funds or IDEA-funded special education services; (4) most charter school operators GAO surveyed who expressed an opinion told GAO they believe they received a fair share of federal title I and IDEA funds; (5) nonetheless, charter school operators also cited a variety of barriers to accessing title I and IDEA funds, including: (a) difficulties in establishing program eligibility; (b) workload demands; and (c) a lack of program and administrative experience; (6) they reported that outreach and technical assistance were critical to helping them access federal funds; (7) several states and the Department of Education have begun initiatives to help charter schools access federal funds; (8) some states, for example, are revising or developing alternative allocation policies and procedures to better accommodate charter schools' access to federal funds and providing training and technical assistance to charter school operators; and (9) the Department has recently issued guidance to states and school districts on allocating title I funds to charter schools, and, among other things, has sponsored national meetings for state officials and charter school operators.
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According to the Department of Homeland Security (DHS), the number of UAC from any country apprehended at the U.S. border climbed from nearly 28,000 in fiscal year 2012 to more than 42,000 in fiscal year 2013, and to more than 73,000 in fiscal year 2014. Prior to fiscal year 2012, most UAC apprehended at the border were Mexican nationals. However, as figure 1 shows, starting in fiscal year 2013, the total number of UAC from El Salvador, Guatemala, and Honduras surpassed the number of UAC from Mexico and, in fiscal year 2014, far surpassed the number of UAC from Mexico. Recent data and research indicate that, while fewer UAC are being apprehended in the United States in 2015, the pace of migration from Central America remains high. According to DHS, as of August 2015, apprehensions at the southwest border are down 46 percent compared with last year--with more than 35,000 UAC apprehended in fiscal year 2015 compared with about 66,000 through the same time period in fiscal year 2014. However, analyses of DHS data indicate that apprehensions in the month of August 2015 increased compared to previous months this year and exceeded by nearly 50 percent August 2014 apprehensions. Moreover, research by two nongovernmental organizations indicates that a greater number of Central Americans this year are being apprehended in Mexico. According to the Migration Policy Institute, Mexico has increased its enforcement capacity and is apprehending a greater number of Central American migrants, including children. Specifically, in its study published in September 2015, the institute projected that Mexico's apprehensions of children from El Salvador, Guatemala, and Honduras will increase this year by 9,000. In addition, according to research conducted by the Washington Office on Latin America, Mexico has greatly increased its rate of apprehension of Central American migrants. These studies indicate that many Central American children who in the past may have made it to the U.S. border and been counted in U.S. apprehension statistics, have this year been apprehended in Mexico. Children from El Salvador, Guatemala, and Honduras face a host of perils both within their countries and along the migration route to the United States. These countries have among the world's highest murder rates, according to the United Nations Office on Drugs and Crime, along with a widespread presence of gangs, high poverty rates, and a number of other persistent problems. Children who migrate can encounter further risks along the journey, including robbery, extortion, abandonment, rape, or murder. A number of U.S. agencies provide assistance to the three countries. The U.S. Agency for International Development (USAID), the Department of State (State), DHS, the Millennium Challenge Corporation (MCC), and the Inter-American Foundation (IAF) have programs providing assistance in areas such as economic development, rule of law, citizen security, law enforcement, education, community development, and others. In fiscal year 2014, USAID, State, DHS, and IAF allocated a combined $44.5 million for El Salvador, $88.1 million for Guatemala, and $78 million for Honduras. In addition, MCC signed a threshold program agreement with Honduras in fiscal year 2013 totaling $15.6 million, a compact agreement with El Salvador in fiscal year 2014 totaling $277 million, and a threshold program agreement with Guatemala in fiscal year 2015 totaling $28 million. Additional information on agency- and program-specific funding is included in our July 2015 report. In September 2014, the governments of El Salvador, Guatemala, and Honduras issued a regional plan in response to the recent migration increase. The plan, referred to as the Plan of the Alliance for Prosperity in the Northern Triangle: A Road Map, outlines four strategic actions that seek to stimulate the productive sector to create economic opportunities, develop opportunities for people, improve public safety and enhance access to the legal system, and strengthen institutions to increase people's trust in the state. In addition, in March 2015, the administration issued the U.S. Strategy for Engagement in Central America, with the primary objectives of prosperity, governance, and security, and the goals of an economically integrated Central America that is fully democratic; provides economic opportunities for its people; has more accountable, transparent, and effective public institutions; and is a safe environment for its citizens. As we reported in July 2015, according to agency officials a variety of factors likely caused the rapid increase in UAC migration of recent years, including the increased presence of coyotes, perceptions concerning U.S. immigration law, recent improvements in the U.S. economy, the increased use of social media, and the worsening of pervasive problems. Increased presence of smugglers (or coyotes). Agency officials from all three countries that we spoke to said that smugglers, also known as coyotes, had proliferated and grown more influential and sophisticated in recent years. Officials from USAID and State in all three countries noted that coyotes were often well known and trusted in communities. In addition, agency officials we spoke to in all three countries noted that coyotes had instituted new marketing and messaging tactics, such as offering three attempts to migrate to the United States for one fee-- known as a "three-for-one" deal. Coyotes had also intentionally spread rumors and misinformation about U.S. immigration policy. For example, agency officials told us that, in some cases, in an effort to drive smuggling business, coyotes led many people to believe children could migrate to the United States and receive permission to stay indefinitely if they arrived by a certain date. Perceptions of U.S. immigration policy. According to agency officials, general perceptions concerning U.S. immigration policy had played a growing role in UAC migration. According to State officials in El Salvador and Guatemala, local media outlets had optimistically discussed comprehensive immigration reform efforts in the United States and sometimes failed to discuss the complexity of immigration reform. In addition, according to USAID officials, Honduran youth and coordinators of community centers who were interviewed as part of a USAID focus group indicated they believed the United States would allow migrant minors, mothers traveling with minors, and pregnant women to stay for a period of time upon arrival in the United States. Improvements in U.S. economy and family reunification. Agency officials also noted that recent improvements in the U.S. economy had fueled increased UAC migration, enabling family reunification in the United States. For example, State and USAID officials in Honduras noted that the improving economy had enabled parents who immigrated to the United States to send money back to their home country to pay coyotes so their children could migrate and reunify the family in the United States. According to officials in El Salvador, as the economy improved there, more Salvadorans have attempted to migrate to the United States to reunify with family. Increased use of social media. The use of social media can encourage migration, according to some agency officials. For example, officials in Guatemala noted that social media outlets enable migrants who arrive in the United States to share messages and pictures with families in their home countries, an act that can serve as a powerful and influential endorsement of the decision to migrate. Additionally, according to a study performed by State contractors in El Salvador, many people advertise immigration services through social media and offer travel services to ensure safe arrival in the United States. Worsening of longstanding pervasive challenges. Violence, poverty, and poor access to education and other services have been pervasive development challenges in all three countries, predating the UAC migration increase. However, according to agency officials we spoke to in all three countries, some of these problems had grown worse in recent years and could have contributed to the rise of UAC migration. For example, in Honduras, agency officials noted that levels and perceptions of violence had grown worse, in part because of the rise in extortions. Worsening security concerns also negatively affect access to education. For example, agency officials in El Salvador noted that many children will not attend school after the seventh grade because traveling to some schools requires crossing gang borders, and that girls in particular face the risk of being attacked or raped en route. In Guatemala, agency officials stated that poor economic and social conditions in the Western Highlands--a remote, mountainous area in the western part of Guatemala, inhabited by over 20 different indigenous groups--had declined even further in recent years. In addition, agency officials noted that deteriorating climate conditions, including several consecutive years of drought and a coffee rust blight that has hurt coffee production and cost jobs in Honduras and Guatemala, exacerbated long-standing economic concerns in many communities. For our July 2015 report, we met with children from all three countries who offered similar insights concerning the causes of migration. For example, children at a USAID outreach center in San Pedro Sula, Honduras, noted the lack of educational and job opportunities in their communities as a reason for migrating. Children from a particularly violent neighborhood told us it was even more difficult for them to obtain a job because potential employers would sometimes choose not to hire them because of where they live. Children at an outreach center in El Salvador also noted that sometimes, even with an education, one cannot find work in El Salvador and that there are more opportunities and chances to succeed in the United States. Children at this same center indicated that the desire to migrate is even stronger for children with parents in the United States. Prior to this hearing, we asked agency officials for their observations on what factors may have led to the overall decline in UAC apprehensions in fiscal year 2015 as well as the increase in UAC apprehensions in August 2015. Several DHS offices offered various perspectives for these changes in UAC apprehension numbers. Officials from U.S. Customs and Border Protection's (CBP) U.S. Border Patrol and from U.S. Immigration and Customs Enforcement's (ICE) Enforcement and Removal Operations stated that most of the decrease in the number of UAC apprehensions in fiscal year 2015 could be attributed to Mexico's increased enforcement of its own southern border. Concerning the uptick in apprehensions in August 2015, officials from CBP's U.S. Border Patrol and DHS's Office of Intelligence and Analysis stated that the increase could be attributed to the recent U.S. policy change ending the detention of migrant families. According to these officials, the policy change may have created the impression that the United States is allowing family units into the country and then releasing them, which could serve as a motivating factor for migration. Similarly, officials from ICE's Homeland Security Investigations stated that interviews with migrants have indicated that migrants believe that if they arrive in the United States with children, they will not be detained for a long time and will be allowed to stay in the United States. Officials from ICE's Enforcement and Removal Operations stated that there is no definitive answer for what may have caused the increase in apprehensions in August 2015, but that some of the same factors that caused the UAC migration increase in 2014, such as pursuit of economic opportunities, desire for family reunification, and violence, could be considered. In our July 2015 report, we found that among the various agency actions taken in response to UAC migration, several sought to directly combat coyotes, which agency officials identified as a key emergent factor causing migration. Agencies also had established efforts to increase legal migration and improve migrant return centers, and had identified other longstanding efforts as seeking to address underlying causes of migration. Antismuggling efforts. In response to the increase in UAC migration, we found that DHS and State had supported several law enforcement and legislative outreach efforts with an increased focus on investigating and dismantling smuggling operations in all three countries. For example, according to DHS officials, in response to the rapid increase in UAC migration in 2014, DHS shifted the investigative priorities of its Transnational Criminal Investigative Units (TCIU)--which include host government police, customs officers, and prosecutors, among others--to target child-smuggling operations in all three countries. A DHS official in Guatemala told us the unit there was able to dismantle two of the seven criminal organizations it was investigating that were actively smuggling children. In addition, State in Honduras is working with a Department of Justice resident legal advisor to assist the Honduran attorney general's office in prosecuting trafficking and alien-smuggling cases, while State support in Guatemala included assistance to reform police training, with a new emphasis on UAC-related issues in the community policing techniques, criminal investigations, and human rights curricula. State also participated in legislative and political outreach efforts to combat smuggling. For example, in Guatemala, State has advocated modifying certain laws that would better enable Guatemalan law enforcement to investigate and prosecute these cases. Public information campaigns to deter migration. We also found that DHS and State had carried out several public information campaigns between 2013 and 2015 intended to dissuade citizens of El Salvador, Guatemala, and Honduras from migrating to the United States. DHS's campaigns in 2013 and 2014 focused on warning potential migrants of the dangers of the journey. DHS had launched two campaigns in 2015, including one to increase awareness of requirements under the executive action on immigration, which was launched in January 2015 but was stopped February 16, 2015, because of a federal court ruling that granted a preliminary injunction to prevent expansion of Deferred Action for Childhood Arrivals, among other things. DHS also has an ongoing campaign, "Know the Facts," which was launched in Mexico, El Salvador, Guatemala, and Honduras in late July. According to DHS, the campaign, which was developed with the Department of State and was approved by the White House, is intended to deter individuals from Mexico, El Salvador, Guatemala, and Honduras from entering the United States illegally by increasing awareness of U.S. immigration policies and enhanced border security efforts, as well as the dangers posed by smugglers. The campaign was extended to run through the end of November due to the increase in the number of UACs arriving to the United States, according to DHS. State public affairs officials we spoke to at the U.S embassies in all three countries told us they used the DHS campaign materials and developed their own materials to launch related public information campaigns in-country while also supporting similar host government campaigns. In-country refugee parole program. In an effort to increase legal migration and reduce the number of children attempting to migrate to the United States, we found that State and DHS had collaborated to implement a new in-country refugee/parole processing program. The program was announced in November 2014 and began accepting applications the following month. Efforts to strengthen migrant return and repatriation centers. USAID and State also have an interagency agreement to provide assistance to strengthen migrant reception and repatriation efforts in all three countries. Efforts under this program have included providing immediate, basic assistance to returnees; undertaking construction efforts to improve existing facilities; and working with host governments to systemize data gathered from the returned migrants. Longstanding efforts seeking to address underlying causes of migration. We also reported that USAID, State, IAF, and MCC programs have long sought to address what officials have identified as underlying causes of migration, including persistent development challenges such as violence, poverty, and lack of educational opportunities. For example, USAID supports programs in each country seeking to reduce violence, improve economic opportunities through improved agricultural practices and other efforts, and increase access to education and health services, among others. State supports programs in each of the three countries seeking to reduce violence and improve citizen security by offering training and technical support to prosecutors, the police, and border patrol units, among others. IAF officials said that IAF supports local initiatives in more than 880 communities in El Salvador, Guatemala, and Honduras, with nearly half of its investment in the three countries intended to directly benefit youth through job creation and other community-based activities. MCC's compact in El Salvador and threshold program in Guatemala-- each in development prior to the recent migration increase--include programs to improve the quality of secondary education to assist youth in finding employment. USAID, State, and IAF outlined plans to modify some of these longstanding efforts in response to the rise in UAC migration. For example, in Guatemala, USAID outlined plans to increasingly target youth at risk of migration through various programs and to introduce agricultural programming, including coffee rust-resistant seedlings, and to provide nonagricultural economic opportunities for youth. State and DHS have outlined plans to strengthen border security efforts through their vetted units to stem migration, and to increase the size of antigang units in an effort to reduce violence. Our July 2015 report found that agencies had generally located programs in alignment with long-term objectives for El Salvador, Guatemala, and Honduras, such as addressing areas of high poverty and violence. These objectives are outlined in various strategy and planning documents. In some cases, the development objectives outline priority geographic locations for programs that agencies have identified as addressing underlying causes of UAC migration, such as crime and poverty. USAID's Country Development Cooperation Strategy documents, for example, outline development objectives for each country that focus on specific locations. State country planning documents similarly highlight strategic priorities for the three countries, and in some cases outline priority geographic locations. Agency officials told us they drew on various sources of information to understand which areas in El Salvador, Guatemala, and Honduras had high levels of UAC migration, including information produced by DHS, USAID, and entities such as the International Organization for Migration, host government agencies, and other local organizations. In particular, they told us a key point of reference was a DHS-produced map that showed the number of UAC by location of origin based upon DHS apprehension data from January 1 to May 15, 2014. DHS officials identified various challenges to obtaining UAC location information, including the inability of children to accurately relay information on their origins, lack of documentation, and inability of border agents interacting with children to collect or record their information accurately. Nonetheless, USAID and State officials in the three countries told us that the top UAC locations of origin identified in the map were generally consistent, with a few exceptions, with their understanding of the top UAC locations of origin. Further, agency officials stated that their established programs were already located in these areas. In Honduras, where over half of the DHS- identified top 20 municipalities in terms of UAC locations of origin are situated, agency officials told us the DHS map confirmed for them that programs already existed in those locations. In Guatemala, USAID and State officials said that they consulted the DHS map and other available information about UAC origin locations and determined that there was a general overlap between those locations and agency programs. USAID officials in Guatemala noted that about 60 percent of the agency's resources in Guatemala are used for activities in the Western Highlands, which these officials said they have identified as the primary area of UAC migration in that country. In El Salvador, USAID officials stated that, according to their review of the DHS map, their programs were already located in areas of high UAC migration. Finally, according to IAF, the DHS map illustrated a general overlap between the location of its grantees and locations with high levels of UAC migration. We obtained information on the location of USAID and State/INL-funded programs in El Salvador, Guatemala, and Honduras; the location of IAF grantees in these countries; and the top UAC locations of origin in each country, as identified by DHS. Our July 2015 report includes a series of figures that present this information. In our July 2015 report, we found agencies had outlined plans and taken some steps in the three countries since the recent rise in UAC migration by adding or expanding activities in locations identified as having high levels of UAC migration. For example, according to State's current country plan for Honduras, State plans to expand violence prevention programs, such as the Gang Resistance Education and Training Program, to reach three new police metropolitan areas in Tegucigalpa and six police metropolitan areas in San Pedro Sula, two areas in the country agencies identified as having among the highest levels of UAC migration. In El Salvador, USAID outlined plans to expand educational opportunities to youth in additional municipalities with high levels of migration. As of June 2015, IAF officials indicated IAF had identified at least 19 new programs in El Salvador, Guatemala, and Honduras that will seek to address underlying causes of migration in areas with high levels of UAC migration. As we reported in July 2015, most agencies we reviewed had established processes to measure and evaluate programs agencies identified as addressing underlying causes of migration. For example, USAID had conducted several recent evaluations of its programs developed before the rapid increase in UAC migration but identified as addressing the causes of migration, including programs addressing crime and violence prevention and workforce development. USAID officials and documents indicated that USAID also planned to measure the impact on migration of some future programs, such as whether a program affected a person's decision to migrate. State awarded a contract, which began in September 2014, to evaluate all countries under the CARSI program, including projects that are designed to address causes of UAC migration in El Salvador, Guatemala, and Honduras. IAF also conducts two types of project evaluations, including an end-of-project assessment for all projects, and evaluations of a subset of projects that ended 5 years earlier. According to IAF officials, in 2015, IAF planned to evaluate projects with a focus on youth engagement, including two projects in El Salvador and one in Guatemala. IAF expected these evaluations to be available in 2016. However, we found that several DHS and State programs intended to reduce migration and counter smugglers had weaknesses in performance measurement. First, DHS had established performance indicators for its TCIUs, but had not established performance targets, making it difficult to track progress of these units' efforts to combat UAC smuggling and other priorities. DHS's Transnational Criminal Investigative Unit Executive Report provides overviews of TCIU efforts by country, including basic performance indicators used to track TCIU success. These measures are divided into three performance categories--enforcement, capacity building, and intelligence--with various types of outputs by category. However, DHS had not set targets for these performance measures. We concluded in our July 2015 report that establishing such targets would enable DHS to compare outputs--such as arrests made--against the pre-established targets, and to better assess TCIU progress. In our July 2015 report, we recommended that DHS establish annual performance targets associated with the performance measures it has established for these units. DHS concurred with our recommendation, and noted that it would work with host nation partners to establish goals to measure TCIU investigative activities and capacity development. Last month, DHS reported to us that it also planned to create additional annual TCIU performance measures in areas such as capacity building, international cooperation, and collaboration. DHS noted it would use these measures, alongside an analysis of host country conditions that can affect TCIU efforts, to determine TCIU successes and inform efforts moving forward. Second, we found that DHS and State had not consistently evaluated their information campaigns intended to combat the misinformation promoted by smuggling organizations and reduce migration, making it difficult to know the effectiveness of these efforts. DHS evaluated its 2013 campaign but did not evaluate its 2014 campaign. An official from DHS's office of public affairs told us that DHS did not evaluate its 2014 campaign because of funding constraints. Moreover, DHS launched this campaign at the end of June 2014, by which point migration levels had already peaked, reaching record levels, as shown in figure 3. Similarly, we found that while State had collected some information on its public outreach efforts, it had not evaluated the effectiveness of its information campaigns, according to public affairs officers we spoke to in all three Central American countries. These public affairs officers told us they did not know what the impact of the campaigns was and believed it would be difficult to measure their impact. All three of these officers expressed either uncertainty or doubt concerning the effectiveness of past campaigns centered on the dangers of migration, indicating that it is uncertain whether such campaigns resonated with citizens of the three countries since the dangers were already well known or would not dictate a person's decision to migrate. In our July 2015 report, we concluded that evaluations are an important investment toward ensuring a campaign's success, and that timely feedback is critical as campaigns intended to deter cyclical migration are time-sensitive. Moreover, given the increased presence of children in recent migration cycles, these campaigns need to be timed right and deliver appropriate messages. In our July 2015 report, we recommended that State and DHS integrate evaluation into their planning for, and implementation of, future public information campaigns intended to dissuade migration. DHS and State concurred with our recommendation and indicated they would take steps to strengthen campaign evaluation efforts. DHS has since noted that it will use performance metrics for its ongoing "Know the Facts" campaign in an effort to measure audience recall awareness of the campaign and its impact. DHS noted in particular that its post-campaign research will include face-to-face interviews in the capital cities and some secondary markets in El Salvador, Guatemala, Honduras, and Mexico--totaling about 1,400 interviews in each country-- with interviews anticipated to begin at the end of October and a final report published by the end of November or early December. Aside from challenges in performance measurement, USAID, State, and IAF project documents outline various factors that can hamper the long- term sustainability of projects, such as lack of accountability within government institutions, lack of political will, low tax collection, poor market conditions, and limited private sector engagement. In our July 2015 review, we observed examples of how some of these factors have the potential to hamper assistance programs. For example, an interagency agreement between the departments of State and Justice outlining efforts to train Honduran prosecutors includes an assumption that the government of Honduras would commit to having a certain number of prosecutors available for at least 18 months to participate in the program. However, at the time of our visit to the country, there were no active prosecutors participating in Tegucigalpa. In El Salvador, where we visited a vocational school that, according to USAID officials, had been established in a joint partnership between USAID and a Salvadoran private company, we observed a computer lab filled with computers recently provided by USAID but with no teacher present. According to USAID officials in El Salvador, the school had asked the Salvadoran Ministry of Education to provide a salary for the teacher, but the ministry had not yet done so at the time of our visit. Agencies have outlined approaches for seeking to ensure program sustainability despite the challenges described above, such as by prioritizing improvements to government institutions; identifying sustainable funding sources, such as the private sector; and advocating for legislative and policy reforms that support program objectives. In addition, agency officials have noted the importance of involving communities, the private sector, and the police in program design to ensure they are invested in and supportive of programs' objectives. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff has any questions about this testimony, please contact me at [email protected] or 202-512-8612. 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 Judith Williams, Assistant Director; Joe Carney; Rachel Girshick; Claudia Rodriguez; Dina Shorafa; Ashley Alley; Martin De Alteriis; Seyda Wentworth; John Mingus; Oziel Trevino; and Lynn Cothern. 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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Since 2012 there has been a rapid increase in the number of apprehensions at the U.S.-Mexican border of UAC from El Salvador, Guatemala, and Honduras. Current data indicate the rate of UAC migration from Central America in 2015 is lower than the record levels of 2014, though apprehensions increased in August 2015. Children from these three countries face a host of challenges, such as extreme violence and persistent poverty. This testimony summarizes the findings from GAO's July 2015 report, which reviewed (1) U.S. assistance in El Salvador, Guatemala, and Honduras addressing agency-identified causes of UAC migration; (2) how agencies have determined where to locate these assistance efforts; and (3) the extent to which agencies have developed processes to assess the effectiveness of programs seeking to address UAC migration. This testimony also provides updated information on several topics covered in the report. GAO reviewed agency documents and interviewed officials in Washington, D.C., and in Central America for the report. GAO reported in July 2015 that U.S. agencies had sought to address causes of unaccompanied alien child (UAC) migration through recent programs, such as information campaigns to deter migration, developed in response to the migration increase and other long-standing efforts. The increase in migration since 2012 was likely triggered, according to U.S. officials, by several factors such as the increased presence and sophistication of child smugglers (known as coyotes) and confusion over U.S. immigration policy. Officials also noted that certain persistent conditions such as violence and poverty have worsened in certain countries. In addition to long-standing efforts, such as U.S. Agency for International Development (USAID) antipoverty programs, agencies had taken new actions. For example, Department of Homeland Security (DHS)-led investigative units had increasingly sought to disrupt human smuggling operations. GAO found that U.S. agencies located programs based on various factors, including long-term priorities such as targeting high-poverty and -crime areas, but adjusted to locate more programs in high-migration communities. For example, Department of State (State) officials in Guatemala said they moved programs enhancing police anticrime capabilities into such communities, and USAID officials in El Salvador said they expanded to UAC migration-affected locations. GAO found that most agencies had developed processes to assess the effectiveness of programs seeking to address UAC migration, but weaknesses existed in these processes for some antismuggling programs. For example, DHS had established performance measures, such as arrests, for units combating UAC smuggling, but had not established numeric or other types of targets for these measures, which would enable DHS to measure the units' progress. In addition, DHS and State had not always evaluated information campaigns intended to combat coyote misinformation. DHS launched its 2013 campaign in April, but launched its 2014 campaign in late June after migration levels peaked. Neither agency evaluated its 2014 campaign. DHS has reported that it plans to evaluate its ongoing campaign before the end of this year. GAO's July 2015 report included recommendations that DHS and State integrate evaluations into their information campaigns intended to deter migration, and that DHS establish performance targets for its investigative units. DHS concurred with both recommendations, and said that it plans to evaluate its most recent campaign. State also concurred with the recommendation directed to it.
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With more than 100,000 commercial vessels navigating U.S. waters and 12.2 million barrels of oil being imported into the United States each day, some oil spills in domestic waters are inevitable. Fortunately, however, spills are relatively infrequent and are decreasing. While oil transport and maritime traffic have continued to increase, the total number of reported spills has generally declined each year since 1990. OPA places the primary burden of liability and the costs of oil spills on the vessel owner and operator who were responsible for the spill. This "polluter pays" system provides a deterrent for vessel owners and operators who spill oil by requiring that they assume the burden of spill response, natural resource restoration, and compensation to those damaged by the spill, up to a specified limit of liability--which is the amount above which responsible parties are no longer financially liable under certain conditions. (See fig. 1 for the limits of liability by vessel type.) For example, if a vessel's limit of liability is $10 million and a spill resulted in $12 million in costs, the responsible party only has to pay up to $10 million--the Fund will pay for the remaining $2 million. The Coast Guard is responsible for adjusting limits for significant increases in inflation and for making recommendations to Congress on whether other adjustments are necessary to help protect the Fund. OPA also requires that vessel owners and operators must demonstrate their ability to pay for oil spill response up to their limit of liability. Specifically, by regulation, with few exceptions, owners and operators of vessels over 300 gross tons and any vessels that transship or transfer oil in the Exclusive Economic Zone are required to have a certificate of financial responsibility that demonstrates their ability to pay for oil spill response up to their limit of liability. OPA consolidated the liability and compensation provisions of four prior federal oil pollution initiatives and their respective trust funds into the Oil Spill Liability Trust Fund and authorized the collection of revenue and the use of the money, with certain limitations, with regard to expenditures. The Fund's balance has generally declined from 1995 through 2006, and since fiscal year 2003, its balance has been less than the authorized limit on federal expenditures for the response to a single spill, which is currently set at $1 billion (see fig. 2). The balance has declined, in part, because the Fund's main source of revenue--a $0.05 per barrel tax on U.S. produced and imported oil--was not collected for most of the time between 1993 and 2006. As a result, the Fund balance was $604.4 million at the end of fiscal year 2006. The Energy Policy Act of 2005 reinstated the barrel tax beginning in April 2006. With the barrel tax once again in place, NPFC anticipates that the Fund will be able to cover potential noncatastrophic liabilities. OPA also defines the costs for which responsible parties are liable and for which the Fund is made available for compensation in the event that the responsible party does not pay or is not identified. These costs, or "OPA compensable" costs, are of two main types: Removal costs: Removal costs are incurred by the federal government or any other entity taking approved action to respond to, contain, and clean up the spill. For example, removal costs include the equipment used in the response--skimmers to pull oil from the water, booms to contain the oil, planes for aerial observation--as well as salaries and travel and lodging costs for responders. Damages caused by the oil spill: OPA-compensable damages cover a wide range of both actual and potential adverse impacts from an oil spill, for which a claim may be made to either the responsible party or the Fund. Claims include natural resource damage claims filed by trustees, claims for uncompensated removal costs and third-party damage claims for lost or damaged property and lost profits, among other things. The Fund also covers costs when responsible parties cannot be located or do not pay their liabilities. NPFC encounters cases where the source of the spill, and therefore the responsible party is unknown, or where the responsible party does not have the ability to pay. In other cases, since the cost recovery can take a period of years, the responsible party may become bankrupt or dissolved. Based on our analysis of NPFC records, responsible parties have reimbursed the majority--about 65 percent--of the Fund's costs for the 51 spills. Response to large oil spills is typically a cooperative effort between the public and private sector, and there are numerous players who participate in responding to and paying for oil spills. To manage the response effort, the responsible party, the Coast Guard, EPA, and the pertinent state and local agencies form the unified command, which implements and manages the spill response. Appendix I contains additional information on the parties involved in spill response. On the basis of information we were able to assemble about responsible parties' expenditures and payments from the Fund, we estimate that 51 oil spills involving removal costs and damage claims totaling at least $1 million have occurred from 1990 to 2006. During this period, 3,389 oil spills occurred in which one or more parties sought reimbursement from the Fund. The 51 major spills represent less than 2 percent of this total. As figure 3 shows, there are no discernable trends in the number of major oil spills that occur each year. The highest number of spills was seven in 1996; the lowest number was zero in 2006. These 51 spills occurred in a variety of locations and involved a range of vessel types. The spills occurred on the Atlantic, Gulf, and Pacific coasts and include spills both in open coastal waters and inland waterways. In addition, as figure 4 shows, 30 of the 51 spills involved cargo/freight vessels and tank barges, 12 involved fishing and other types of vessels, and 9 involved tanker vessels. The total cost of the 51 spills cannot be precisely determined because private-sector expenditures are not tracked, the various parties involved in covering these costs do not categorize them uniformly, and spills costs are somewhat fluid and accrue over time. Because spill cost data are somewhat imprecise and the data we collected vary somewhat by source, the results described below will be reported in ranges, in which various data sources are combined together. The lower and higher bounds of the range represent the low and high end of cost information we obtained. Our analysis of these 51 spills shows their total cost was approximately $1 billion--ranging from $860 million to $1.1 billion. This amount breaks down by source as follows: Amount paid out of the Trust Fund: Because the NPFC tracks and reports all Fund expenditures, the amount paid from the Fund can be reported as an actual amount, not an estimate. For these 51 spills, the Fund paid a total of $239.5 million. Amount paid by responsible parties: Because of the lack of precise information about amounts paid by responsible parties and the differences in how they categorize their costs, this portion of the expenditures must be presented as an estimate. Based on the data we were able to obtain and analyze, responsible parties spent between $620 million and $840 million. Even at the low end of the range, this amount is nearly triple the expenditure from the Fund. Costs of these 51 spills varied widely by spill, and therefore, by year (see fig. 5). For example, 1994 and 2004 both had four spills during the year, but the average cost per spill in 1994 was about $30 million, while the average cost per spill in 2004 was between $71 million and $96 million. Just as there was no discernible trend in the frequency of these major spills, there is no discernible trend in their cost. Although the substantial increase in 2004 may look like an upward trend, 2004 may be an anomaly that reflects the unique character of two of the four spills that occurred that year. These two spills accounted for 98 percent of the year's costs. Location, time of year, and type of oil are key factors affecting oil spill costs, according to industry experts, agency officials, and our analysis of spills. Officials also identified two other factors that may influence oil spill costs to a lesser extent--the effectiveness of the spill response and the level of public interest in a spill. In ways that are unique to each spill, these factors can affect the breadth and difficulty of the response effort or the extent of damage that requires mitigation. The location of a spill can have a large bearing on spill costs because it will determine the extent of response needed, as well as the degree of damage to the environment and local economies. According to state officials with whom we spoke and industry experts, there are three primary characteristics of location that affect costs: Remoteness: For spills that occur in remote areas, spill response can be particularly difficult in terms of mobilizing responders and equipment, and they can complicate the logistics of removing oil from the water--all of which can increase the costs of a spill. Proximity to shore: There are also significant costs associated with spills that occur close to shore. Contamination of shoreline areas has a considerable bearing on the costs of spills as such spills can require manual labor to remove oil from the shoreline and sensitive habitats. The extent of damage is also affected by the specific shoreline location. Proximity to economic centers: Spills that occur in the proximity of economic centers can also result in increased costs when local services are disrupted. A spill near a port can interrupt the flow of goods, necessitating an expeditious response in order to resume business activities, which could increase removal costs. Additionally, spills that disrupt economic activities can result in expensive third-party damage claims. The time of year in which a spill occurs can also affect spill costs--in particular, impacting local economies and response efforts. According to several state and private-sector officials with whom we spoke, spills that disrupt seasonal events that are critical for local economies can result in considerable expenses. For example, spills in the spring months in areas of the country that rely on revenue from tourism may incur additional removal costs in order to expedite spill clean-up, or because there are stricter standards for clean up, which increase the costs. The time of year in which a spill occurs also affects response efforts because of possible inclement weather conditions. For example, spills that occur during the winter months in areas of the country that experience harsh winter conditions can result in higher removal costs because of the increased difficulty in mobilizing equipment and personnel to respond to a spill in inclement weather. According to a state official knowledgeable about a January 1996 spill along the coast of Rhode Island, extremely cold and stormy weather made response efforts very difficult. The type of oil spilled affects the degree to which oil can be cleaned up and removed, as well as the nature of the natural resource damage caused by the spill. The different types of oil can be grouped into four categories, each with its own set of impacts on spill response and the environment (see table 1). Lighter oils such as jet fuels, gasoline, and diesel fuel dissipate and evaporate quickly, and as such, often require minimal cleanup. However, these oils are highly toxic and can severely affect the environment if conditions for evaporation are unfavorable. For instance, in 1996, a tank barge that was carrying home-heating oil grounded in the middle of a storm near Point Judith, Rhode Island, spilling approximately 828,000 gallons of heating oil (light oil). Although this oil might dissipate quickly under normal circumstances, heavy wave conditions caused an estimated 80 percent of the release to mix with water. Natural resource damages alone were estimated at $18 million, due to the death of approximately 9 million lobsters, 27 million clams and crabs, and over 4 million fish. Heavier oils, such as crude oils and other heavy petroleum products are less toxic than lighter oils but can also have severe environmental impacts. Medium and heavy oils do not evaporate much, even during favorable weather conditions, and can blanket structures they come in contact with--boats and fishing gear, for example--as well as the shoreline, creating severe environmental impacts to these areas, and harming waterfowl and fur-bearing mammals through coating and ingestion. Additionally, heavy oils can sink, creating prolonged contamination of the sea bed and tar balls that sink to the ocean floor and scatter along beaches. These spills can require intensive shoreline and structural clean up, which is time-consuming and expensive. For example, in 1995, a tanker spilled approximately 38,000 gallons of heavy fuel oil into the Gulf of Mexico when it collided with another tanker as it prepared to lighter its oil to another ship. Less than 1 percent (210 gallons) of the oil was recovered from the sea, and as a result, recovery efforts on the beaches of Matagorda and South Padre Islands were labor intensive, as hundreds of workers had to manually pick up tar balls with shovels. The total removal costs for the spill were estimated at $7 million. Some industry experts cited two other factors as also affecting costs incurred during a spill. Effectiveness of Spill Response: Some private-sector officials stated that the effectiveness of spill response can impact the cost of cleanup. The longer it takes to assemble and conduct the spill response, the more likely it is that the oil will move with changing tides and currents and affect a greater area, which can increase costs. Some officials said the level of experience of those involved in the incident command is critical to the effectiveness of spill response. For example, they said poor decision making during a spill response could lead to the deployment of unnecessary response equipment, or worse, not enough equipment to respond to a spill. Several officials expressed concern that Coast Guard officials are increasingly inexperienced in handling spill response, in part because the Coast Guard's mission has been increased to include homeland security initiatives. Public interest: Several officials with whom we spoke stated that the level of public attention placed on a spill creates pressure on parties to take action and can increase costs. They also noted that the level of public interest can increase the standards of cleanliness expected, which may increase removal costs. The total costs of the San Francisco spill are currently unknown. According to NPFC officials, as of December 4, 2007, the Unified Command estimated that $48 million had been spent on the response, which includes approximately $2.2 million from the Fund. The total costs will not likely be known for a while, as it can take many months or years to determine the full effect of a spill on natural resources and to determine the costs and extent of the natural resource damage. Our work for this testimony did not include a thorough evaluation of the factors affecting the spill. However, some of the same key factors that have influenced the cost of 51 major oil spills will likely have an effect on the costs in the San Francisco spill. For example, the spill occurred in an area close to shore, which caused the closing of as many as 22 beaches, according to Coast Guard officials. A weather-related factor was that the spill occurred during dense fog, which complicated efforts to determine how much of an area the spill covered. Moreover, the cargo ship spilled a heavy oil--specifically intermediate fuel oil--that requires particularly intensive shoreline and structural clean-up, and harmed scores of birds and marine mammals through coating and ingestion. Concerns have also been raised about the effectiveness of the spill response and incident command, another of the factors cited as contributing to increased costs. The National Transportation Safety Board, the Coast Guard, as well as other government agencies, are currently investigating the details of the accident and the subsequent response. The Fund has been able to cover costs from major spills that responsible parties have not paid, but risks remain. Specifically, the current liability limits for certain vessel types, notably tank barges, may be disproportionately low relative to costs associated with such spills. There is also no assurance that vessel owners and operators are able to financially cover these new limits, because the Coast Guard has not yet issued regulations for satisfying financial responsibility requirements. In addition, although OPA calls for periodic increases in liability limits to account for significant increases in inflation, such increases have never been made. Aside from issues related to limits of liability, the Fund faces other potential drains on its resources, including ongoing claims from existing spills. The Fund has been able to cover costs from major spills that responsible parties have not paid, but additional focus on limits of liability is warranted. Limits of liability are the amount, under certain circumstances, above which responsible parties are no longer financially liable for spill removal costs and damage claims. If the responsible party's costs exceed the limit of liability, they can make a claim against the Fund for the amount above the limit. Major oil spills that exceed a vessel's limit of liability are infrequent, but their impact on the Fund can be significant. Ten of the 51 major oil spills that occurred since 1990 resulted in limit-of- liability claims on the Fund. These limit-of-liability claims totaled more than $252 million and ranged from less than $1 million to more than $100 million. Limit-of-liability claims will continue to have a pronounced effect on the Fund. NPFC estimates that 74 percent of claims under adjudication that were outstanding as of January 2007 were for spills in which the limit of liability had been exceeded. The amount of these claims under adjudication was $217 million. We identified three areas in which further attention to these liability limits appears warranted: the appropriateness of some current liability limits, the need to adjust limits periodically in the future to account for significant increases in inflation, and the need for updated regulations for ensuring vessel owners and operators are able to financially cover their new limits. The Coast Guard and Maritime Transportation Act of 2006 significantly increased the limits of liability from the limits set by OPA in 1990. Both laws base the liability on a specified amount per gross ton of vessel volume, with different amounts for vessels that transport oil commodities (tankers and tank barges) than for vessels that carry oil as a fuel (such as cargo vessels, fishing vessels, and passenger ships). The 2006 act raised both the per-ton and the required minimum amounts, differentiating between vessels with a double hull, which helps prevent oil spills resulting from collision or grounding, and vessels without a double hull (see table 2 for a comparison of amounts by vessel category). For example, the liability limit for single-hull vessels larger than 3,000 gross tons was increased from the greater of $1,200 per gross ton or $10 million to the greater of $3,000 per gross ton or $22 million. Our analysis of the 51 spills showed that the average spill cost for some types of vessels, particularly tank barges, was higher than the limit of liability, including the new limits established in 2006. As figure 6 shows, the 15 tank barge spills and the 12 fishing/other vessel spills had average costs greater than both the 1990 and 2006 limits of liability. For example, for tank barges, the average cost of $23 million was higher than the average limit of liability of $4.1 million under the 1990 limits and $10.3 million under the new 2006 limits. The nine spills involving tankers, by comparison, had average spill costs of $34 million, which was considerably lower than the average limit of liability of $77 million under the 1990 limits and $187 million under the new 2006 limits. Similarly, the 15 major spills involving cargo/freight vessels had an average spill cost of $67 million, which was lower than both the 1990 and 2006 limits of liability. In a January 2007 report examining spills in which the limits of liability had been exceeded, the Coast Guard had similar findings on the adequacy of some of the new limits. Based on an analysis of 40 spills in which costs had exceeded the responsible party's liability limit since 1991, the Coast Guard found that the Fund's responsibility would be greatest for spills involving tank barges, where the Fund would be responsible for paying 69 percent of costs. The Coast Guard concluded that increasing liability limits for tank barges and non tank vessels--cargo, freight, and fishing vessels-- over 300 gross tons would positively impact the Fund balance. With regard to making specific adjustments, the Coast Guard said dividing costs equally between the responsible parties and the Fund was a reasonable standard to apply in determining the adequacy of liability limits. However, the Coast Guard did not recommend explicit changes to achieve either that 50/50 standard or some other division of responsibility. Although OPA requires adjusting liability limits to account for significant increases in inflation, no adjustments to the limits were made between 1990 and 2006, when the Congress raised the limits in the Coast Guard and Maritime Transportation Act. During those years, the Consumer Price Index rose approximately 54 percent. OPA requires the President, who has delegated responsibility to the Coast Guard, through the Secretary of Homeland Security, to issue regulations not less often than every 3 years to adjust the limits of liability to reflect significant increases in the Consumer Price Index. We asked Coast Guard officials why no adjustments were made between 1990 and 2006. Coast Guard officials stated that they could not speculate on behalf of other agencies as to why no adjustments had been made prior to 2005 when the delegation to the Coast Guard was made. The decision to leave limits unchanged had financial implications for the Fund. Raising the liability limits to account for inflation would have the effect of reducing payments from the Fund, because responsible parties would be responsible for paying costs up to the higher liability limit. Not making adjustments during this 16-year period thus had the effect of increasing the Fund's financial liability. Our analysis showed that if the 1990 liability limits had been adjusted for inflation during the 16-year period, claims against the Fund for the 51 major oil spills would have been reduced 16 percent, from $252 million to $213 million. This would have meant a savings of $39 million for the Fund. Certificates of Financial Responsibility have not been adjusted to reflect the new liability limits. The Coast Guard requires Certificates of Financial Responsibility, with few exceptions, for vessels over 300 gross tons or any vessels that are lightering or transshipping oil in the Exclusive Economic Zone as a legal certification that vessel owners and operators have the financial resources to fund spill response up to the vessel's limit of liability. Currently, Certificate of Financial Responsibility requirements are consistent with the 1990 limits of liability and, therefore, there is no assurance that responsible parties have the financial resources to cover their increased liability. The Coast Guard plans to initiate a rule making to issue new Certificate of Financial Responsibility requirements. Coast Guard officials indicated their goal is to publish a Notice of Proposed Rulemaking by the end of 2007, but they said they could not be certain they would meet this goal. The Fund also faces several other potential challenges that could affect its financial condition: Additional claims could be made on spills that have already been cleaned up: Natural resource damage claims can be made on the Fund for years after a spill has been cleaned up. The official natural resource damage assessment conducted by trustees can take years to complete, and once it is completed, claims can be submitted to the NPFC for up to 3 years thereafter. For example, NPFC recently received and paid a natural resource damage claim for a spill in U.S. waters in the Caribbean that occurred in 1991. Costs and claims may occur on spills from previously sunken vessels that discharge oil in the future: Previously sunken vessels that are submerged and in threat of discharging oil represent an ongoing liability to the Fund. There are over 1000 sunken vessels that pose a threat of oil discharge. These potential spills are particularly problematic because in many cases there is no viable responsible party that would be liable for removal costs. Therefore, the full cost burden of oil spilled from these vessels would likely be paid by the Fund. Spills may occur without an identifiable source and therefore, no responsible party: Mystery spills also have a sustained impact on the Fund, because costs for spills without an identifiable source--and therefore no responsible party--may be paid out of the Fund. Although mystery spills are a concern, the total cost to the Fund from mystery spills was lower than the costs of known vessel spills in 2001 through 2004. Additionally, none of the 51 major oil spills was the result of discharge from an unknown source. A catastrophic spill could strain the Fund's resources: Since the 1989 Exxon Valdez spill, which was the impetus for authorizing the Fund's usage, no oil spill has come close to matching its costs. Cleanup costs for the Exxon Valdez alone totaled about $2.2 billion, according to the vessel's owner. By comparison, the 51 major oil spills since 1990 cost, in total, between $860 million and $1.1 billion. The Fund is currently authorized to pay out a maximum of $1 billion on a single spill. Although the Fund has been successful thus far in covering costs that responsible parties did not pay, it may not be sufficient to pay such costs for a spill that has catastrophic consequences. In conclusion, the "polluter pays" system established under OPA has been generally effective in ensuring that responsible parties pay the costs of responding to spills and compensating those affected. However, increases in some liability limits appear warranted to help ensure that the "polluter pays" principle is carried out in practice. For certain vessel types, such as tank barges, current liability limits appear disproportionately low relative to their historic spill costs. The Coast Guard has reached a similar conclusion but so far has stopped short of making explicit recommendations to the Congress about what the limits should be. Absent such recommendations, the Fund may continue to pay tens of millions for spills that exceed the responsible parties' limits of liability. Further, to date, liability limits have not been regularly adjusted for significant changes in inflation. Consequently, the Fund was exposed to about $39 million in liability claims for the 51 major spills between 1990 and 2006 that could have been saved if the limits had been adjusted for inflation. Without such actions, oil spills with costs exceeding the responsible parties' limits of liability will continue to place the Fund at risk. Given these concerns, in our September 2007 report, we recommended that the Commandant of the Coast Guard (1) determine whether and how liability limits should be changed, by vessel type, and make recommendations about these changes to the Congress and (2) adjust the limits of liability for vessels every 3 years to reflect significant changes in inflation, as appropriate. DHS, including the Coast Guard, generally agreed with the report's contents and agreed with the recommendations. To date, the Commandant of the Coast Guard has not implemented these recommendations. Madame Chair this concludes my statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact Susan Fleming at (202) 512-2834 or [email protected]. Individuals making contributions to this testimony include Nikki Clowers, Assistant Director; Simon Galed; Stan Stenersen; and Susan Zimmerman. Response to large oil spills is typically a cooperative effort between the public and private sector, and there are numerous players who participate in responding to and paying for oil spills. To manage the response effort, the responsible party, the Coast Guard, EPA, and the pertinent state and local agencies form the unified command, which implements and manages the spill response. Beyond the response operations, there are other stakeholders, such as accountants who are involved in documenting and accounting for costs, and receiving and processing claims. In addition, insurers and underwriters provide financial backing to the responsible party. The players involved in responding to and/or paying for major spill response are as follows: Government agencies: The lead federal authority, or Federal On-Scene Coordinator, in conducting a spill response is usually the nearest Coast Guard Sector and is headed by the Coast Guard Captain of the Port. The Federal On-Scene Coordinator directs response efforts and coordinates all other efforts at the scene of an oil spill. Additionally, the on-scene coordinator issues pollution removal funding authorizations--guarantees that the agency will receive reimbursement for performing response activities--to obtain services and assistance from other government agencies. Other federal agencies may also be involved. NOAA provides scientific support, monitoring and predicting the movement of oil, and conducting environmental assessments of the impacted area. The federal, state, and tribal trustees join together to perform a natural resource damage assessment, if necessary. Within the Coast Guard, the NPFC is responsible for disbursing funds to the federal on-scene coordinator for oil spill removal activities and seeking reimbursement from responsible parties for federal costs. Additionally, regional governmental entities that are affected by the spill--both state and local--as well as tribal government officials or representatives may participate in the unified command and contribute to the response effort, which is paid for by the responsible party or are reimbursed by the responsible party or the Fund. Responsible parties: OPA stipulates that both the vessel owner and operator are ultimately liable for the costs of the spill and the cleanup effort. The Coast Guard has final determination on what actions must be taken in a spill response, and the responsible party may form part of the unified command--along with the federal on-scene coordinator and pertinent state and local agencies--to manage the spill response. The responsible parties rely on other entities to evaluate the spill effects and the resulting compensation. Responsible parties hire environmental and scientific support staff, specialized claims adjustors to adjudicate third- party claims, public relations firms, and legal representation to file and defend limit of liability claims on the Fund, as well as serve as counsel throughout the spill response. Qualified individuals: Federal regulations require that vessels carrying oil as cargo have an incident response plan and, as part of the plan, they appoint a qualified individual who acts with full authority to obligate funds required to carry out response activities. The qualified individual acts as a liaison with the Federal On-Scene Coordinator and is responsible for activating the incident response plan. Oil spill response organizations: These organizations are private companies that perform oil spill cleanup, such as skimming and disposal of oil. Many of the companies have contractual agreements with responsible parties and the Coast Guard. The agreements, called basic ordering agreements, provide for prearranged pricing, response personnel, and equipment in the event of an oil spill. Insurers: Responsible parties often have multiple layers of primary and excess insurance coverage, which pays oil spill costs and claims. Pollution liability coverage for large vessels is often underwritten by not-for-profit mutual insurance organizations. The organizations act as a collective of ship owners, who insure themselves, at-cost. The primary insurers of commercial vessels in U.S. waters are the Water Quality Insurance Syndicate, an organization providing pollution liability insurance to over 40,000 vessels, and the International Group of P & I Clubs, 13 protection and indemnity organizations that provide insurance primarily to foreign- flagged large vessels. At the federal level, the National Oil and Hazardous Substances Pollution Contingency Plan provides the framework for responding to oil spills. At the port level, each port has an Area Contingency Plan, developed by a committee of local stakeholders, that calls for a response that is coordinated with both higher-level federal plans and lower-level facility and vessel plans. The federal plans designate the Coast Guard as the primary agency to respond to oil spills on water. The Coast Guard has a National Strike Force to provide assistance to efforts by the local Coast Guard and other agencies. The Coast Guard also has an exercise program--known as the Spills of National Significance exercise program--to test national level response capabilities. This program is focused on exercising the entire response system as the local, regional and national level using large-scale, high probability oil and hazardous material incidents that result from unintentional causes such as maritime accidents or natural disasters. The most recent program exercise, in June 2007, tested the response and recovery to an oil and hazardous materials release in the wake of a large scale earthquake in the Mississippi and Ohio river valleys. 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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When oil spills occur in U.S. waters, federal law places primary liability on the vessel owner or operator--that is, the responsible party--up to a statutory limit. As a supplement to this "polluter pays" approach, a federal Oil Spill Liability Trust Fund administered by the Coast Guard pays for costs when a responsible party does not or cannot pay. This testimony is based on GAO's September 2007 report on oil spill costs and select program updates on the recent San Francisco spill. Specifically, it answers three questions: (1) How many major spills (i.e., at least $1 million) have occurred since 1990, and what is their total cost? (2) What factors affect the cost of spills? and (3) What are the implications of major oil spills for the Oil Spill Liability Trust Fund? On the basis of cost information collected from a variety of sources, GAO estimates that 51 spills with costs of at least $1 million have occurred from 1990 to 2006 and that responsible parties and the federal Oil Spill Liability Trust Fund (Fund) have spent between $860 million and $1.1 billion for oil spill removal costs and compensation for damages (e.g., lost profits and natural resource damages). Since removal costs and damage claims may stretch out over many years, the costs of the spills could rise. The 51 spills varied greatly from year to year in number and cost. All vessel types were involved with the 51 major spills GAO identified, with cargo/freight vessels and tank barges involved with 30 of the 51 spills. According to industry and agency officials, three main factors affect the cost of spills: a spill's location, the time of year, and the type of oil spilled. Spills that occur in remote areas, for example, can increase costs involved in mobilizing responders and equipment. Similarly, a spill occurring during tourist or fishing season might produce substantial compensation claims, while a spill occurring during another time of year may not be as costly. The type of oil affects costs in various ways: fuels like gasoline or diesel fuel may dissipate quickly but are extremely toxic to fish and plants, while crude oil is less toxic but harder to clean up. The total costs of the recent San Francisco oil spill are unknown, but these identified factors are likely to influence the costs. To date, the Fund has been able to cover costs from major spills that responsible parties have not paid, but risks remain. Specifically, GAO's analysis shows that the new 2006 limits of liability for tank barges remain low relative to the average cost of such spills. Since 1990, the Oil Pollution Act (OPA) required that liability limits be adjusted above the limits set forth in statute for significant increases in inflation, but such changes have never been made. Not making such adjustments between 1990 and 2006 potentially shifted an estimated $39 million in costs from responsible parties to the Fund.
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Floods continue to be the most destructive natural hazard in terms of damage and economic loss to the nation. Property damage from flooding now totals over $1 billion each year in the United States and floods occur within all 50 states. Nearly 9 of every 10 presidential disaster declarations result from natural phenomena in which flooding was a major component. Most communities in the United States can experience some kind of flooding after spring rains, heavy thunderstorms, or winter snow thaws. Not only do floods cause damage and loss, they can be deadly--flooding caused the deaths of about 900 people from fiscal year 1992 through fiscal year 2001. Tropical Storm Allison, which struck the Gulf Coast in June 2001, demonstrated the economic and social impact flooding can have, causing billions of dollars in damages and 41 deaths. As a result of the storm, FEMA paid out over $1 billion in insurance claims, the largest amount paid for a single event since 1978 when FEMA began to collect summary statistics on flood claims. More recently, Hurricane Isabel ravaged the Mid-Atlantic states in September 2003. Through November 30, 2003, FEMA had paid over $160 million in flood insurance claims and estimates that ultimately, flood insurance claim payments resulting from Isabel will be about $450 million. At least 40 deaths have been attributed to the storm. Floods can be slow or fast rising but generally develop over a period of days. Flash flood waters move at very fast speeds and can roll boulders, tear out trees, destroy buildings, and obliterate bridges. Walls of water can reach heights of 10 to 20 feet and generally are accompanied by a deadly cargo of debris. Flood damage causes both direct and indirect costs. Direct costs reflect immediate losses and repair costs as well as short-term costs such as flood fighting, temporary housing, and administrative assistance. By contrast, indirect costs are incurred in an extended time period following a flood and include loss of business and personal income (including permanent loss of employment), reduction in property values, increased insurance costs, loss of tax revenue, psychological trauma, and disturbance to ecosystems. In 1968, in recognition of the increasing amount of flood damage, the lack of readily available insurance for property owners, and the cost to the taxpayer for flood-related disaster relief, the Congress passed the National Flood Insurance Act (Pub. L. No. 90-448) that created the National Flood Insurance Program. Through the National Flood Insurance Program, FEMA has sought to minimize flood-related property losses by making flood insurance available on reasonable terms and encouraging its purchase by people who need flood insurance protection--particularly those living in flood prone areas. The program identifies flood prone areas in the country, makes flood insurance available to property owners in communities that participate in the program, and requires floodplain building standards to mitigate flood hazards. FEMA also seeks to mitigate flood hazards through a variety of mitigation grant programs. Under the flood insurance program, FEMA prepares flood insurance rate maps to delineate flood prone areas including special flood hazard areas-- also known as 100-year floodplains--where enhanced building standards and insurance requirements apply. Currently, FEMA is in the initial stages of a billion dollar effort to update the nation's flood maps. The Map Modernization program is intended to improve the accuracy of flood maps, put the maps in digital format to improve their accessibility, and provide the basis for assessing the impact of other hazards in support of DHS's efforts to protect the nation from both man-made and natural disasters. For example, the maps could be used to assess the impact of toxic chemical spills on local waterways. At the request of the Chairman of the House Financial Services Subcommittee on Housing and Community Opportunity, we have been reviewing the Map Modernization program and plan to report on FEMA's program strategy and the status of the program later this spring. Flood maps provide the basis for establishing floodplain building standards that participating communities must adopt and enforce as part of the program. For a community to participate in the program, any structures built within a special flood hazard area after the flood map was completed must be built according to the program's building standards that are aimed at minimizing flood losses. A key component of the program's building standards that must be followed by participating communities is a requirement that the lowest floor of the structure be elevated to or above the base flood level--the highest elevation at which there is a 1-percent chance of flooding in a given year. The administration has estimated that the program's standards for new construction save about $1 billion annually in flood damage avoided. According to FEMA, buildings constructed in compliance with these standards suffer approximately 80 percent less damage annually than those not built according to these standards. Flood maps also provide the basis for setting insurance rates and identifying properties whose owners are required to purchase flood insurance. When the program was created, the purchase of flood insurance was voluntary. To increase the impact of the program, the Congress amended the original law in 1973 to require the purchase of flood insurance in certain circumstances. Flood insurance is required for structures in special flood hazard areas of communities participating in the program if (1) any federal loans or grants were used to acquire or build the structures or (2) the structures are secured by mortgage loans made by lending institutions that are regulated by the federal government. The National Flood Insurance Reform Act of 1994 that further amended the program also reinforced the objective of using insurance as the preferred mechanism for disaster assistance. The act expanded the role of federal agency lenders and regulators in enforcing the mandatory flood insurance purchase requirements. It also prohibited further flood disaster assistance for any property where flood insurance was not maintained even though it was mandated as a condition for receiving prior disaster assistance. Currently, the program provides insurance for approximately 4.4 million policyholders in the nearly 20,000 communities that participate in the program. The program has paid about $12 billion in insurance claims, primarily from policyholder premiums that otherwise would have been paid through taxpayer-funded disaster relief or borne by home and business owners themselves. FEMA also has a variety of grant programs designed to mitigate the effects of natural hazards, including flooding, on people and property. From October 1989 through July 2003, FEMA funded approximately 3,900 flood mitigation projects worth about $2 billion through the flood insurance program and a variety of other grant programs. Through these projects, FEMA mitigated over 29,000 properties. FEMA's Flood Mitigation Assistance Program is funded through the flood insurance program and is designed to reduce claims under the program. Grants provided to states and communities are to be used for flood related mitigation activities such as elevation, acquisition, and relocation of buildings insured by the flood insurance program. In implementing this program, FEMA has encouraged states to prioritize project grant applications that include repetitive loss properties. In addition, FEMA provides funding for mitigation planning activities and projects before and after floods occur, respectively through the Pre-Disaster Mitigation Program and the Hazard Mitigation Grant Program. In implementing the Pre-Disaster Mitigation Program for 2003, FEMA specifically targeted projects designed to mitigate repetitive loss properties. Through the Hazard Mitigation Grant Program, FEMA estimates that it has mitigated over 2,500 repetitive loss properties through acquisitions, elevations, and other flood protection measures. The flood insurance program has raised financial concerns because, over the years, it has lost money and at times has had to borrow funds from the U.S. Treasury. One of the primary reasons--payments for repetitive loss properties--has been consistently identified in our past work and by FEMA. About 49,000--approximately 1 percent of the 4.4 million buildings currently insured under the program--have been flooded on more than one occasion during a 10-year period and have received flood insurance payments of $1,000 or more for each claim. These repetitive loss properties are problematic not only because of their vulnerability to flooding but also because of the costs of repeatedly repairing flood damages. For example, a 1998 study by the National Wildlife Federation noted that nearly 1 out of every 10 repetitive loss homes has had cumulative flood loss claims that exceeded the value of the house. According to FEMA, repetitive loss properties have accounted for about 38 percent of all program claim costs historically and are projected by FEMA to cost about $200 million annually. Since 1978, the total cost of these repetitive loss properties to the program has been about $4.6 billion. Nearly half of all nationwide repetitive loss property insurance payments had been made in Louisiana, Florida and Texas. For example, in Texas, since 1978 there have been approximately 45,000 flood claims totaling over $1 billion for repetitive damage. These 3 states, plus 12 others, have accounted for nearly 90 percent of the total payments made for repetitive loss properties. FEMA has developed a strategy to reduce the number of properties repeatedly flooded that, like congressional proposals, seeks to target repetitive loss properties with the greatest losses. FEMA's strategy identifies the highest priority properties, for example those with four or more losses, that would benefit from mitigation activities designed to remove them altogether from the floodplains, elevate them above the reach of floodwaters, or apply other measures that would significantly reduce their exposure to flood risk. According to FEMA, it has paid out close to $1 billion dollars in flood insurance claims over the last 21 years for these properties. As of November 30, 2003 FEMA had identified approximately 11,000 currently insured repetitive loss properties in this target group. FEMA has set up a special direct facility for servicing these properties and provides information about these property to state and local floodplain management officials. States or communities may sponsor projects to mitigate flood losses to these properties or may be able to provide property owners technical assistance on mitigation options. To facilitate grant-funded mitigation activities for this target group, FEMA also initiated a pilot program to allow states and communities (where these properties are located) to use simplified methodology and software to establish the cost-effectiveness of proposed projects when applying for grants to mitigate these repetitive loss properties. Members of Congress have also recognized the financial burden repetitive loss properties place on the program and have proposed changing premium rates for properties with the greatest losses. Two bills introduced in 2003--H.R. 253 and H.R. 670--proposed amending the National Flood Insurance Act of 1968, to, among other things, change the premiums for repetitive loss properties. Under the proposed bills, premiums charged for such properties would reflect actuarially based rates if the property owner has refused a buyout, elevation, or other flood mitigation measure from the flood insurance program or FEMA. H.R. 253, as passed by the House, included a pilot program to allow FEMA to use flood insurance program funds to target "severe" repetitive loss properties for mitigation. Specifically, FEMA could use up to $40 million each year for the next 5 years for mitigation directed at these properties. For property owners who refuse FEMA's mitigation offers, their premium rates would be increased by 50 percent if they subsequently made a claim to the program exceeding $1,500. In the past, we have noted that increasing policyholder premiums could cause some of the policyholders to cancel their flood insurance. H.R. 253 includes a provision that provides FEMA the flexibility of increasing the deductible, which would result in a lower premium rate, for policies where property owners refuse mitigation offers and make subsequent claims exceeding $1,500. This may provide property owners who refuse mitigation offers a means for maintaining their flood insurance without a significant increase in their premium rate. While we have not fully analyzed the potential results of FEMA's repetitive loss strategy and mitigation actions proposed by H.R. 253, based on a preliminary assessment, they appear to have the potential to reduce the number and/or vulnerability of repetitive loss properties and, thereby, the potential to help improve the program's financial condition. By making near term investments targeted to the most costly properties to insure, FEMA should be able to reduce annual expenditures for these properties in the long term by reducing the national inventory of repetitive loss properties. According to FEMA, there are a total of about 100,000 repetitive loss properties accounting for $4.6 billion in losses since 1978. Of these properties, FEMA reports that there are about 49,000 properties that are currently insured that have accounted for about $2.6 billion in losses since 1978. Of these currently insured properties, about 6,000 repetitive loss properties that have accounted for about $792 million in losses since 1978 could be considered for mitigation efforts funded through the pilot program proposed by H.R. 253. In accordance with the bill's proposed criteria, each of these properties either had 4 or more separate claims each exceeding $5,000 with cumulative claims exceeding $20,000 or had at least 2 separate claims with cumulative losses exceeding the value of the property. The remaining 43,000 currently insured repetitive loss properties, accounting for $1.8 billion in losses since 1978, do not meet the criteria for the proposed pilot program. Of these properties that would not be eligible for the pilot program, about 26,000 properties, accounting for about $1.6 billion in losses since 1978, had cumulative losses greater than $20,000, but either (1) less than 4 claims had been filed or (2) each claim did not meet the $5,000 threshold. (For state by state details on the total number of repetitive loss properties, the number of currently insured repetitive loss properties, the number of currently insured repetitive loss properties that meet the criteria proposed in the H.R. 253 pilot program, and the number of currently insured repetitive loss properties that do not meet the criteria, see appendix 1, tables 1, 2, 3, and 4, respectively.) As with all federal initiatives, the success of FEMA 's efforts in implementing a repetitive loss strategy and any future legislated program directives will be most effectively determined by using outcome-based, rather than output-based performance measures. Such outcome-based measures could allow FEMA to assess the impact of savings to the National Flood Insurance Program resulting from its mitigation of repetitive loss properties. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have. For further information on this testimony, please contact William O. Jenkins at (202) 512-8777. Individuals making key contributions to this testimony include Chris Keisling, Kirk Kiester, and Meg Ullengren. This appendix contains data we obtained from FEMA's National Flood Insurance Program Bureau & Statistical Agent on repetitive loss properties and the flood insurance losses associated with those properties. To assess the reliability of this data, we interviewed agency officials knowledgeable about the data and the system development manager responsible for maintaining the data and the systems. We determined that the data were sufficiently reliable for identifying repetitive loss properties and illustrating the potential impact of the pilot program proposed by H.R. 253 on these properties. Flood Insurance: Challenges Facing the National Flood Insurance Program. GAO-03-606T. Washington, D.C.: April 1, 2003. Major Management Challenges and Program Risks: Federal Emergency Management Agency. GAO-03-113. Washington, D.C.: January 2003. Flood Insurance: Extent of Noncompliance with Purchase Requirements Is Unknown. GAO-02-396. Washington, D.C.: June 21, 2002. Flood Insurance: Information on the Financial Condition of the National Flood Insurance Program. GAO-01-992T. Washington, D.C.: July 19, 2001. Flood Insurance: Emerging Opportunity to Better Measure Certain Results of the National Flood Insurance Program. GAO-01-736T. Washington, D.C.: May 16, 2001. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Floods have been, and continue to be, the most destructive natural hazard in terms of damage and economic loss to the nation. From fiscal year 1992 through fiscal year 2002, about 900 lives were lost due to flooding and flood damages totaled about $55 billion. Some properties have been repeatedly flooded and the subject of federal flood insurance claims. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for assisting state and local governments, private entities, and individuals to prepare for, mitigate, respond to, and recover from natural disasters, including floods. The National Flood Insurance Program (NFIP) is the primary vehicle for FEMA's efforts to mitigate the impact of floods. The Senate Subcommittee on Economic Policy, Committee on Banking, Housing, and Urban Affairs, asked GAO to discuss (1) FEMA's approach to flood mitigation, (2) the effect of repetitive loss properties on the NFIP, and (3) recent actions taken or proposed to address the impact of repetitive loss properties on the NFIP. FEMA has taken a multifaceted approach to mitigating, or minimizing the life and property losses and disaster assistance costs that result from flooding. Through the National Flood Insurance Program, FEMA develops and updates flood maps that identify flood prone areas and makes insurance available for communities that agree to adopt and enforce building standards based upon these maps. Since its inception in 1968, the National Flood Insurance Program has paid $12 billion in insurance claims to owners of flood-damage properties that have been funded primarily by policyholders' premiums that otherwise would have been paid through taxpayer-funded disaster relief or borne by home and business owners themselves. Through a variety of grant programs, FEMA also provides funding for mitigation planning activities and projects before and after floods occur. Repetitive loss properties represent a significant portion of annual flood insurance program claims. About 1 percent of the 4.4 million properties currently insured by the program are considered to be repetitive loss properties--properties for which policyholders have made two or more $1,000 flood claims. However, about 38 percent of all program claim costs have been the result of repetitive loss properties, at a cost of about $4.6 billion since 1978. Recent federal actions to reduce program losses related to repetitive loss properties include FEMA's strategy to target severe repetitive loss properties for mitigation and congressional proposals to phase out coverage or begin charging full and actuarially based rates for repetitive loss property owners who refuse to accept FEMA's offer to purchase or mitigate the effect of floods on these buildings. FEMA's strategy and the congressional proposals appear to have the potential to reduce the number and vulnerability of repetitive loss properties and, thereby, the potential to help reduce the number of flood insurance claims.
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Chemical facilities manufacture a host of products--including basic organic chemicals, plastic materials and resins, petrochemicals, and industrial gases, to name a few. Other facilities, such as fertilizer and pesticide facilities, pulp and paper manufacturers, water facilities, and refineries, also house large quantities of chemicals. EPA has a role in preventing and mitigating accidental releases at chemical facilities through, among other things, the RMP provisions of the Clear Air Act. Under these provisions, EPA identified 140 toxic and flammable chemicals that, when present above certain threshold amounts, would pose the greatest risk to human health and the environment if released. According to EPA, approximately 15,000 facilities in a variety of industries produce, use, or store one or more of these chemicals beyond threshold amounts. The 2003 President's National Strategy for the Physical Protection of Critical Infrastructures and Key Assets sets forth actions that EPA and DHS will take to secure the chemical infrastructure. The strategy directs EPA and DHS to promote enhanced site security at chemical facilities and review current practices and statutory requirements on the distribution and sale of certain pesticides and industrial chemicals to help identify whether additional measures are necessary. DHS is also charged with continuing to develop the Chemical Sector Information Sharing and Analysis Center, a partnership with industry to facilitate the collection and sharing of threat information, by promoting the Center and recruiting chemical industry constituents to participate. A presidential directive issued in December 2003 designates DHS as the lead federal agency for chemical security, a change from national strategies issued in July 2002 and February 2003, which named EPA as the lead. A number of other critical infrastructures have federal security requirements. All commercial nuclear power facilities licensed by the Nuclear Regulatory Commission are subject to a number of security requirements. The Aviation and Transportation Security Act of 2001 directed the Transportation Security Administration to take over responsibility for airport screening. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 requires community water systems serving more than 3,300 people to conduct a vulnerability assessment, prepare an emergency response plan, certify to EPA that the vulnerability assessment and emergency response plan have been completed, and provide a copy of the assessment to EPA. To improve security in our nation's ports, the regulations implementing the Maritime Transportation Security Act of 2002 direct vessels and facilities--some of which are chemical facilities--to develop security plans. Congress is considering several legislative proposals that would grant DHS, or DHS and EPA, the authority to require chemical facilities to take security steps. S. 994 requires the Secretary of Homeland Security to promulgate regulations specifying which facilities should be required to conduct vulnerability assessments and to prepare and implement site security plans, a timetable for completing the vulnerability assessments and security plans, the contents of plans, and limits on the disclosure of sensitive information. S. 157 would direct EPA to designate high-priority chemical facilities based on the threat posed by an unauthorized release and require these facilities to conduct vulnerability assessments, identify hazards that would result from a release, and prepare a prevention, preparedness, and response plan. S. 157 would also require facilities to send these assessments and plans to EPA. EPA and DHS would jointly review the assessments and plans to determine compliance. S. 157 would also require that facilities consider inherently safer practices (referred to as inherently safer technologies), such as substituting less toxic chemicals. Experts agree that chemical facilities present an attractive target for terrorists intent on causing massive damage because many facilities house toxic chemicals that could become airborne and drift to surrounding areas if released. Chemical facilities could also be attractive targets for the theft of chemicals that could be used to create a weapon capable of causing harm. Justice has concluded that the risk of an attempt in the foreseeable future to cause an industrial chemical release is both real and credible. In fact, according to Justice, domestic terrorists plotted to use a destructive device against a U.S. facility that housed millions of gallons of propane in the late 1990s. In testimony on February 6, 2002, the Director of the Central Intelligence Agency warned of the potential for an attack by al Qaeda on chemical facilities. Some chemical facilities may be at higher risk of a terrorist attack than others because they contain large amounts of toxic chemicals and are located near population centers. Attacks on such facilities could harm a large number of people, with health effects ranging from mild irritation to death, cause large-scale evacuations, and disrupt the local or regional economy. No specific data are available on what the actual effects of successful terrorist attacks on chemical facilities would be. However, RMP facilities must submit to EPA estimates, including the residential population located within the range of a toxic gas cloud produced by a "worst-case" chemical release, called the "vulnerable zone." According to EPA, 123 chemical facilities located throughout the nation have toxic "worst-case" scenarios where more than one million people could be at risk of exposure to a cloud of toxic gas. About 600 facilities could each potentially threaten between 100,000 and a million people, and about 2,300 facilities could each potentially threaten between 10,000 and 100,000 people within these facilities' "vulnerable zones." According to EPA, "worst-case" scenarios do not consider the potential causes of a release or how different causes or other circumstances, such as safety features, could lessen the consequences of a release. Hence, the "worst-case" scenario calculations would likely be overstating the potential consequences. However, under the Clean Air Act, RMP facilities must estimate the effects of a toxic chemical release involving the greatest amount of the toxic chemical held in a single vessel or pipe--not the entire quantity on site. Therefore, for some facilities it is conceivable that an attack where multiple chemical vessels were breached simultaneously could result in an even larger release, potentially affecting a larger population than estimated in the RMP "worst-case" scenarios. Other factors besides location and the quantity of chemicals onsite could also make a facility a more attractive target. For example, a facility that is widely recognizable, located near a historic or iconic symbol, or critical to supporting other infrastructures could be at higher risk. A 2002 Brookings Institution report ranks an attack on toxic chemical facilities behind only biological and atomic attacks in terms of possible fatalities. Currently, no one has comprehensively assessed security across the nation at facilities that house chemicals. According to a 1999 study by the Department of Health and Human Services' Agency for Toxic Substances and Disease Registry (ATSDR), security at chemical facilities in two communities was fair to very poor. ATSDR observed security vulnerabilities such as freely accessible chemical barge terminals and chemical rail cars parked near residential areas in communities where facilities are located. Following visits to 11 chemical facilities, Justice concluded that some facilities may need to implement more effective security systems and develop alternative means to reduce the potential consequences of a successful attack. The ease with which reporters and environmental activists gained access to chemical tanks and computer centers that control manufacturing processes at chemical facilities in recent years also raises doubts about security effectiveness at some facilities. No federal laws explicitly require all chemical facilities to take security actions to safeguard their facilities against a terrorist attack. Although the federal government requires certain chemical facilities to take security precautions directed to prevent trespassing or theft, these requirements do not cover a wide range of chemical facilities and may do little to actually prevent a terrorist attack. For example, under EPA's regulations implementing the Resource Conservation and Recovery Act of 1976, facilities that house hazardous waste generally must take certain security actions, such as posting warning signs and using a 24-hour surveillance system or surrounding the active portion of the facility with a barrier and controlled entry gates. However, according to EPA, these requirements would be applicable to only approximately 21 percent of the 15,000 RMP facilities. Regulations implementing the Maritime Transportation Security Act of 2002 also require vessels and port facilities--some of which are chemical facilities--to develop security plans. A number of federal laws also impose safety requirements on chemical facilities, but these requirements do not specifically and directly address security preparedness against terrorism. Several statutes, including the Occupational Safety and Health Act, the Clean Air Act, and the Emergency Planning and Community Right-to-Know Act, impose safety and emergency response requirements on chemical facilities that may incidentally reduce the likelihood and mitigate the consequences of terrorist attacks. All of these requirements could potentially mitigate a terrorist attack in a number of ways. First, because some of these requirements only apply to facilities with more than threshold quantities of certain chemicals, facility owners have an incentive to reduce or eliminate these chemicals, which may make the facility a less attractive target or minimize the impact of an attack. Second, both the Clean Air Act risk management plan provisions and the hazard analyses under the Occupational Safety and Health Act require facility operators to identify the areas of their facilities that are vulnerable to a chemical release. When facilities implement measures to improve the safety of these areas, such as installing sensors and sprinklers, the impact of a terrorist-caused release may be lessened. Third, the emergency response plans increase preparedness for a chemical release--whether intentional or unintentional. While these safety requirements could mitigate the effects of a terrorist attack, they do not impose any security requirements, such as conducting vulnerability assessments and addressing identified problems. While no law explicitly requires facilities to address the threat of terrorism, EPA believes that the Clean Air Act could be interpreted to provide it with authority to address site security from terrorist attacks at chemical facilities. Section 112(r) of the Clean Air Act--added by the Clean Air Act Amendments of 1990--imposes certain requirements on chemical facilities with regard to "accidental releases." The act defines an accidental release as an unanticipated emission of a regulated substance or other extremely hazardous substance into the air. Arguably, any chemical release caused by a terrorist attack would be unanticipated and thus could be covered under the Clean Air Act. An interpretation of an unanticipated emission as including an emission due to a terrorist attack would provide EPA with authority to require security measures or vulnerability assessments with regard to terrorism. However, EPA has not attempted to use these Clean Air Act provisions. EPA is concerned that such an interpretation would pose significant litigation risk. As we reported in March 2003, there are a number of practical and legal arguments against this interpretation. We find that EPA could reasonably interpret its Clean Air Act authority to cover chemical security, but also agree with the agency that this interpretation could be open to challenges. At the time of our 2003 review, EPA supported passage of legislation to specifically address chemical security. Despite a congressional mandate to do so, the federal government has not conducted the assessments necessary to develop comprehensive information on the chemical industry's vulnerabilities to terrorist attacks. The Chemical Safety Information, Site Security and Fuels Regulatory Relief Act of 1999 required Justice to review and report on the vulnerability of chemical facilities to terrorist or criminal attack. In May 2002, nearly 2 years after it was due, Justice prepared and submitted an interim report to Congress that described observations on security at 11 chemical manufacturing facilities Justice visited to develop a methodology for assessing vulnerability, but its observations cannot be generalized to the industry as a whole. In its fiscal year 2003 budget, Justice asked for $3 million to conduct chemical plant vulnerability assessments. In the February 2003 conference report on Justice's appropriation act for fiscal year 2003, Congress directed that $3 million of the funding being transferred to DHS to be used for the chemical plant vulnerability assessments. Justice believes that chemical plant vulnerability assessments are now part of DHS' mission. Federal agencies have taken preliminary steps to assist the industry in its preparedness efforts. While Justice has not assessed the vulnerability of the chemical industry, it has provided the industry with a tool for individual facilities to use in assessing their vulnerabilities. Justice, together with the Department of Energy's Sandia National Laboratories, developed a vulnerability assessment methodology for evaluating the vulnerability to terrorist attack of facilities handling chemicals. The methodology helps facilities identify and assess threats, risks, and vulnerabilities and develop recommendations to reduce risk, where appropriate. As the lead federal agency for the operational response to terrorism, Justice's FBI is responsible for weapons of mass destruction threat assessment and communicating warnings. Finally, agents in the FBI's local field offices provide information and technical assistance to state and local jurisdictions and to some chemical facilities to bolster their preparedness to respond to terrorist incidents. EPA has also taken some actions. Officials have analyzed the agency's database of RMP facilities to identify high-risk sites for DHS and Justice's Federal Bureau of Investigation (FBI). But these facilities are only a portion of the universe of all industrial facilities that house toxic or hazardous chemicals. At the time of our review, EPA had not analyzed non-RMP facilities to determine whether any of those facilities should be considered at high risk for a terrorist attack. EPA has also issued warning alerts to the industry, hosted training classes on vulnerability assessment methodologies, and informally visited about 30 high-risk facilities to learn about and encourage security efforts. Finally, DHS' Information Analysis and Infrastructure Protection directorate collects information from the U.S. intelligence community, other federal agencies, and the private sector. Working with ACC, an industry association representing chemical manufacturers, DHS also supports the Chemical Sector Information Sharing and Analysis Center to collect and share threat information for the chemical industry. In addition, according to EPA officials, DHS has begun identifying high-risk facilities and conducting site visits at facilities. However, neither EPA nor DHS is currently monitoring the extent to which the industry has implemented security measures. The chemical manufacturing industry has undertaken a number of voluntary initiatives to address security concerns at chemical facilities, including developing security guidelines and tools to assess vulnerabilities, but major challenges remain. All of the industry groups with whom we met have taken actions such as forming security task forces, holding meetings and conferences to share security information with members, and participating in security briefings with federal agencies. In response to the terrorist attacks on September 11, 2001, ACC--whose members own or operate approximately 1,000 RMP facilities ---now requires its members, as a condition of membership, to rank facilities using a screening tool to evaluate its facilities' risk level. It also requires facilities to identify, assess, and address vulnerabilities at facilities using one of several available vulnerability assessment methodologies. In doing so, ACC member facilities generally follow a multistep process that includes evaluating on-site chemical hazards, existing safety and security features, and the attractiveness of the facility as a terrorist target; using hypothetical threat scenarios to identify how a facility is vulnerable to attack; and identifying security measures that create layers of protection around a facility's most vulnerable areas to detect, delay, or mitigate the consequences of an attack. ACC established time frames for completing the vulnerability assessment and implementing security measures, based on the facility's risk ranking. ACC reports that the 120 facilities ranked as the highest risk and 372 facilities ranked as the next highest have completed vulnerability assessments. Most of ACC's lower-risk facilities are progressing on schedule. ACC generally requires third-party verification that the facility has made the improvements identified in its vulnerability assessment. While these are commendable actions, they do not provide a high level of assurance that chemical facilities have better protected their facilities from terrorist attack. First, ACC does not require third parties to verify that the facility has conducted the vulnerability assessment appropriately or that its actions adequately address security risks. Even though compliance with ACC's safety and security requirements is a condition of membership, we do not believe that its requirements for facilities to periodically report on compliance with these requirements is an effective enforcement measurement because ACC does not verify implementation or evaluate the adequacy of facility measures. Second, its member facilities comprise only 7 percent of the facilities required to submit risk management plans to EPA, leaving about 14,000 other RMP facilities that may not participate in voluntary security efforts. These facilities include agricultural suppliers, such as fertilizer facilities; petroleum and natural gas facilities; food storage facilities; water treatment facilities; and wastewater treatment facilities, among others. Third, other facilities house chemicals that EPA has identified as hazardous, but in quantities that are below the threshold level required to be categorized as RMP facilities. Other industry groups are also developing security initiatives, but the extent of these efforts varies from issuing security guidance to requiring vulnerability assessments. For example, the American Petroleum Institute, which represents petroleum and natural gas facilities, published security guidelines developed in collaboration with the Department of Energy that are tailored to the differing security needs of industry sectors. Despite industry associations' efforts to encourage security actions at facilities, the extent of participation in voluntary initiatives is unclear. EPA officials estimate that voluntary initiatives led by industry associations only reach a portion of the 15,000 RMP facilities. Furthermore, EPA officials stated that these voluntary initiatives raise an issue of accountability, since the extent to which industry group members are implementing voluntary initiatives is unknown. The chemical industry faces a number of challenges in preparing facilities against terrorist attacks, including ensuring that facilities obtain adequate information on threats and determining the appropriate security measures given the level of risk. Trade association and industry officials identified a number of concerns about preparing against terrorist attacks. First, industry officials noted that they need better threat information from law enforcement agencies, as well as better coordination among agencies providing threat information. Second, industry officials report that chemical companies face a challenge in achieving cost-effective security solutions, noting that companies must weigh the cost of implementing countermeasures against the perceived reduction in risk. Industry groups with whom we spoke indicated that their member companies face the challenge of effectively allocating limited security resources. Third, facilities face pressure from public interest groups to implement inherently safer practices (referred to in the industry as inherently safer technologies), such as lowering toxic chemical inventories and redesigning sites to reduce risks. Justice has also recognized that reducing the quantity of hazardous material may make facilities less attractive to terrorist attack and reduce the severity of an attack. While industry recognizes the contribution that inherently safer technologies can make to reducing the risk of a terrorist attack, industry officials noted that decisions about inherently safer technologies require thorough analysis and may shift, rather than reduce, risks. Finally, industry officials stated that the industry faces a challenge in engaging all chemical facilities in voluntary security efforts. ACC has made efforts to enlist facilities beyond its membership in voluntary security initiatives. The Synthetic Organic Chemical Manufacturers' Association (SOCMA) adopted ACC's security code for its member facilities as a condition of membership. However, the extent to which all partnering companies and associations implement the requirements is unclear. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Joanna Owusu, Vince Price, Carol Herrnstadt Shulman, and Amy Webbink made key contributions to this statement. This appendix presents information on the processes covered under the Clean Air Act's requirements for risk management plan (RMP) facilities by industry sector and the residential population surrounding RMP facilities that could be threatened by a "worst-case" accidental chemical release.
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The events of September 11, 2001, triggered a national re-examination of the security of thousands of industrial facilities that use or store hazardous chemicals in quantities that could potentially put large numbers of Americans at risk of serious injury or death in the event of a terrorist-caused chemical release. GAO was asked to examine (1) available information on the threats and risks from terrorism faced by U.S. chemical facilities; (2) federal requirements for security preparedness and safety at facilities; (3) actions taken by federal agencies to assess the vulnerability of the industry; and (4) voluntary actions the chemical industry has taken to address security preparedness, and the challenges it faces in protecting its assets and operations. GAO issued a report on this work in March 2003 (GAO-03-439). Chemical facilities may be attractive targets for terrorists intent on causing economic harm and loss of life. Many facilities exist in populated areas where a chemical release could threaten thousands. The Environmental Protection Agency (EPA) reports that 123 chemical plants located throughout the nation could each potentially expose more than a million people if a chemical release occurred. To date, no one has comprehensively assessed the security of chemical facilities. No federal laws explicitly require that chemical facilities assess vulnerabilities or take security actions to safeguard their facilities from attack. However, a number of federal laws impose safety requirements on facilities that may help mitigate the effects of a terrorist-caused chemical release. Although EPA believes that the Clean Air Act could be interpreted to require security at certain chemical facilities, the agency has decided not to attempt to require these actions in light of the litigation risk and importance of an effective response to chemical security. Ultimately, no federal oversight or third-party verification ensures that voluntary industry assessments of vulnerability are adequate and that security vulnerabilities are addressed. Currently, the federal government has not comprehensively assessed the chemical industry's vulnerabilities to terrorist attacks. EPA, the Department of Homeland Security (DHS), and the Department of Justice have taken preliminary steps to assist the industry in its preparedness efforts, but no agency monitors or documents the extent to which chemical facilities have implemented security measures. Consequently, federal, state, and local entities lack comprehensive information on the vulnerabilities facing the industry. To its credit, the chemical manufacturing industry, led by its industry associations, has undertaken a number of voluntary initiatives to address security at facilities. For example, the American Chemistry Council, whose members own or operate approximately 1,000, or 7 percent, of the facilities subject to Clean Air Act risk management plan provisions, requires its members to conduct vulnerability assessments and implement security improvements. The industry faces a number of challenges in preparing facilities against attacks, including ensuring that all chemical facilities address security concerns. Despite the industry's voluntary efforts, the extent of security preparedness at U.S. chemical facilities is unknown. In October 2002 both the Secretary of Homeland Security and the Administrator of EPA stated that voluntary efforts alone are not sufficient to assure the public of the industry's preparedness. Legislation is now pending that would mandate chemical facilities to take security steps to protect against the risk of a terrorist attack.
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The PMA issued in 2001 targeted improper payments as an area with opportunities for improvement. The PMA included five governmentwide initiatives--one of which is improved financial management, which expressly addresses improper payments as a priority. This initiative called for the administration to establish a baseline on the extent of erroneous payments. Under it, agencies were to include in their 2003 budget submissions to OMB information on improper payment rates, including actual and target rates where available, for benefit and assistance programs over $2 billion. The PMA also noted that using this information, OMB will work with agencies to establish goals to reduce improper payments identified in their programs. In July 2001, as part of its efforts to advance the PMA initiative, OMB revised Circular No. A-11 to require 16 federal agencies (15 of the then 24 Chief Financial Officer's (CFO) Act agencies and the Railroad Retirement Board) to submit improper payment data, assessments, and action plans for about 50 programs to OMB with their initial budget submissions. Specifically, the circular required that agencies submit information including estimated improper payment rates, target rates for future reductions in these payments, the types and causes of these payments, and variances from targets or goals established. In addition, agencies were to provide a description and assessment of the current methods for measuring the rate of improper payments and the quality of data resulting from these methods. Agencies were to first include this improper payment information in their initial fiscal year 2003 budget submissions. A June 2002 revision to the circular removed the Agency for International Development from the list and reduced the number of programs for which improper payment information was required to 46. (App. II lists the agencies and programs.) In November 2002, the Congress passed the IPIA. The law requires agency heads to annually review all programs and activities that they administer and identify those that may be susceptible to significant improper payments. Once agencies identify their susceptible programs, the act requires them to estimate and report on the annual amount of improper payments in those programs and activities. For programs for which estimated improper payments exceed $10 million, agencies are to report annually to the Congress on the actions they are taking to reduce those payments. The report is also to include a discussion of the causes of the improper payments identified, actions taken to correct those causes, and the results of the actions taken to address those causes. The act further requires OMB to prescribe guidance for federal agencies to use in implementing the act. OMB issued this guidance in Memorandum M- 03-13 in May 2003. It requires use of a systematic method to annually review and identify those programs and activities that are susceptible to significant improper payments. OMB guidance defines significant improper payments as annual improper payments in any particular program exceeding both 2.5 percent of program payments and $10 million. The OMB guidance then requires agencies to estimate the annual amount of improper payments using statistically valid techniques for each susceptible program or activity. For those agency programs determined to be susceptible to significant improper payments and with estimated annual improper payments greater than $10 million, the IPIA and related OMB guidance require each agency to report the results of its improper payment efforts in the Management Discussion and Analysis (MD&A) section of its PAR for fiscal years ending on or after September 30, 2004. The IPIA requires the following information in their reports: a discussion of the causes of the improper payments identified, actions taken to correct those causes, and results of the actions taken to address those causes; a statement of whether the agency has the information systems and other infrastructure it needs in order to reduce improper payments to the agency's targeted levels; if the agency does not have such systems and infrastructure, a description of the resources the agency has requested in its most recent budget submission to obtain the necessary information systems and infrastructure; and a description of the steps the agency has taken and plans to take to ensure that agency managers (including the agency head) are held accountable for reducing improper payments. OMB's guidance in M-03-13 requires that three additional things be included in the report: a discussion of the amount of actual erroneous payments that the agency expects to recover and how it will go about recovering them; a description of any statutory or regulatory barriers that may limit the agency's corrective actions in reducing erroneous payments; and provided the agency has estimated a baseline erroneous payment rate for the program, a target for the program's future erroneous payment rate that is lower than the agency's most recent estimated error rate. On July 22, 2004, OMB, working with the CFO Council's Improper Payments Committee, issued a standardized reporting format, or framework, for reporting IPIA information. This framework was included as Attachments 2 and 3 to OMB Memorandum M-04-20, "Fiscal Year 2004 Performance and Accountability (PAR) and Reporting Requirements for the Financial Report of the United States Government." To satisfy the reporting requirements of the IPIA for fiscal year 2004, the framework instructed agencies to provide a brief summary of both what they have accomplished and what they plan to accomplish in the MD&A portion of the fiscal year 2004 PAR. All other required reporting details are to be included in an appendix to the PAR. The framework for the information reported in the appendix incorporates the requirements set forth in the law and further illustrates the reporting format required in OMB's implementation guidance. Under accelerated financial reporting requirements of the PMA, agency fiscal year 2004 PARs were due November 15, 2004. Accordingly, the first set of reports representing the results of agencies' assessing improper payments for all federal programs in accordance with the IPIA and OMB guidance were due in November 2004. In August 2004, OMB established Eliminate Improper Payments as a new program-specific initiative. With this new program initiative, agencies are to measure their improper payments annually, develop improvement targets and corrective actions, and track the results annually to ensure the corrective actions are effective. This initiative is also to have its own scorecard requirements and rating beginning with fiscal year 2005. With the establishment of this new program-specific initiative, agency efforts to address improper payment issues will no longer be tracked under the governmentwide initiative, Improved Financial Performance. In our December 2004 report on the U.S. government's consolidated financial statements for the fiscal years ended September 30, 2004 and 2003, which includes our associated opinion on internal control, we reported that while most agencies acknowledged the IPIA reporting requirements in their PARs, they did not always indicate whether they had completed agencywide assessments, and they did not estimate improper payments for all of their susceptible programs. In response to the new requirements of the IPIA, agencies overall made progress in identifying programs susceptible to the risk of improper payments. At the same time, our reviews of the fiscal year 2004 PARs for 29 of 35 federal agencies that are significant to the U.S. government's consolidated financial statements suggest that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, certain agencies have not yet performed risk assessments of all their programs. Appendix III lists the agencies included in this review. In its guidance on implementing the IPIA, OMB required agencies to institute a systematic method of inventorying all programs and activities and identifying those the agency believes are susceptible to the risk of significant error. OMB further instructed agencies to describe, in their PARs, the risk assessments performed. We determined that 23 of the 29 agencies reviewed reported that they had completed risk assessments for all programs and activities. Of the 15 agencies with prior reporting requirements under OMB Circular No. A-11, 12 reported that they had performed comprehensive inventories and assessed the risk of improper payments for all their programs and activities. Three of the 15 agencies stated that their risk assessments were not complete for all programs and activities. Of those 14 agencies without prior reporting requirements, 11 agencies reported that they had completed risk assessments for all programs and activities, whereas 3 agencies reported that they had not. Recognizing weaknesses in agency risk assessments, three agency auditors cited noncompliance with the IPIA in their annual auditor's reports included in the agency PARs. For example, two agency auditors each reported that their agency's risk assessment did not consider all payment types or programs. Another auditor reported the agency did not institute a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments. Once agencies have identified programs that may be susceptible to significant improper payments, developing statistically valid estimates of the amounts of improper payments for their programs and activities has been a further challenge. Appendix IV lists the 29 agencies and 70 programs for which we reviewed fiscal year 2004 PARs for improper payment reporting. In the 29 agency PARs included in our review, 17 agencies reported over $45 billion of improper payments in 41 programs. This represented almost a $10 billion, or 27 percent, increase in the dollar amount of improper payments reported by agencies in fiscal year 2003. However, we determined that this increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in the Department of Health and Human Services' Medicare Program. The 24 agency programs with no prior reporting requirements reported improper payment estimates that did not significantly increase the governmentwide total. As discussed earlier, OMB Circular No. A-11 has required certain agencies to report selected improper payment information on 46 programs to OMB beginning 3 years ago with their fiscal year 2003 budget submissions. We found that for 34 of the programs, agencies reported estimates in their fiscal year 2004 PARs or stated that improper payment amounts were insignificant. As shown in table 1, the governmentwide estimate did not include the remaining 12 programs with total outlays of $248.7 billion in 2004. This included some of the largest risk-susceptible federal programs, such as the Department of Health and Human Services' Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education's Title I Program, with outlays of over $10 billion annually. The table further shows that of these 12 programs, 8 reported that they would be able to estimate and report on improper payments sometime within the next 4 years, but could not do so now. The other 4 programs in 4 agencies did not estimate improper payment amounts for their programs and were silent as to whether they would report estimates in future reports. As a result, improper payments for several large risk-susceptible programs will not become transparent for several or an undetermined number of years, although these agencies were required to report such information since their fiscal year 2003 budget submissions. Moreover, by only looking at those agencies significant to the U.S. consolidated financial statements, this estimate does not include all of the agencies subject to the IPIA. OMB reported that in certain risk-susceptible programs, agencies were unable to determine the rate or amount of improper payments due to measurement challenges as well as time and resource constraints, which OMB expects to be resolved in the future. Although OMB reported that the $45 billion in improper payments will be used as a baseline on which short- and long-term program improvements and strategies will be based, it recognizes that fiscal year 2005 reductions in improper payments will be affected by outlay changes as well as the identification of new improper payments as additional programs are measured and methodologies for currently measured programs are enhanced. Measuring improper payments and designing and implementing actions to reduce or eliminate them are not simple tasks. The ultimate success of the governmentwide effort to reduce improper payments depends, in part, on each federal agency's continuing diligence and commitment to comply fully with the requirements of the act and the related OMB guidance. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used efficiently and for their intended purposes. Without such efforts, the likelihood of designing and implementing actions governmentwide to reduce or eliminate improper payments is doubtful. Fulfilling the requirements of the IPIA will require sustained attention to implementation and oversight to monitor whether desired results are being achieved. We are making three recommendations to help ensure the successful implementation of the Improper Payments Information Act of 2002 and its goal of enhancing the accuracy and integrity of federal payments. Specifically, we recommend that the Director of OMB: Require those agencies that did not address the IPIA requirements or did not perform risk assessments of all of their programs and activities to establish time frames and identify resources needed to perform risk assessments and satisfy reporting requirements. Develop a plan to address the resource needs of those agencies that did not perform risk assessments or satisfy reporting requirements. Consider as part of the budget process, for any agency that OMB deems to have not taken the IPIA requirements seriously or that has lagged behind, the feasibility of disincentives for poor performance, such as reductions in funds for the program involved or adding incentives such as gain sharing for making substantive progress. In its written comments on a draft of this report, which are enclosed in appendix V, OMB emphasized that in fiscal year 2004, federal agencies established a strong foundation for measuring improper payments, identifying and implementing the necessary corrective actions, and tracking success over time. OMB's response further discussed key findings included in its report, Improving the Accuracy and Integrity of Federal Payments, which was issued on January 25, 2005. With regard to our first recommendation that agencies establish time frames and identify resources needed to perform risk assessments and satisfy reporting requirements, OMB stated that pursuant to the PMA initiative called Eliminate Improper Payments, federal agencies are already required to submit relevant time frames and account for the resources necessary to complete planned actions. Further, OMB stated that the remaining risk assessments to be completed correlate to programs with relatively small outlays. While we view the PMA initiative as a positive action, it applies to 15 agencies, 3 of which we found had not yet assessed all their programs. Three other agencies--the Farm Credit System Insurance Corporation, the National Credit Union Administration, and the Pension Benefit Guaranty Corporation--which are not included in the PMA initiative and therefore are not required to establish time frames and account for needed resources, have outlays that are significant to the U.S. government's consolidated financial statements and were silent with respect to IPIA requirements in their fiscal year 2004 PARs. In addition to these three agencies, the PMA initiative would also not cover those agencies that while not significant to the U.S. government's consolidated financial statements, are subject to the IPIA. Our recommendation is directed to the broader range of agencies. Regarding our second recommendation that OMB develop a plan to address resource needs of agencies that did not perform risk assessments or satisfy reporting requirements, OMB stated that agency plans for addressing IPIA reporting requirements are closely considered in identifying agency resource needs and preparing the President's Budget. While we agree with OMB on that point, as discussed in our response to OMB's comments on the first recommendation, certain agencies are not required to submit plans that include time frames and resource needs to OMB. As a result, resource needs may not be addressed in the budget process. With respect to our third recommendation that it consider using incentives and disincentives, as applicable, for quick and timely action for meeting the IPIA requirements, OMB offered the view that the requirements of the PMA and inspector general reviews of agency IPIA activities provide sufficient incentive for ensuring that agencies meet the necessary requirements. We agree that these requirements will help ensure that agencies take the IPIA seriously. Our recommendation is directed at any agency that does not do so or agencies that may benefit from incentives such as gain sharing to fund efforts to reduce improper payments. Again, as discussed above, while the major 15 agencies are covered by the PMA, 3 of these had not yet assessed all their programs and a number of agencies not covered under the PMA initiative, but significant to the U.S. government's consolidated financial statements, were silent with respect to the IPIA requirements. OMB's written comments and our evaluation of one comment not addressed above are presented in appendix V. 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 date. At that time, we will send copies of the report to interested congressional committees. We will also be sending copies to the Director of the Office of Management and Budget and the heads of the agencies included in our scope of review. 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. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-6906 or [email protected]. Additional contacts and major contributors to this report are provided in appendix VI. This report is based on our review of agency fiscal year 2004 Performance and Accountability Reports (PAR). We reviewed the fiscal year 2004 PARs of 29 of 35 agencies that are significant to the U.S. government's consolidated financial statements to obtain information on the status of their implementation of the Improper Payments Information Act of 2002 (IPIA) and the related Office of Management and Budget (OMB) implementation guidance. We paid particular attention to the 15 agencies with prior improper payment reporting requirements for 46 of their programs under OMB Circular No. A-11, Section 57. A list of the agencies with prior reporting requirements is presented in appendix II. In addition, we reviewed relevant agency documents, including strategic plans, agency performance plans and reports, agency audit reports, and reports from agency program partners. We completed reviews of fiscal year 2004 PARs for 29 agencies identifying 70 key programs. Appendix III lists the agencies and programs included in this review. To supplement our review and analysis, we contacted agencies to clarify responses, requested additional information, and updated the initial responses. We did not determine the validity of representations made or the documentation provided. We performed our work in Washington, D.C., from November 2004 through February 2005 in accordance with U.S. generally accepted government auditing standards. 2003 (in millions) X 2003 (in millions) X 2003 (in millions) Will estimate within the next 6 years 28. State Children's 29. Child Care and 30. All programs and 31. Low Income Public 32. Section 8 Tenant 33. Section 8 Project Development Block Grant (Entitlement Grants, States/Small Cities) X 2003 (in millions) Will estimate within the next 6 years 37. All programs and 39. Federal Employees' 41. All programs and 42. All programs and Education Grants and Cooperative Agreements 44. All programs and (Civil Service Retirement System and Federal Employees Retirement System) X 2003 (in millions) Will estimate within the next 6 years 48. All programs and 51. 7(a) Business Loan Security Income Program 2003 (in millions) Narcotic and Law Enforcement Affairs- Narcotics Program Information Program-U.S. Speaker and Specialist Program 65. Earned Income Tax 10 Agency did not address improper payments or the IPIA requirements for this program in its fiscal year 2004 PAR. The following is GAO's comment on OMB's letter dated March 25, 2005. 1. In our review of these agencies' fiscal year 2004 PARs, we determined that assessments were not completed for all programs and activities. In addition to those named above, Lisa Crye, Bonnie McEwan, and Donell Ries made important contributions to this report. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select "Subscribe to Updates."
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Fiscal year 2004 marked the first year that federal agencies governmentwide were required to report improper payment information under the Improper Payments Information Act of 2002 (IPIA). The increasing scope of reporting over the past several years has demonstrated that improper payments are a significant and widespread problem in federal agencies, and in the past a limited number of agencies reported in their Performance and Accountability Reports (PAR) annual payment accuracy rates and estimated improper payment amounts. Because of your continued interest in addressing the governmentwide improper payments issue, you asked GAO to report on (1) the extent to which agencies have performed the required assessments to identify programs and activities that are susceptible to significant improper payments and (2) the annual amount estimated for improper payments by the agencies. The federal government made progress in identifying programs susceptible to the risk of improper payments in response to the new IPIA requirements. The fiscal year 2004 PARs for 29 of 35 federal agencies that are significant to the U.S. government's consolidated financial statements show that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, 6 agencies reported that they did not perform risk assessments of all their programs. The magnitude of the governmentwide improper payment problem is still unknown, because agencies have not yet prepared estimates of improper payments for all of their programs. In the 29 agency PARs included in GAO's fiscal year 2004 review, 17 agencies reported over $45 billion of improper payments in 41 programs governmentwide. This represented almost a $10 billion, or 27 percent, increase in the amount of improper payments reported by agencies in fiscal year 2003. This increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in one major program. Looking forward, future estimates are likely to trend higher because the governmentwide estimate did not include 12 programs with outlays of $248.7 billion in fiscal year 2004 that were required to annually report improper payments under OMB Circular No. A-11 during the past 3 years. This included some of the largest risksusceptible federal programs, such as the Department of Health and Human Services' Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education's Title I Program, with outlays of over $10 billion annually.
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Although the current focus of concern is largely on the potential for several years of declining physician fees, the historic and continuing challenge for Medicare is 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 in the 1980s, 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 required the establishment of both a national fee schedule and a system of spending targets, which together first affected physician fees in 1992. From 1992 through 1997, annual spending growth for physician services was far lower than in 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 more than 5 percent from 2000 through 2005. Although this average annual rate of growth remains 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 spending increases caused by excess growth in volume and intensity. Services covered by the SGR system's spending targets include physician services and other items and services, such as clinical laboratory services, specified by the Secretary of HHS, that are commonly performed or furnished by physicians or in a physician's office. The SGR system's spending targets do not cap expenditures for SGR-covered 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 spending for SGR-covered services and thus serves as an automatic budgetary control device. In addition, reduced fee updates signal physicians collectively and Congress that spending because of 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 for spending on SGR-covered 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 and other SGR-covered services; (2) the average number of Medicare beneficiaries in the traditional fee-for- service program; (3) national economic output, as measured by real (inflation-adjusted) GDP per capita; and (4) expected expenditures for physician services and other SGR-covered services resulting from changes in laws or regulations. SGR spending targets are cumulative. That is, the sum of all spending for SGR-covered services 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. Under the SGR system, the volume and intensity of physician services and other SGR-covered services--that is, spending per beneficiary adjusted for the estimated underlying cost of providing those services--is allowed to grow at the same rate that the national economy grows over time on a per capita basis. When the SGR system was established, economic growth was seen as a benchmark that would allow for affordable increases in volume and intensity. Currently, the SGR system's benchmark for volume and intensity growth is projected to be about 2.2 percent annually. Consequently, volume and intensity growth that exceeds 2.2 percent causes Medicare SGR-covered spending to exceed the SGR system's target, while slower volume and intensity growth leads to spending that falls below the SGR target. If cumulative spending on SGR-covered services is in line with the SGR system'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 annual physician fee update will be less than the change in MEI or may even be negative. Conversely, if cumulative spending falls short of the target, physicians benefit because the update will exceed the change in MEI. The SGR system places limits 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. 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 by reducing fees to lower future spending. From 2000 through 2005, based on an analysis of physician services claims from April of each year, average annual growth in the volume and intensity of Medicare physician services exceeded 5 percent--more than double the approximately 2.2 percent growth rate permitted under the SGR system. To offset the resulting excess spending, the SGR system calls for reductions in physician fees. 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 other items and services commonly performed by physicians or furnished in a physician's office, expenditures for both types of services were included when spending targets were introduced. To the extent that spending for these other 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 SGR-covered services which are not paid for under the fee schedule. Legislated minimum updates for 2004 through 2006 have also contributed to future physician fee cuts. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and the Deficit Reduction Act of 2005 (DRA) averted fee reductions projected for 2004 through 2006 by specifying minimum updates to physician fees for those years. The MMA-specified minimum annual increase of 1.5 percent replaced SGR system fee reductions of 4.5 percent in 2004 and 3.3 percent in 2005. DRA had the effect of replacing a fee reduction of 4.4 percent in 2006 with a 0.2 percent fee increase. These legislated minimum fee updates have resulted in additional aggregate spending. Because neither MMA nor DRA made corresponding revisions to the SGR system's spending targets, the SGR system must offset the additional spending by reducing fees beginning in 2007. From 2000 through 2005, Medicare spending on physician services grew far faster than the growth in physician fees and the number of eligible beneficiaries. Our analysis of Medicare claims data for services provided during the first 28 days of April of each year indicates that from April 2000 to April 2005 a growing percentage of beneficiaries obtained services from physicians. Among those beneficiaries who obtained such services, there were increases in the average number of services provided. Overall, the volume of services provided increased as well as the intensity (and thus costliness) of the services provided. Our analysis also found that the number of physicians billing Medicare and allowed charges per physician increased over the period as did the proportion of claims for which physicians accepted Medicare payment as payment in full. From 2000 through 2005, while Medicare physician fees rose by 4.5 percent, program spending on physician services grew by nearly 60 percent. On a per beneficiary basis, spending for physician services grew by approximately 45 percent. Annual per beneficiary spending increases ranged from a low of 2 percent in 2002 to a high of about 11 percent in both 2001 and 2004. (See fig. 2.) It is important to note that even in 2002, a year in which fees were reduced by nearly 5 percent, Medicare spending per beneficiary for physician services went up. In general, the proportion of beneficiaries who received services from a physician rose during the period covered in our review. (See fig. 3.) Specifically, from 2000 through 2005, the proportion of beneficiaries receiving services during the month of April rose from about 41 percent to about 45 percent. Although this measure declined slightly in April 2003, the proportion of beneficiaries receiving services remained a percentage point higher than in April 2000 and the upward trend resumed in 2004. Nationwide, this measure increased in both urban and rural areas. The proportion of beneficiaries receiving services rose from about 42 percent in April 2000 to about 46 percent in April 2005 in urban areas and from about 39 percent in April 2000 to about 42 percent in April 2005 in rural areas. From April 2000 to April 2005, an increasing number of services were provided to beneficiaries who were treated by a physician. Specifically, in that period, the average number of services provided per 1,000 beneficiaries who were treated rose by 14 percent--from about 3,400 to about 3,900. (See fig. 4.) The number of services provided per 1,000 beneficiaries was higher in urban areas (3,516 services per 1,000 beneficiaries who received services in 2000) relative to rural areas (3,196 services per 1,000 beneficiaries who received services in 2000). However, in percentage terms, the urban and rural areas experienced similar increases in the number of services per treated beneficiary--15 percent in urban areas, compared with 12 percent in rural areas. Because there were increases in both the proportion of beneficiaries obtaining services from physicians and the number of services provided to each beneficiary who obtained care, the overall volume of services increased from 2000 through 2005. That is, the number of physician services per beneficiary, including beneficiaries who obtained care and those that did not, increased. Volume generally increased across broad categories of services--evaluation and management, procedures, imaging services, and tests. On average, volume for all physician services increased at an annual rate of 4.4 percent. (See table 1.) The volume of evaluation and management services, a category that includes office visits, increased at an average annual rate of 2.4 percent. There was a small average annual decline in the volume of major procedures (less than 1 percent), although minor procedures grew at an average annual rate of 6.3 percent. Volume grew most rapidly (9.1 percent average annual rate) for tests. From April 2000 to April 2005, the services that physicians provided to beneficiaries also increased in intensity. The fee schedule expresses this intensity through relative value units (RVU), which account for the amount of physician time, expertise, and resources required to deliver a service compared to other services. Because Medicare's fee for a service is based on the number of RVUs associated with it, more intense services are also more costly. Overall, physician services per beneficiary rose in intensity, as measured in RVUs, at an average annual rate of about 5 percent. Intensity increases occurred among all categories of services, including major procedures. Intensity grew most rapidly among imaging services (10.5 percent average annual rate) and tests (13.9 percent average annual rate). Thus, taken as a whole, beneficiaries' increased utilization of physician services has manifested itself in both increased volume and increased intensity of services for the 6 years reviewed. An increasing number of physicians billed Medicare from April 2000 to April 2005. (See fig. 5.) In April 2000, the number of physicians billing Medicare was about 419,000, and in April 2005, that number had increased to a little more than 467,000. While Medicare experienced an 11 percent increase in the number of physicians billing the program, the number of beneficiaries in Medicare--FFS and managed care combined--rose by 8 percent. On average, total allowed charges per physician billing Medicare increased by about 41 percent from April 2000 to April 2005. A portion of this increase can be attributed to the changes in Medicare's fees, which increased by about 4.5 percent over the period. However, most of the increase was the result of physicians providing more services and more intense, and thus more costly, services. From April 2000 to April 2005, the vast majority of Medicare physician services were performed by participating physicians--that is, physicians who formally agreed to submit all claims on assignment. The percentage of services submitted by participating physicians increased from 95 percent to over 96 percent. (See fig. 6.) By submitting all Medicare claims on assignment, these physicians agreed to accept Medicare's fee as payment in full for all of the services they provided. This includes the coinsurance amount (usually 20 percent) paid by the beneficiary. Nonparticipating physicians could choose for each service they provided to submit an assigned claim, thereby accepting Medicare's fee as payment in full, or an unassigned claim. Nonparticipating physicians who submitted an unassigned claim could charge the beneficiary an additional amount, within set limits, for that service--a practice referred to as balance billing. 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 2005, we testified that potential alternatives cluster around two basic approaches. One approach would end the use of spending targets as a method for updating physician fees and encouraging fiscal discipline. The other would retain spending targets but modify the current SGR system to address its perceived shortcomings. The Medicare Payment Advisory Commission (MedPAC) has recommended replacing the SGR system with a system that bases the annual fee updates on changes in the cost of efficiently providing care as measured by MEI.24, 25 Under this approach, efforts to control aggregate spending would be separate from the mechanism used to update fees. The advantage of eliminating spending targets would be greater fee update stability. Although basing physician fee updates on changes in MEI would limit the annual increases in the price that Medicare pays for each service, this approach does not contain an explicit mechanism for constraining aggregate spending resulting from increases in the volume and intensity of services physicians provide. If no other actions were taken, Medicare spending for physician services would rise relative to projected spending under the SGR system. 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 address other factors. 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 are considered for other provider payment updates. An alternative approach for modifying 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. As presented in our 2004 report, the SGR system could be modified in a number of ways. For example, Congress could raise the allowance for increased spending due to volume and intensity growth by some factor above the percentage change in real GDP per capita. The Secretary of HHS could, under current authority, consider excluding Part B drugs from the definition of services furnished "incident to" physician services for the purposes of the SGR system. DRA mandated that MedPAC study a variety of SGR reforms, such as setting regional, instead of national, spending targets. The effects on overall Medicare spending for physician services, relative to projected spending under the current SGR system, would depend on whether the reforms simply allowed for higher fees or provided meaningful incentives for physicians to moderate volume and intensity growth. Mr. Chairman, this concludes my prepared statement. 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. I will be happy to answer questions you or the other Members of the Subcommittee may have. For further information regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101 or [email protected]. James Cosgrove, Assistant Director; Todd Anderson; Jessica Farb; and Eric Wedum contributed to this statement. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In 2002, the system Medicare uses to determine annual changes to physician fees--the sustainable growth rate (SGR) system--reduced fees by almost 5 percent. Subsequent administrative and legislative actions averted fee declines in 2003 through 2006. Absent additional actions, fee reductions are projected for 2007 through 2015. Consequently, the appropriateness of the SGR system has been questioned. At the same time, there are concerns about the impact of increased physician services spending on the long-term fiscal sustainability of Medicare. GAO was asked to discuss the SGR system and Medicare physician payments. This statement addresses (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, (3) trends in the use of services provided by physicians and spending for those services from 2000 through 2005, and (4) options for revising or replacing the SGR system. This statement is based on two GAO reports: Medicare Physician Services: Use of Services Increasing Nationwide and Relatively Few Beneficiaries Report Major Access Problems ( GAO-06-704 , July 21, 2006), and Medicare Physician Payments: Concerns about Spending Target System Prompt Interest in Considering Reforms ( GAO-05-85 , Oct. 8, 2004). 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 the estimated increase in the average cost of providing physician services. 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. Recent growth in spending due to volume and intensity increases has been more than double that allowed under the SGR system, resulting in excess spending that must be recouped through reduced fee updates. Legislative actions that specified minimum updates for 2004 through 2006 have also contributed to future physician fee cuts. These actions, which averted fee reductions, did not revise the spending targets. Therefore, the SGR system must offset the additional spending resulting from the excess volume and intensity and the minimum fee updates by reducing fees beginning in 2007. From 2000 through 2005, Medicare spending for services provided by physicians grew rapidly. Our analysis of Medicare claims submitted during the first 28 days of April in these years shows that an increasing proportion of beneficiaries obtained services and the volume and intensity of the services provided increased. While Medicare physician fees rose by 4.5 percent over the period, program spending on physician services per beneficiary grew by approximately 45 percent. The number of physicians billing Medicare and total allowed charges per billing physician also increased, as did the proportion of claims for which physicians accepted Medicare payment as payment in full. Potential alternatives to the SGR system cluster around two basic approaches: (1) ending the use of spending targets as a method for updating physician fees and encouraging fiscal discipline and (2) retaining spending targets but modifying the current SGR system to address perceived shortcomings. Either approach could be complemented by focused efforts to moderate volume and intensity growth directly. 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.
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In 1935, title II of the Social Security Act created the Social Security retirement program to pay benefits to retired workers. Subsequent federal laws added benefits for workers' dependents and survivors and, later, for disabled workers. Workers now earn entitlement to benefits on the basis of the number of Social Security credits they have earned while working in jobs covered by Social Security. Because the act required SSA to maintain records of wage amounts employers report having paid to individuals, in 1936, SSA created SSNs as a means of maintaining individual earnings records and issued cards to workers as records of their SSNs. The act now requires individuals to provide SSA their number when they apply for Social Security benefits. SSA uses the SSN to identify applicants' personal earnings records, which contain information the agency uses to compute benefits payable to beneficiaries. Over the years, the SSN has come to be viewed by many as a national identifier because almost every American has an SSN, and each is unique.SSA estimates that about 277 million individuals currently have SSNs. Furthermore, the boom in computer technology over the past several decades has prompted private businesses and government agencies to rely on SSNs as a way to accumulate and identify information in their databases. Simply stated, the uniqueness and broad applicability of the SSN have made it the identifier of choice for government agencies and private businesses, both for compliance with federal requirements and for the agencies' and businesses' own purposes. No federal law regulates overall use of SSNs. However, a number of federal laws and regulations enacted since the 1960s require certain programs and federally funded activities to use the SSN for administrative purposes. These laws and regulations generally limit the use of the SSN to the required purpose by explicitly prohibiting other uses or disclosures. Federal law neither requires nor prohibits many of the public and private sectors' other uses of SSNs. A number of federal laws and regulations require the use of the SSN as an individual's identifier to facilitate automated exchanges that help administrators enforce compliance with federal laws, determine eligibility for benefits, or both. The Internal Revenue Code and regulations, which govern the administration of the federal personal income tax program, require that individuals' SSNs serve as taxpayer identification numbers.This means that employers and others making payments to individuals must include the individuals' SSNs in reporting to IRS many of these payments. Reportable payments include interest payments to customers, wages paid to employees, dividends provided to stockholders, and retirement benefits paid to individuals. Other reportable transactions include purchases involving more than $10,000 in cash, such as the purchase of an automobile or a boat, or mortgage interest payments totaling more than $600. In addition, the Code and regulations require individuals filing personal income tax returns to include their SSNs as their taxpayer identification number, the SSNs of people whom they claim as dependents, and the SSNs of spouses to whom they paid alimony. Using the SSNs, IRS matches the information supplied by entities reporting payments or other transactions with returns filed by taxpayers to monitor individuals' compliance with federal income tax laws. A number of federal laws require program administrators to use SSNs in determining applicants' eligibility for federally funded benefits. The Social Security Act requires individuals to provide their SSNs in order to receive benefits under the SSI, Food Stamp, Temporary Assistance for Needy Families (TANF), and Medicaid programs. These programs provide benefits to people with limited income and resources as well as medical care for the needy. Applicants give program administrators information on their income and resources, and program administrators use applicants' SSNs to match records with those of other organizations to verify the information. For example, SSA uses SSNs to determine whether applicants for SSI benefits have accurately reported their income by matching records with the Department of Veterans Affairs, the Office of Personnel Management, and the Railroad Retirement Board to identify any retirement or disability payments to these applicants. In addition to using SSNs to match records with other federal benefit-paying agencies, administrators of these programs said they also match records with state unemployment agencies, IRS, and employers to verify earned and unearned income, such as unemployment benefits, wages, retirement benefits, and interest paid to applicants. In fact, we have recommended in numerous reports that administrators of programs paying federally funded benefits match data in their payment files with SSA records to identify deceased beneficiaries, and that SSA match its records with other state and federal program records to reduce SSI payments to individuals whom the agency finds residing in nursing homes and prisons as well as those receiving benefits under other programs. Using SSNs to identify such recipients enhances program payment controls and reduces fraud and abuse. Another federal law that requires the use of SSNs to identify individuals is the Commercial Motor Vehicle Safety Act of 1986. This law established the Commercial Driver's License Information System (CDLIS), a nationwide database. States are required to use individuals' SSNs to search this database for other state-issued licenses commercial drivers may hold. This checking is necessary because commercial drivers are limited to owning one state-issued driver's license. If a state grants a license, the state is required to record the license information, including the driver's SSN, in the CDLIS. States may also use SSNs to search another database, the National Driver's Registry, to determine whether an applicant's license has been cancelled, suspended, or revoked by another state. In these situations, the states use SSNs to limit the possibility of inappropriately licensing applicants. Federal law also requires the use of SSNs in state child support programs to help states locate noncustodial parents, establish and enforce support orders, and recoup state welfare payments from parents. The Personal Responsibility and Work Opportunity Act of 1996 expanded the Federal Parent Locator Service--an automated database searchable by SSN--to include information helpful for tracking delinquent parents across state lines. The law requires states to maintain records that include (1) SSNs for individuals who owe or are owed support for cases in which the state has ordered child support payments to be made, the state is providing support, or both, and (2) employers' reports of new hires identified by SSN. States must transmit this information to the Federal Parent Locator Service. The law also requires states to record SSNs on many other state documents, such as professional, occupational, and marriage licenses; divorce decrees; paternity determinations; and death certificates, and to make SSNs associated with these documents available for state child support agencies to use in locating and obtaining child support payments from noncustodial parents. Federal laws that require the use of an SSN generally limit its use to the statutory purposes described in each of the laws. For example, the Internal Revenue Code, which requires the use of SSNs for certain purposes, declares tax return information, including SSNs, to be confidential and prescribes both civil and criminal penalties for unauthorized disclosure. Similarly, the Social Security Act, which requires the use of SSNs for a number of different purposes, declares that SSNs obtained or maintained by authorized individuals on or after October 1, 1990, are confidential and prohibits their disclosure. The Personal Responsibility and Work Opportunity Act of 1996 explicitly restricts the use of SSNs to purposes set out in the act, such as locating absentee parents to enforce child support payments. In addition to the restrictions contained in laws that require the use of SSNs, the Privacy Act of 1974 also restricts federal agencies in collecting and disclosing personal information, which includes SSNs. The act requires federal agencies that collect information from individuals to inform the individuals of the agencies' authority for requesting the information, whether providing the information is optional or mandatory, and how the agencies plan to use the information. The act, which also prohibits federal agencies from disclosing information without the individuals' consent, does not apply to other levels of government and private businesses. Except as discussed above, federal law does not regulate the use of SSNs. Thus, legitimate businesses and nonfederal agencies have devised uses of SSNs not covered by federal law, as discussed in the following section. The advent of computerized record keeping has led private businesses and government agencies to routinely use SSNs for activities other than those required by federal laws and regulations. Businesses and government agencies may ask for SSNs when individuals apply for benefits or services, such as worker's compensation, driver's licenses, credit, checking accounts, insurance, apartment rentals, and public utilities. Law enforcement agencies may also use SSNs for investigative purposes. Because there are so many users of the SSN, we focused on describing SSN use by organizations that routinely use these numbers for activities that affect a large number of people: organizations that sell personal information, provide financial services, and offer health care services and state government agencies that are responsible for collecting personal income tax and licensing drivers. In general, organizations may record SSNs in their databases for two purposes: to locate records for routine internal activities, such as maintaining and updating account information, and, more frequently, to facilitate information exchanges with other organizations. Continuing advances in computer technology and the ready availability of computerized data have spurred the growth of a new business activity: amassing vast amounts of personal information, including SSNs, about members of the public for resale. Businesses involved in this activity act as information brokers. One information broker official told us his organization has more than 12,000 discrete databases. The increasing proliferation of information brokers has aroused concerns about individuals' personal identifying information, including SSNs, being made easily available to others. Federal law does not prohibit such disclosure of SSNs. Brokers buy information from public and private sources in various markets throughout the nation. The information may include public records of bankruptcy, tax liens, civil judgments, criminal histories, deaths, real estate ownership, driving histories, voter registration, and professional licenses. This information may also include privately owned information such as telephone directories and copyrighted publications, which are often made public, and certain information from consumer credit reports. Generally, each record provides details about the specific event for which it was created as well as some personal identifying data--for example, an individual's name; date of birth; current and prior addresses; telephone number; and, sometimes, SSN. An information broker official told us that not every record his organization buys includes an SSN and that public records are more likely to contain SSNs than those from nonpublic sources. Brokers may provide their services (that is, information products) to a variety of customers either over private networks or over the Internet. Brokers that provide information over private networks generally limit their services to businesses that establish accounts with them. Brokers providing services over the Internet generally offer their services to the public at large. Law firms, businesses, law enforcement agencies, research organizations, and individuals are among those who use brokers' services. For example, lawyers, debt collectors, and private investigators may request information on an individual's bank accounts and real estate holdings for use in civil or divorce proceedings; automobile insurers may want information on whether insurance applicants have been involved in accidents or have been issued traffic citations; employers may want background checks on new hires; pension plan administrators may want information to locate pension beneficiaries; and individuals may ask for information to help locate birth parents. When requesting information, customers may ask for nationwide database searches or searches of only specific geographical areas. Information brokers' databases can be searched by identifiers that may include SSNs; brokers may also include SSNs along with information they provide customers. When possible, information brokers retrieve data by SSN because it is more likely to produce records unique to the individual than other identifiers are. Three national credit bureaus serve as clearinghouses, receiving charge and payment transaction information from businesses that grant consumer credit and providing businesses consumer credit reports. Officials representing a bank and a credit card company--businesses that provide credit--told us that because it serves their interests for credit bureaus to have the most to up-to-date consumer payment histories, businesses in their industries voluntarily report customers' charge and payment transactions, accompanied by SSNs, to credit bureaus. SSNs are one of the principal identifiers credit bureaus use to update individuals' credit records with the monthly reports of credit and payment activity creditors send them. In addition, credit bureaus use SSNs provided by customers to retrieve credit reports on individuals. Credit bureau officials told us that customers are not required to provide SSNs when requesting reports, but requests without SSNs need to include enough information to sufficiently identify the individual. An official for a credit bureau trade association estimated that each national credit bureau has more than 180 million credit records. A publication by this official's trade association estimated that, combined, all three bureaus sell 600 million credit reports annually. Businesses such as insurance companies, collection agencies, and credit granters use SSNs to request information about customers from credit bureaus. To determine a customer's likelihood of repaying a loan, businesses--banks and credit card companies in particular--want information on customers' histories of repaying debts and whether customers have filed for bankruptcy or have monetary judgments against them, such as tax liens. Officials representing credit granters said most banks and credit card companies ask applicants to provide their SSNs, and these credit granters may choose to deny services to individuals who refuse. These officials said their organizations generally do not use SSNs as internal identifiers but instead assign an account number as a customer's primary identifier. Health care services are generally delivered through a coordinated system that includes health care providers and insurers. Officials representing hospitals, a health maintenance organization (HMO), and a health insurance trade association told us that their organizations always ask for an SSN, but they do not deny services if a patient refuses to provide the number. A hospital and an HMO official said that their organizations assign patients other identifying numbers, which they use internally as primary identifiers for patient medical records, and that they use SSNs as a backup to identify records when a patient either forgets or does not know the patient number he or she was assigned. The HMO official said SSNs are also used to integrate patients' records when providers merge, a trend that is growing. In data exchanges, hospital and HMO officials said they use SSNs to track patients' medical care across multiple providers, which helps establish the patients' medical history and avoid duplicate tests. A trade association official told us that some health insurers use the SSN or a variation of the number as a primary identifier, which becomes the customer's insurance number. We were told that the BlueCross BlueShield health insurance plans and the Medicare program frequently use this method. In addition, the trade association official said insurers and providers frequently match records among themselves, using SSNs to determine whether individuals have other insurance to coordinate payment of insurance benefits. Officials in the health care industry expect their use of SSNs to increase. For example, the hospital official said that to ensure it has a valid address to bill patients, her hospital plans to use SSNs during the admission process to obtain on-line verification of patients' addresses from credit bureaus. The states use SSNs to support state government operations and offer services to residents. The Social Security Act authorizes states to use SSNs to administer any tax, general public assistance, driver's license, or motor vehicle registration law in order to identify individuals affected by such laws. Officials of the Maryland and Virginia personal income tax and Ohio and Georgia driver licensing programs told us that they use SSNs in both administering these programs and enforcing compliance with regulations governing the programs. State income tax administrators routinely use the SSN as a primary identifier in their programs. An official from an organization representing state tax administrators said that all states levying personal income taxes use SSNs to administer their programs. Tax officials said that states use SSNs to make state tax systems compatible with the federal system and to reduce taxpayer reporting burden. Maryland and Virginia tax administrators told us their state tax returns require individuals to provide their SSNs, and individuals who omit SSNs risk being considered nonfilers if tax administrators cannot otherwise identify the submitter of the return. Tax administrators also use SSNs internally for auditing purposes. For example, tax administration officials said they use SSNs to cross-reference owners' or officers' business income tax returns with their personal income tax returns so that an audit of one triggers an audit of the other. Also, in the course of monitoring compliance with state income tax laws, states use SSNs to exchange data with other organizations. For example, in order to monitor taxpayer income reporting, states rely on SSNs for data matches with IRS and state tax agencies to identify residents who received income from out-of-state employers and businesses and to verify credits for income taxes that filers report paying to other states. Also, when tax administrators assess liens against taxpayers, states may use SSNs to request information from information brokers and credit bureaus to identify taxpayer assets, such as bank accounts and real estate. In addition, federal and state agencies, such as IRS and state child support agencies, use SSNs when asking state tax administrators to offset state refunds otherwise due to taxpayers. State driver licensing agencies are more likely to use SSNs to exchange data with other organizations than to support internal activities. A few states print SSNs on licenses and use the SSNs either as license numbers or along with the state-assigned license numbers. Most state driver licensing agencies that request SSNs, however, include SSNs in driver records as a secondary identifier and devise their own license numbers. Information from the AAMVA and other sources suggests that many states request, but may not require, applicants for noncommercial driver's licenses to provide their SSNs. AAMVA officials estimate that there are about 175 million noncommercial drivers nationwide. To monitor driver compliance with state laws, state officials said they use SSNs during the licensing process to search national databases maintained by AAMVA to identify driver's licenses the applicant may hold in other states and determine whether the applicant has had a license suspended or revoked in another state. These officials also told us that organizations such as the courts and law enforcement agencies may choose to request driver records by SSN when they do not know the driver's license number. AAMVA officials expect states' use of SSNs to increase as the result of a recent federal law. Effective October 1, 2000, the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 prohibits federal agencies from accepting state-issued driver's licenses as proof of identification, unless licenses satisfy federal requirements set out in the act. Specifically, states must either verify a driver's SSN with SSA and record the number in their database or display the number, visually or electronically, on the license. States' practices for disclosing SSNs contained in driver records vary. In states in which driver records are public information, states may disclose SSNs to individuals and organizations such as credit card companies, direct marketers, and credit bureaus. For example, Massachusetts driver licensing officials told us that their driver records are public and that the state includes individuals' license numbers (usually the SSN) when providing information to organizations or people requesting driver records. Officials of the programs and activities we reviewed believed their entities would be negatively affected if federal laws were enacted restricting use of SSNs. Businesses that sell personal information and state driver licensing officials, however, told us that their organizations have already voluntarily responded to concerns about their practices for disclosing SSNs. State tax administrators and credit bureau officials said that federal restrictions could hamper their ability to conduct routine internal activities. For example, representatives of these organizations said such restrictions could impede credit bureaus' ability to accurately post consumer payment and credit transactions and state tax agencies' ability to identify tax filers. Moreover, many of the officials we interviewed believed that federal restriction of their use of SSNs would hamper their ability to conduct data exchanges with other organizations. Without SSNs, state tax administrators said, it would be difficult to associate tax return information received from other tax agencies with tax information reported by residents. In addition, a health care provider said federal restrictions on SSN use could impede providers' ability to track patients' medical histories over time and among multiple providers. Also, AAMVA officials said federal restrictions could hinder states' ability to screen for applicants who try to conceal traffic violations they have acquired under other state licenses. Many of the officials we interviewed said federal restrictions on their use of SSNs could make it difficult for their organizations to be assured of receiving credit reports for the specific individuals they requested. Officials of bank and credit card companies said they rely heavily on credit reports to make decisions about providing customers service on credit. Officials of businesses that sell personal information and driver licensing agencies also believed that federal restrictions on SSN use could make it difficult for others to obtain specific records from them. For example, driver licensing officials said that if "outsiders," such as government and law enforcement agencies, do not know the driver's license number and cannot request driver records by SSNs, these agencies can only use the driver's name and are more likely, therefore, to receive the records of other people with the same name. Because of privacy concerns raised by disclosure of personal information, businesses and states have become more sensitive to this issue and are voluntarily restricting the disclosure of some personal information, including SSNs. In December 1997, 14 businesses that sell personal information--the self-identified industry leaders--responded to these concerns by, among other things, voluntarily executing a written agreement stating their intent to restrict disclosure of SSNs associated with data they obtain from nonpublic sources. These 14 businesses essentially agreed to make SSNs from such sources available to only a limited range of customers identified as having appropriate uses for the information, such as law enforcement. The 14 organizations also agreed to annual compliance reviews by independent contractors. When an organization fails to comply with the agreement, the Federal Trade Commission can cite the organization for unfair and deceptive business practices. Because the agreement was not scheduled to be fully implemented until December 31, 1998, its effectiveness could not be determined during our review. In addition, some states are discontinuing practices that result in routine disclosure of SSNs. For example, since July 1, 1997, Georgia no longer automatically prints SSNs on licenses but rather assigns its own numbers for driver licenses and uses SSNs as license numbers only if requested by the license holder to do so. Ohio, which before July 29, 1998, routinely printed SSNs along with state-assigned numbers on driver's licenses, now allows drivers the option of not having SSNs printed on their licenses. Also, AAMVA officials believe most states in which driver records are public now exclude SSNs when responding to requests for driver records. SSA provided technical comments on a draft copy of this report, which we have incorporated as appropriate. We are providing copies of this report to the Commissioner of Social Security, officials of organizations and agencies we interviewed concerning their use of SSNs, and other interested congressional parties. Copies will also be made available to others upon request. Please contact me on (202) 512-7215 if you have any questions about this report. Other major contributors to this report are listed in appendix III. We identified federal requirements and restrictions governing Social Security numbers (SSN) by using a list prepared by the Social Security Administration (SSA) that identified federal laws addressing SSNs. We developed information on programs' required uses of SSNs by interviewing officials at the following: SSA's Retirement, Survivors, and Disability Insurance and Supplemental Security Income programs; the Internal Revenue Service's federal personal income tax program; the Department of Health and Human Services' Medicare, Medicaid, Temporary Assistance for Needy Families, and Child Support Enforcement programs; and the Department of Agriculture's Food Stamp program. On the basis of literature searches and interviews with Federal Trade Commission, SSA, and other cognizant officials, we identified numerous types of businesses and government activities and programs that use SSNs extensively. We then selected two areas of commercial activity (the financial services and health care services industries) and two state government activities (personal income tax and driver licensing programs) for a detailed examination of their SSN use. In addition, we included in our review the industry that gathers and sells personal information. Although organizations in this industry do not obtain SSNs directly from the people they provide information about, these organizations do provide customers personal information about individuals that may include their SSNs. Because there are no readily available data on how extensively businesses and states use SSNs, we selected entities that are commonly known to use SSNs routinely and that affect a large number of the general public by this use. We developed information on SSN use for these entities through interviews with officials representing the selected businesses, trade organizations, and state programs. We obtained officials' statements about the prevalence of the use of SSNs among other similar businesses and state agencies as well as officials' opinions about the potential impact on their operations if they were restricted in how they could use SSNs. We performed our work at SSA headquarters in Baltimore, Maryland; Washington, D.C.; and some of their suburbs and at selected other locations including Annapolis, Maryland; Atlanta, Georgia; Harrisburg, Pennsylvania; and Richmond, Virginia. We conducted telephone interviews with officials in Columbus, Ohio; Boston, Massachusetts; and Kansas City, Missouri. We selected both large and small organizations to determine if size altered the organization's use of SSNs or its views about the effect of limiting the use of SSNs. Information in this report was obtained primarily through interviews and is not generalizable to the universe of government and business communities of the officials we interviewed. We did not verify the accuracy of the information provided. This report does not address SSN use for illegal activities, such as credit card or program fraud, which are punishable under criminal statutes, because such an investigation was beyond the scope of the work we were asked to do. (In May 1998, we reported to the Congress on identity fraud, which can involve misuse of SSNs.) The following people also made important contributions to this report: Dennis Gehley and William Staab, Senior Evaluators, conducted work in the health care and financial communities, and Roger Thomas, Senior Attorney, provided legal counsel. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed how the social security number (SSN) is used, focusing on: (1) federal laws and regulations requiring or restricting SSN use; (2) how extensively the private and public sectors use SSNs for purposes not required by federal law; and (3) what businesses and governments believe the impact would be if federal laws limiting the use of SSNs were passed. GAO noted that: (1) no single law regulates the overall use of SSNs; (2) the Social Security Act, which created the social security programs for which the SSN was developed, did not require the Social Security Administration (SSA) to devise SSNs; (3) however, once SSA created and began using SSNs to help administer its programs, Congress recognized the universal nature of the SSN and subsequently enacted laws requiring SSN uses for some purposes not related to social security; (4) federal laws now require that SSNs be used in the administration of some programs, including the federal personal income tax program; the Supplemental Security Income, Medicaid, Food Stamp, and Child Support Enforcement programs; and state commercial driver licensing programs; (5) some of these laws impose restrictions on SSN use relating to the programs or activities involved; (6) no federal law, however, imposes broad restrictions on businesses' and state and local governments' use of SSNs when that use is unrelated to a specific federal requirement; (7) the report additionally addresses businesses' and governments' uses of SSNs for purposes not required by federal law; (8) officials of all of the organizations GAO reviewed--businesses that sell personal information, those that offer financial and health care services, and state personal income tax and driver licensing agencies--routinely choose to use SSNs as a management tool to conduct their business or program activities; (9) credit bureau and state personal income tax officials, for example, said they use the SSN as a primary record identifier for internal activities, such as maintaining individual consumer credit histories and identifying income tax filers; (10) all the organizations said they used SSNs to facilitate data exchanges necessary to their business; (11) they use SSNs to obtain information to assess credit risk, locate assets, or to ensure compliance with their program rules and regulations; (12) GAO reports officials of the organizations as saying their ability to conduct routine internal activities and data exchanges could be adversely affected if the federal government passed laws that limited their use of SSNs; and (13) however, given the public's concern about the disclosure of SSNs, officials of businesses that sell personal information and driver licensing agencies said that some members of their industry have taken steps to limit disclosure.
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